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Obtaining a Merchant Account in the Travel Industry
by Kris Hall @ 19/02/2013
One of the most important factors to starting and running a successful tour operator or travel agency is the ability to take payments from your customers. Obtaining the ability to take credit or debit card payments from your customers is paramount. Without these facilities you could be turning away business.
There are a number of routes to obtaining your own travel merchant account but as a start up or small travel business obtaining a travel merchant account can be challenging.
Unfortunately the travel industry is deemed high risk by many merchant providers. This is primarily due to the level of chargeback risk travel businesses pose to the merchant providers.
What is chargeback risk?
A chargeback should not be confused with a refund, which is simply a merchant refunding a transaction.
The merchant’s processing bank is always 100% responsible for all transactions performed by the merchant. In most industries this can leave the merchant provider open to millions of pounds of potential losses if the merchant operates in an illegal or risky manner which generates many chargeback’s. The merchant account providers usually pass this onto the merchant but if the merchant is fraudulent or simply does not have the funds then the merchant provider must pay all the funds back to the customer to make the card holder whole.
The risk of a travel business failing before the consumer has received their purchase adds additional chargeback risks to merchant providers. The reasons for this are outlined in the examples below:
Example 1: If a customer walks into a clothes shop and purchases an item of clothing at the till they would pay for it using their credit card and walk out of the door that day with their purchase.
Example 2: If a customer purchases a holiday pre payment is required anywhere up to 12 months in advance of the actual travel date. During this time the travel company may experience financial difficulties and cease trading. This then leaves the customer with little or no choice but to process a chargeback with their card company resulting in a loss for the merchant provider.
How to obtain your own merchant account in a high risk industry
Even though the travel industry is deemed high risk by travel merchant providers there are a number of routes you can take to obtain your own merchant facilities. We have outlined two of the main routes below:
Applying directly – In order to obtain your own travel merchant account you can apply to the merchant providers directly. They will ask you to provide information to access the level of risk they take by providing a merchant account to your business. Once they have completed these checks they will either decline your application or approve it with terms in place to improve security. These terms can include some or all of the below:
– Security deposits or bonds equalling a percentage of your peak turnover
– Rolling reserves which result in a percentage of customers funds being held by the merchant provider for up to 12 months at a time
– Personal guarantees
Applying through an approved trust account model – Due to the unique way that the trust account protects the consumer’s funds against the failure of a tour operator or travel agent the risk to merchant providers is greatly reduced. Merchant providers are much happier to consider travel companies operating through a trust account arrangement as it mitigates the risk of the consumer’s funds being non-refundable in the eventuality of a failure.
A big benefit of applying through a trust account model is that additional security such as personal guarantees or bonds is rarely needed. Usually this method of applying for merchant facilities is the most successful.
Tour Operator or Travel Agent?
by Kris Hall @ 06/12/2012
Are you looking to start your own travel company? Do you have a particular hobby or interest that you enjoy and would like to earn money for as a job on a full or part time basis? If the answer is yes then starting a niche travel company in the Travel Industry could be something to consider.
What are the main differences between starting a Tour Operator or Travel Agency?
There are a number of differences between the two options and considering which one your business will fit into really depends on what type of travel you are looking to sell. The main differences are outlined below:
A tour operator typically combines tour and travel components to provide a holiday. The most common example of a tour operator’s package would include a hotel, a transfer from the airport, a specific activity and possibly a flight. Niche tour operators may specialise in specific destinations, e.g. Italy, India, UK, activities and experiences, e.g. skiing, music trips, special interest tours, or a combination of both.
For profit, tour operators usually negotiate net rates with suppliers and then add their own margins onto the package on a percentage or per passenger basis.
A travel agent is a private retailer that provides travel related services to the public on behalf of suppliers such as hotels, flights, car hire or package holidays (tour operators).
A travel agency’s main function is to act as an agent selling travel products and services on behalf of a supplier. Consequently, unlike other retail businesses, they do not keep any stock in hand. A package holiday or a ticket is not purchased from a supplier unless a customer requests that purchase. The holiday or ticket is supplied to them at a discount and profitis therefore the difference between the advertised price which the customer pays and the discounted price at which it is supplied to the agent. This is known as the commission.
As agents sell packages on behalf of tour operators financial protection is generally not required as the consumer’s contract is direct with the financially protected tour operator. However, many travel agents now wish to provide financial protection to provide their customers with an added level of protection and piece of mind.
Why start a Tour Operator over a Travel Agency?
Ultimately the decision is up to you. Whilst both have their benefits if you want the flexibility to design your own packages using your own carefully selected suppliers, be in control of your own profit margins and put your own personal touch on each trip you sell then starting business a tour operator is probably the best option for you.
If you have decided on starting a tour operator then please see our page regarding Starting a Travel Company. Alternatively, please see our other pages if you would like to find out more regarding the UK Travel Laws and Regulations.
Starting an Online Tour Operator for the First Time?
by Kris Hall @ 05/12/2012
If you are looking at starting out as a tour operator in the Travel Industry today there are a number of upfront costs that you carefully need to think about before starting. I have written some information below as a rough guide to aid anyone looking to develop a tour operator for the first time.
