How Distribution and Payment Fees Impact Hotel Profits

Hotels face significant challenges in maintaining profitability due to opaque distribution and payment fees that add hidden costs to their operations.

The travel industry is a complex network of intermediaries, each taking a slice of the transaction value, which often remains hidden from both suppliers and consumers. AltexSoft has examined the intricate web of distribution and payment fees that affect the profitability of independent hotels, providing insights into the various players involved and the costs they incur.

Distribution Channels and Their Impact

Travel distribution involves multiple intermediaries, including Global Distribution Systems (GDSs), online travel agencies (OTAs), and bed banks, each adding layers of cost. In the airline sector, GDSs like Amadeus, Sabre, and Travelport dominate, charging airlines fees per segment booked. These fees can account for up to 25% of ticket prices. Airlines are exploring alternatives like the New Distribution Capability (NDC) to reduce reliance on GDSs and lower costs.

In contrast, the hotel industry is more fragmented. Independent hotels rely heavily on OTAs, which charge commissions ranging from 10% to 30%. Bed banks, which negotiate discounted room rates, also play a role, earning commissions from hotels. These distribution channels, while providing market access, have a significant impact on hotel profitability.

Payment Processing: An Overlooked Cost

Beyond distribution, payment processing introduces another layer of hidden costs. Hotels and other travel merchants must integrate with payment gateways to facilitate transactions, incurring various fees. Payment processors like Stripe and PayPal charge fees based on transaction types and methods, which are often not transparent.

Card-related costs are a major concern, with interchange fees and card network charges adding to expenses. In high-risk industries, such as travel, these fees are higher than in other sectors. Some airlines pass these costs to consumers, while others refuse certain payment methods to protect margins.

B2B Transactions and Hidden Frictions

Business-to-business (B2B) transactions in the travel industry, such as payments from agencies to suppliers, also involve hidden costs. Settlements through systems like IATA’s Billing and Settlement Plan (BSP) or ARC in the US are essential but come with fees. Virtual credit cards (VCCs) offer an alternative, providing security and control but at a cost to suppliers. Agencies benefit from rebates, while airlines gain protection against agency default.

Cross-Border and Currency Costs

Travel’s global nature means cross-border payments are inevitable, introducing additional costs. Card transactions across borders incur network and issuer fees, with interchange and network costs often reaching 3% to 4%. Dynamic currency conversion (DCC) incurs additional costs for consumers, potentially impacting guest satisfaction and hotel profitability.

Strategies for Cost Optimization

To mitigate these hidden costs, travel businesses can adopt several strategies. Transparency in fee structures is crucial, enabling companies to better understand and manage their expenses. Negotiating better terms with intermediaries can also help reduce costs. Abandoning legacy systems in favor of automated processes can improve efficiency and reduce labor costs associated with payment handling.

Payment orchestration offers another solution, optimizing transaction routing to reduce costs. By leveraging technology, companies can streamline payment processes and enhance overall efficiency.

Conclusion

While the complexity of travel distribution and payment systems presents challenges, understanding and addressing hidden costs can improve profitability for independent hotels. By prioritizing transparency and adopting cost-optimization strategies, travel businesses can more effectively navigate the complex landscape of intermediaries and fees.

Discover more at AltexSoft.