Since the early 1990s, consolidation of credit card acceptance has been a highly discussed, and often controversial topic, mainly due to the high transaction fees hotels had to pay. Eventually, hotels realized that the key to reducing exorbitant transaction fees was to promote widespread credit-card acceptance. Leading hotel companies started implementing different tactics such as cross-border acquiring (a semi-centralized hub of card processing activities, made possible by recruiting merchants based in different countries) to facilitate this consumer behavior shift.
Cross-border acquiring, however, had to overcome many hurdles: first, it only worked in the European Economic Area Countries (making consolidation between USA, Canada, and APAC impracticable). Second, it suffered from numerous technical flaws such as the arbitrage of card scheme fees, or fragmentation of security requirements. Finally, it only applied to credit card transactions, meaning it couldn’t affect transactions using debit cards.
As Steve Robson, Citi’s Head of Commercial Cards, said at the time, “This meant that a fully centralized, single acquiring solution was simply not possible, resulting in a hybrid model between local and centralized.” Nevertheless, with no practical alternative available, virtually every brand played along those lines.
Today, the topic of payments has changed. Discussions in payments are less and less about cost savings, and more about user experience. Consumers are more open to purchasing and paying online, reassured by the guarantee that if something goes wrong with their transaction, they can always dispute the purchase and ask their bank for chargebacks. In-app payments are reaching their tipping point, especially among digital natives, who have no prejudice in storing their favorite payment methods in eWallets or applications.
Behavioral and cultural consumer trends are changing the way we view payments. When we paid with bills and coins it was natural to have to go through a transaction process. But with most payment transactions having moved to card or digital, consumers no longer expect to perform additional actions in order to pay.
The very simple act of pulling a credit card out from their wallets creates an unnecessary level of friction. Though more modest, a shift is observable amongst older generations of consumers as well. Even though less prone to finalize their transactions online, they are nevertheless getting more accustomed to the use of contactless transactions, a form of payment they consider more secure (and often easier) than online payments (e.g. Card-not-Present).
What appears evident across every demographic is that the ease-of-payment has become a critical, and sometimes deciding component of the customer experience, and newer facilitated forms of payments have become far more than just fancy accessories. In the transportation and logistics industries, players such as Uber and Amazon managed to reduce payment friction entirely, while in hospitality, Airbnb changed the guest experience by creating a frictionless payment experience, an experience that is as crucial as any other part of the travelers’ journey.
Today, a frustrating payment experience—not unlike poor quality of mattresses or unfriendly hotel service—can negatively influence guests’ perception of any brand. During the 2017 Wired Business Conference in New York, Visa’s innovation Chief, Jim McCarthy, stated that “the magic of Uber and Amazon (is that) they made payment kind of disappear.” Travelers (and consumers in general) do not want to be reminded about it, and credit cards issuers work hard to keep this magical illusion alive: both Mastercard and Discover abandoned signature requirements for card-present transactions as early as 2017.
The link between payment friction and brand reputation is an intriguing one, although no substantial study on the topic has been published yet. Nevertheless, there are numerous studies on the impact of delays during hotel check-ins, with the most authoritative being Lost in Translation: Cross-Country Differences in Hotel Guest Satisfaction, published by Cornell University in 2013. According to the article, guests from the US have a 5-minute tolerance for payment friction, after which their satisfaction drops by 47%. And queue during check-ins has almost exclusively to do with the “logistic of travel”: passport scans, data collection and, of course, payments.
Technology has made the majority of transactions effortless, and one can speculate that if Cornell published the same study today, guests’ tolerance would be even lower. Some go as far as stating that ease of payment has been one of the main (if not the main) reasons for Amazon’s ascent. Patenting the 1-Click technology has been a game-changer, something to remember “when we write the history of electronic commerce,” as Pennsylvania Law School Professor, R. Polk Wagner, famously stated. Today’s hotels, and companies in general, have to compete with that level of frictionless and, according to Wharton Marketing Professor, Ron Berman, Amazon’s advantage over competition is directly proportional to mobile shopping mass-adoption. “Because [mobile] screens are small,” Berman stated, “the larger the hassle [or number of clicks] it is to purchase, the lower the purchase propensity on mobile phones.” In this scenario, it is easy to understand why guests’ expectations increased so quickly, and why it is so important to adapt.
When addressing payment friction, the industry should consider two key aspects:
- Consumer behavior patterns
- Regional specifics
Credit card usage around the world is largest in the western world. In many countries in Asia, however, a switch to eWallets has grown faster than credit cards.
In the United States and Canada, where convenience in payments plays a crucial role, contactless and CHIP transactions are mass-adopted, with digital payments surpassing cash as early as 2016. In Europe, however, purchasers’ behavior is considerably more fragmented. While UK, Ireland, and Spain are contactless markets, Germany is still very much a debit market (even though contactless payments are large scale-promoted by merchants) and, except for a few apps, eWallet transactions are almost a statistical aberration.
21% of Italian population uses prepaid cards, while only 5% do so in France. Over one in three Russians pay with eWallets, with Yandex.Money being the leading provider. Southeast Asia is historically a contactless market, but regional eWallets (such as Boost in Malaysia, or GrabPay in Singapore) are taking a significant share of the market, encouraged by the success of goliaths such as AliPay and WeChat Pay.
China is again entirely different: according to a recent Alipay and Nielsen survey, 92% of Chinese outbound tourists are “more likely to pay with a mobile phone if a merchant accepted Chinese mobile payment systems,” and 89% “would be more likely to shop and spend locally.” The fragmentation of consumers’ payment touchpoints is so central in any industry that most credit card issuers started asking themselves how to stay relevant in a world that shifted to digital payment services almost overnight. The bottom line is that having a payment strategy in place without taking economic, cultural, and political factors into consideration would be a dangerous mistake.
The ability of hotel companies to remove (or at least reduce) the transactional friction from the guest experience relies in large part on the capacity to make payments as “invisible” as possible. In an over-fragmented market, where innovation and experimentation are siloed, multinational companies should implement an abstraction layer to facilitate interoperability and to provide a unified experience to both guests and staff, no matter their location.
Once transactional exchanges have been reduced to the point where they become almost unperceivable, hotel staff can better focus on taking care of guests’ needs. It’s worth remembering that transactions, per se, are not a service provided to the guests, but a service provided to the companies. By this interpretation, self-check-in, mobile keys, and all the elements that made guest service great, become much easier to implement when the payment part has already been taken care of.