Rethinking Risk – Trust My Group

How trust accounts will reduce risk for the travel industry

The pandemic revealed that the travel industry has a problem with risk and liquidity. When travel providers received a tidal wave of refund requests when the COVID-19 pandemic began in early 2020, it was clear that travel payments and their associated risk needed a rethink.

Businesses in all sectors must weigh up risk as accurately as possible. However, the travel industry has a unique risk proportion compared to other sectors regarding payments. There is often a significant time lag between purchase and delivery, which heightens the risk associated with payments. In that time, anything can happen – a painful lesson that many travel businesses learned in 2020 when the pandemic hit, and travel provider funds were used to provide legally binding refunds. Continuous refund requests hit providers hard as many struggled to reimburse customers on time due to working capital limitations.

Understandably, acquirers will now see the travel industry differently due to the crisis—travel providers struggling with finances have become a considerable risk to card acquirers. Inevitably, acquirers need to reduce their risk exposure.

Card acquirers know this all too well. Suppose a customer instigates a chargeback because the travel product they paid for has not been fulfilled.

In that case, they will seek to recover their money from the card acquirer through the consumer protection methods such as chargebacks. When a card acquirer weighs up the advantages and disadvantages of working with a travel provider, they will traditionally demand cash collateral or other forms of financial security from travel providers to mitigate risk.

As a result of the pandemic, acquirers are instructing travel businesses to increase their collateral, which has had a devastating knock-on effect for businesses that need capital to continue their operations for travel providers. For companies already struggling, this move could be the final push that unfortunately ends in insolvency. Cash collateral, called holdbacks, takes significant funds from travel companies, which can damage company liquidity. The COVID-19 pandemic has led card acquirers to impose harsher terms or cut ties with travel companies completely, deeming them as too significant a risk.

The Solution: Trust Accounts

Trust accounts offer a workable solution to the travel risk problem, which leads to many travel providers facing harsher card acquirer terms. Trust accounts are the most straightforward and most transparent form of payment protection. Several industry commentators, including Steve Heapy, chief executive of Jet2holidays, believe that it is inevitable that the travel industry will need to segregate customer money in a separate account if the Atol system is reformed.

The Civil Aviation Authority (CAA) appears to agree. About their assessment of funding arrangements and the protection of customer money, the organisation said the following: “The existence of segregated monies may provide comfort to merchant acquirers that they will be less exposed to insolvency risk and may make reduced or zero demand for security”. The CAA seeks to “use its existing powers to put in place risk mitigation measures”, which may include trust accounts. Several industry commentators believe this is the direction the CAA will choose.

How does a trust account work?

A customer pays for a travel product in January, which will take place in February. The customer’s funds are protected in the Trust Account between payment and delivery, meaning the funds are available if they need to be refunded. When the customer successfully receives their travel product in February, the merchant releases the funds.

What are the main advantages of trust accounts?

How do they mitigate risk?

Trust accounts have several advantages for travel providers and their travellers. It is easier to provide customers with full or partial refunds if their money is protected in a trust account. As we learned during the pandemic, significant problems arise when the money is used as working capital. Additionally, separating customer money from working company capital encourages travel providers to maintain disciplined cash flow management practices, something all businesses should aim for if they want to avoid insolvency.

Trust accounts reduce the risk for customers, merchant acquirers, suppliers, and third parties. For this reason, the use of trust accounts can lead to more favourable commercial terms. For example, card acquirers view trust accounts as security for consumer funds as they are protected before travel businesses receive any profit from the booking. Finally, trust accounts are recognised as protection under the Package Travel and Linked Travel Arrangements Regulations 2018.