The table below has been designed as a guide and relates to the start up costs involved as an online tour operator.
Activity Estimated Cost
Registering a Limited Company £50
Website Design £500 – £5,000
Package Travel Financial Protection £2,000 – £15,000
Tour Operator Liability Insurances £700+
Back Office Software £2,000
Merchant Facilities £500+
Legal Fees £0 – £1,000
Marketing (PPC or SEO) £500 – £5,000+
Whilst these figures are to be used as estimates there are ways to reduce your start up costs.
For example, if you consider running through the Protected Travel Services (PTS) trust account model whilst taking advantage of the merchant facilities and back office software also provided through PTS you can find that those combined services cost under £2,500 for the year.
In addition, you can contact company registrars such as The Formations Company who can register your company name for under £20.00 in some cases.
If you are thinking of starting your own tour operator then why don’t you contact us today to find out how we can help?
ATOL Flight-Plus Reform (Continued)
by Kris Hall (with additions from Martin Alcock – Travel Trade Consultancy) @ 15/08/2012
There has already been a positive response to the last post made on 08/08/2012 regarding the ATOL Flight-Plus reform.
I have since received some additional comments from the Travel Trade Consultancy that I feel would be worth adding to this topic to provide greater clarity.
I start with a slight correction to my below point. In hind sight, the new legislation being discussed currently in line with the Aviation Bill will only bring in airline holidays (e.g. flight, accommodation and car hire) rather than flight only sales by airlines.
In addition, there are discussions regarding bringing “click-throughs” under some degree of protection. An example of a click-through is where an airline (such as Ryanair) will offer a link through to a common branded accommodation company. Again, these are not currently covered under ATOL due to the loop-hole previously discussed in the post below.
Some leading names in the Travel Industry (such as ABTA) have long been pushing for a “all flight levy” which would provide a certain degree of financial protection on every flight departing from the UK. This has been considered in the past but has so far been resisted due to the lobbying power of the airlines.
In summary, I agree with ABTA and also feel that until all flights are covered against the risk of airline failure the consumer will continue to battle with the confusion surrounding travel in terms of what will and what won’t be protected.
This has been perfectly summarised in this closing statement written by Martin Alcock who described it by saying:
“…Consumers will continue to be baffled by our Heath Robinson-esque protection mechanism.”
ATOL Flight-Plus Reform
by Kris Hall @ 08/08/2012
There has been a mixed response to the new ATOL Flight-Plus scheme brought in by the CAA from the 31st May 2012. Many leading Travel Industry professionals feel that the reform could go further to provide a better level of financial protection to the consumer.
I have to agree.
Whilst the Flight-Plus reform clearly goes a long way in increasing the financial protection provided to the UK traveller by bringing more passengers under the protection of ATOL there are still some areas of concern which will ultimately lead to consumer confusion and more worryingly, lack of financial protection.
One of the main areas of concern relates to consumers who place bookings direct with airlines.
Why is this? Put simply, airlines are specifically excluded from the ATOL scheme under legislation. This was because most scheduled airlines were state owned when the scheme was introduced and were not expected to fail. As a result airlines do not have to provide any financial protection to their passengers. In short, airlines get away scot free from any financial responsibility.
What could go wrong?
As a consumer, you could be forgiven in thinking that if you book a flight direct with a well known airline for your yearly holiday that you will have complete piece of mind in the eventuality of a failure. This couldn’t be any further from the truth.
In fact, should you book a flight direct with an airline which fails then not only will you loose the money you spent on the flight and the flight itself but you could also find yourself in the position of waving goodbye to other pre-arranged ground aspects of your holiday that are financially protected through a Tour Operator adhering to the 1992 Package Travel Regulations (“PTR”).
Airlines are being put under increasing financial pressure due to the fuel price increases (amongst other increases) and as a result the travel news is rife with reports of yet another airline halting operations and going into liquidation. You only have to take one look at this protectmyholiday.com link to see the regularity of these failures.
How will this be resolved? The Government need to pass legislation through Parliament so that the CAA can bring all airlines under the ATOL scheme. This will be beneficial in two main ways:
- Extend the ATOL protection to cover all travellers in the UK
- Increase the Air Passenger Contributions (“APC”) hitting the Air Travel Trust (“ATT”) scheme which will ensure the reduction of the deficit of the Air Travel Trust (circa £42m)
Although there are thousands of Tour Operators and Travel Agents who are working through schemes like the ones provided by Association of Independent Tour Operators (“AITO”) and Protected Travel Services (“PTS”) which aim to provide complete financial protection to UK consumers (in line with the 1992 PTR’s, ATOL Flight-Plus and even to accommodation only bookings which would not normally be covered), attention should be drawn to the large airlines that transport millions of passengers who are providing no protection at all.
Whilst work has begun developing a bill so that the CAA can include airlines under ATOL, it is likely to take 12 months or more to complete. Until such time, the Industry will never truly be able to offer full financial protection to the consumer and as a result will continue to run the risk of the potential damage another airline failure could cause to the reputation of the Travel Industry.
Always look out for the AITO, ATOL or PTS logo for complete financial protection and piece of mind.