There are two commonly used business models used by online travel agencies (OTAs) when working with hotels:
1. Merchant Model
OTAs purchase a bulk of hotels rooms from their merchants (the hotels), at a discounted price and then resell these rooms at a marked up price. In this case, the OTA pays the merchants.
2. Agency Model
OTAs serve as agents for their merchants, listing the hotels, their services, and the prices. The OTAs receive commissions (generally between 10-30%) on bookings made via their sites, with the hotels paying the OTAs following payment receipt.
Each model has its advantages and disadvantages, with the merchant model considered more profitable, while the agency model increases booking rates, driving higher volumes.
Today, most OTAs offer customers the option to pay now (merchant model) at a reduced rate or pay at check-in/check-out (agency model), at a higher rate, or with a refundable option.
Different businesses in this industry have different models and revenue mixes, which lead to complex payment processes between the merchants and OTAs, in terms of timing, PCI regulations regarding saving credit card information and more.
Below is a brief overview of how online travel agencies and merchants settle payments.
The Expedia Group
Expedia Inc., which achieved $8.8 billion in revenue in 2016, owns a portfolio of OTA sites, such as Orbitz, Travelocity, Trivago, Hotels.com, to name a few, but also operates its Expedia platform, independently.
Expedia serves as the merchant of record for its bookings, meaning they are the party held liable financially to the customers, and online payments go through them.
Expedia offers its Expedia Traveler Preference, which combines both merchant and agency revenue models, charging upfront when the merchant model is used. When a customer chooses to pay at the time of booking, this is via the Expedia Collect merchant model. Expedia charges the customer’s credit card and pays the agreed upon payment to the merchant following the customer’s stay. Mark-up’s can reach up to 30%, fluctuating with the travel market, inventory and seasonality.
When the customer opts to pay at the hotel, the Hotel Collect agency model is used, either with or without deposit. A commission, commonly between 20-25%, is paid to Expedia, following payment.
As of Q2 2016, revenues from the agency model made up 56% all Expedia revenues, with merchant revenues representing 44%. Expedia also offers advertising on its site, which is an engine for improving placement, and different marketing plans for its partners, such as flash sales and Members Only deals.
Expedia extends 10% off to its members via its loyalty program. Its portfolio companies, namely Hotels.com and Orbitz, have very popular loyalty programs. Hotels.com offers a free night for every ten nights booked, and Orbitz offers cash incentives for future reservations.
The Priceline Group
The Priceline Group’s portfolio includes popular OTAs such as Booking.com and Kayak. Utilizing the merchant and agency models, Priceline achieved gross profits of $10.3 billion in 2016, and is considered the market leader in the OTA industry. The vast majority of Priceline’s revenues, quoted at 86% in Q2 2016, are from the agency model. Priceline serves as the merchant of record in its transactions.
As customary in this industry, Priceline and Booking.com offer loyalty programs with discounted prices to registered users. Priceline also offers its unique Opaque model, in which customers “name their own price”, placing a bid on the rooms within the parameters of his search. If it is accepted, the customer can close the deal at his chosen rate, but the hotel itself is undisclosed until after the customer completes the reservation. This model allows hotels to decrease losses from surplus inventory while encouraging customers to try and get great last-minute deals.
Virtual Credit Cards are a leading method for transactions between hotels and OTAs
A commonly used payment method between the different players, in the case of the merchant model, are Virtual Credit Cards. These single use virtual cards act like credit cards, enabling secure payment from one party to another. CVV numbers entered by the booking customer cannot be stored due to PCI regulations, so virtual credit cards can be used instead. OTAs charge the customer using their online payment methods, receiving payment generally from a credit or debit card upon reservation. OTAs provide the hotels with a virtual credit card in lieu of the customer’s private payment data, so that they may charge the OTAs the agreed upon room rate and tax following customer check-in/check-out.
Both the Expedia Group and Priceline Group use virtual credit cards for transferring payments to their merchants. In the Expedia Collect model, Expedia provides its merchants with its Expedia Virtual Card. The hotels charge this card as they would a credit card. This single use online payment option offers a highly secure, PCI compliant payment method to the merchant. Priceline similarly provides its merchants with its own virtual credit card, with merchants charging the cards following the customer’s visit for the agreed upon amount and taxes.
Expedia transactions, via its virtual credit card, can only be conducted via an authorized payment terminal. Merchants who implement Direct Pay Online’s online payment solutions, can easily settle their accounts with Expedia Group OTAs. Merchants can choose to transfer funds from Expedia directly to their Direct Pay Online accounts, streamlining the payment process and making these funds available to them via a simple, and secure method.