One of
the key drivers of travel’s evolution from a primarily offline, manually
processed business to one increasingly coordinated online has been the
transformation of the payments industry.
The development of the internet, followed by the birth of e-commerce - notably
Amazon in 1994, eBay in 1995 and shortly thereafter online travel brands such
as Travelocity and Expedia - spurred a need for digital payment options.
One of the first was PayPal, launched in 1999, and today there are hundreds of
ways for consumers around the world to pay for products and services online.
According to the World Payments Report 2018 from
Capgemini and BNP Paribas, global non-cash transaction volumes grew at 10.1% in
2016 to reach 482.6 billion. That rate is expected to accelerate through 2021
to 12.7% compound annual growth rate globally, with emerging markets growing at
21.6%.
In
tandem with the rise of e-commerce has been a rise in fraud.
According to ACI Worldwide, the top 21
breaches in 2018 impacted more than 2.5 billion customers around the globe.
Seventy-four percent of organizations have been a victim of payment fraud, and
the average cost of a data breach in 2018 was $3.86 million.
For travel, this combination of demand for new transaction
models and risks related to cybersecurity coupled with the massive value of the
industry – the World Travel and Tourism Council says travel and tourism
contributed $8.8 trillion to the global economy in 2018 – seems the ideal
environment for innovation.
And yet in Phocuswright’s database of travel
startups around the world, less than a dozen of the more than 2,600 entries are
focused on payment solutions.
For the final entry in our payments month
series, we talk to both startup founders and investors to understand the
challenges and opportunities in this realm of travel.
Complexities
While alternative payment options such as Alipay, WeChatPay,
PayPal and others are gaining traction every year, the traditional card schemes
still dominate, particularly in the West.
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And within that, three brands – Visa, MasterCard and
UnionPay – capture the bulk of purchases for goods and services worldwide.
According
to the Nilson Report, in 2018, of the 369 billion transactions paid with
credit and debit cards, more than 165 billion, or nearly 45%, were completed
with a Visa card. China’s UnionPay ranks second, with more than 98 billion
transactions, and Mastercard ranks third with more than 90 billion.
“What industry can you think of that there has been really
no disruption? Mastercard and Visa have been the 800-pound gorillas for how we
pay for stuff for as long as we can remember,” says Robert Kaufman, the CEO of ConnexPay, a company he founded in 2017 to transform
travel payment acceptance and issuance.
“And if you ask yourself why, it’s because it’s really
complicated. The fact you can use your card at a store and literally at the
same time it’s giving me a total, my phone is also giving me a text alert that
I spent $42 at Home Depot, for example. What happened in that one second – if you
really understand the payments process - is pretty amazing.”
That complexity – related not only to how money moves from
buyer to seller but also to things such as cross-border currency processing and
regulatory requirements – can limit both the ability and willingness of
entrepreneurs to enter this space.
“From an overall ecosystem perspective, it’s a hard thing to
do right,” says Raj Singh, managing director at JetBlue Technology Ventures. And
the existence of a few dominant players can squash innovation.
“The
ability of travel startup companies to build consumer businesses is chilled by
the huge size of Expedia and Booking spending billions of dollars on marketing.
Similarly, we see the same sort of effect with the Visa-Mastercard group out there
spending a lot of money. They are a tough nut to crack.”
Possibilities
Despite the challenges, there are startups finding success
in various aspects of the payment process.
One such example is Uplift,
which has raised more than $220 million to build its system that enables
installment payments for travel.
The difficult piece is the creation of deep trust in order for a company to allow you to touch anything in their payments flow.
Rodrigo Camacho - Nethone
“If you are a startup, you have to be adding value somewhere,”
says Uplift CEO Brian Barth.
“In payments we are moving from Gen One to Gen Two. In the
early days, Gen One, it was around getting costs down, chargebacks, the plumbing
issues. Gen Two is more about creating specialized solutions for travel where you
are trying to focus on a different set of metrics – revenue, conversions, ancillaries,
dynamic offers, segmentation, personalization.”
Thayer Ventures
managing director Chris Hemmeter says his firm was an early investor in Uplift
because the company is tackling a specific need in the industry.
“Uplift has got this great data about what people are spending
their money on in travel and recognizing over time and at scale default
patterns that are different than other kinds of consumer spending - and then using
all of that to get better pricing for essentially travel financing,” Hemmeter
says.
“It’s an interesting concept because it leverages a very
travel-specific set of behaviors and then ingests that into a payments concept.”
Inside track
Barth and Uplift co-founder Stu Kelly brought more than a dozen years of travel experience to the table when they created the company in 2014, having
co-founded travel metasearch company SideStep in 1999.
