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The traditional agency model in the travel industry has been used for years to connect travelers to travel services and accommodations.
These days, the merchant model is becoming ever-popular as it generally allows for more freedom and flexibility for online travel agencies (OTAs), as well as greater profit margins when compared to the agency model.
But what are the core attributes of each, how do they compare, and how can you take advantage of the merchant model framework with WEX?
The merchant model, particularly regarding OTAs, refers to a business model where a company takes ownership of travel-related inventory — hotel rooms, airline tickets, or other travel services — and sells them directly to customers. In this model, the OTA acts as a travel service provider rather than an intermediary between travel products and services and the end customer.
For example, hotels may sell rooms to OTAs in bulk at discounted or wholesale prices. Then the OTA, who now effectively owns the rights to those rooms for a specified period, will resell those rooms to their customers at a markup. Using this model, the OTA itself is responsible for processing customer payments and making separate outbound payments to each supplier in follow-up.
Here are some of the most common characteristics of the merchant model in the travel industry:
When OTAs operate on the agency model, they act as intermediaries between travelers and service providers such as airlines, hotels, and car rental companies, kind of like a matchmaker.
Essentially, OTAs serve as the middlemen that connect travelers to various travel services. While they provide a one-stop shop for booking flights, accommodations, and other travel-related services, they do not outright own the inventory they’re selling and therefore do not process consumer payments directly. Instead, each supplier still owns their respective inventory and is responsible for processing payments.
Here are a few common characteristics of how the agency model works in the travel industry:
OTAs, such as Booking.com, operated by Booking Holdings, have become prominent. In fact, Booking.com is the largest OTA in the world and built its success on the agency model; however, the tides are changing.
An imminent shift to the merchant model is necessary to achieve continued growth, as it allows for more control over bookings and enables OTAs like Booking.com to implement loyalty and rewards programs independent of service providers.
The merchant model offers myriad benefits for both OTAs and end consumers — but it’s also important to look at potential challenges as well.
First, some business benefits for OTAs using the merchant model include:
With these in mind, the merchant model comes with some caveats, too, that are essential to consider when transitioning:
Now, in terms of the end consumers, some notable benefits of the merchant model are:
While the merchant model is on the rise in popularity, and for good reason, it cannot deliver its full roster of benefits across the travel value chain without the proper support structures in place. The solution? A well-implemented B2B payment strategy that helps limit the risks and costs common in online travel agency businesses. In most cases when talking about the merchant model, integrating a B2B payments strategy is just as important as having a robust B2C strategy.
Acting as the merchant of record on all travel-related purchases is a byproduct of adopting the merchant model. As such, it makes sense that taking advantage of virtual cards is one of the first steps to success. Plus, being responsible for processing transactions, while a large task to take on, gives OTAs access to top-value data and insights they can use to understand consumer behavior and preferences. Armed with that information, these businesses can optimize their offerings, marketing strategies, and pricing models to best align with their customers.
Digital payment solutions also provide OTAs with more authority over payments, with features such as range limit controls to help protect them from misuse while, at the same time, delivering operational efficiencies across the organization. Without these options, these factors can impact not only your OTA business but the end consumer, too.
Moreover, traditional methods for obtaining credit to pay suppliers, such as credit limits and bonding, can be expensive and constrain sales while placing all direct costs on the OTA. There are better, smoother ways to transition to a merchant model framework.
As the travel industry continues to shift toward this preference, discover how WEX can provide virtual payment solutions for the best protection and efficiency using the merchant model.
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