That type of history brings both deep industry knowledge and
broad personal contacts – benefits that Travel
Ledger founder Roberto Da Re also says have been invaluable as he has been
building his company in the past year.
Da Re, with prior work at Sabre and as the founder of travel
technology company Dolphin Dynamics, says those experiences helped him understand
the industry’s frustrations around tracking and reconciling data and sparked
the idea to create a new type of billing and settlement platform.
“When I discovered smart contracts and blockchain technology,
I thought this is the right time and the right technology to disrupt that space,”
he says.
Da Re’s co-founders and advisors also have relationships
throughout the industry that are facilitating the launch of the startup.
“Because we’ve all been 15 to 20 years in this space, we
know all of the players both on the buy side as well as the sell side in order
to be able to get the right people at the table,” Da Re says.
Outside in
An alternate perspective comes from Rodrigo
Camacho, chief commercial officer at Nethone, a startup
using artificial intelligence to enable business intelligence and fraud prevention
for online merchants.
Founded in 2016, Nethone gets about half of its revenue from
travel clients, despite the fact that none of the founders had done prior work
in the industry.
But Camacho and CEO Hubert Rachwalski do have extensive
education and experience in economics and statistics, and Camacho says that
knowledge is “absolutely a prerequisite” for developing a solution involving
payments.
Along with those hard skills, Camacho says they have worked
tirelessly to build the relationships necessary to succeed.
The reality of expertise is that the experts tend to assume that the industry is the way it is, and they don’t necessarily look for the innovative solutions, while somebody coming fresh says why is it done this way.
Raj Singh - JetBlue Technology Ventures
“In travel, everybody knows each other, and that is quite
difficult to penetrate,” he says.
“But at the same time, it’s a bit of fresh air when they do see
somebody new coming into the space, especially when it’s someone coming with
disruptive technology and a disruptive approach to a problem that is quite
systemic in the industry.”
JetBlue
Technology Ventures’ Singh agrees an outside perspective can be advantageous.
“The
reality of expertise is that the experts tend to assume that the industry is
the way it is, and they don’t necessarily look for the innovative solutions, while somebody coming fresh says why is it done this way,” he says.
Camacho
is overcoming a lack of pre-existing connections by regularly attending industry
events, to both build his network and his understanding of the unique payment
and fraud challenges travel suppliers are facing so Nethone can fine-tune its
solutions.
“The
difficult piece is the creation of deep trust in order for a company to allow
you to touch anything in their payments flow. Having that one-on-one
relationship allows you to have these conversations for them to let you into
the secret garden of exactly the way their payments are working, and then you
can provide really tangible value back,” Camacho says.
“For
me that is what is essential and that is the most difficult thing to build as a
startup, because as a young company you don’t have that precedent. You don’t
have IBM stamped on your chest, which means then you don’t have that trust when
you walk in the door. You have to build that trust.”
Kaufman,
who prior to founding ConnexPay spent 20 years at U.S. Bank, says one way he
has addressed that need to establish trust is by hiring people with travel expertise
to supplement his payment industry knowledge.
“The travel companies that we work with feel more confident
in our capabilities when we have employees that understand their business,” he
says.
Along
with trust, Singh says startups need to be able to “speak the language” of the industry,
and bridging that divide is something JetBlue Technology Ventures regularly does.
“Yes we put money into startups, but one of
the reasons we’re attractive to startups is we can be the translator between
their aspirations and what the industry actually understands,” Singh says.
Future outlook
While Nethone is still early in its development, Camacho
says the company is seeing quite a bit of interest from investors because payment
fraud prevention sits at the intersection of two critical areas.
“Online payments are exploding and will continue to grow. And
at the same time, cybersecurity is also exploding, because exposure is growing
every single day as we put more and more of our valuable data and assets online
or in digital products,” he says.
Kaufman also sees positive signs from the investment
community, which he attributes to both the overall strength of the economy and also
to the fact that funders recognize innovation in financial technology has to
come from outside the core banking industry.
“And it’s hard for the banks, the large organizations, to do
it themselves with all the regulation they have to deal with,” Kaufman says.
Hemmeter points to Asia as a driving force, since the
massive - and growing - number of outbound travelers from that region “have a
whole different attitude around payments.”
Specifically for hospitality, Hemmeter says innovation
in payments will happen in tandem with disruption of legacy platforms,
specifically property management systems, such as being done by one of Thayer
Ventures’ portfolio companies, Mews.
“If you are innovating around payments in some way and
trying to address that transaction point, you have got to have a PMS that’s
open and flexible and where you can create that integration,” Hemmeter says.
“Once that infrastructure changes, which it’s in the process
of doing, we could see the way opening up for more innovation.”