ASCENT has been helping merchants take credit card payments in the Vacation Rental (VR) industry for more than 20 years. We are, therefore, uniquely positioned to provide some perspective on what is happening in the payments industry during the COVID‐19 pandemic. The VR Industry will get through this crisis, but not without some potentially serious introspection and infrastructure changes in some areas to create a more solid financial foundation. If you are in this space for the long haul, read on.
Credit Card Processors, OTA’s, and Payment Facilitators are holding funds at an unprecedented rate at a time when cash flow is desperately needed by many short‐term and medium‐term rental property managers. Within days of the stock market plunge, reports surfaced of large processors putting an immediate hold on all travel‐related monetary distributions, including valid credit card transactions. Well known OTA’s in the Short‐Term Rental (STR) space made unprecedented policy changes to refund rental payments to guests who had not yet completed their stays, while others chose to discontinue their “early payout” programs. To understand why these decisions were made, and how the players in the VR space are being affected, let’s take a look at how the banks that process credit cards look at risk and the impact of consumer’s rights in the U.S throughout the payment system.
HOW ACQUIRING BANKS CALCULATE VACATION RENTAL (VR) RISK
The credit card companies (card brands) and acquirers (processing banks) tend to lump VR under a generic “T&E” (travel and entertainment) category, along with airlines, cruise lines, and hotels. Scrutiny of these businesses is extremely high, especially at this time. The federal government is working on getting bailout funds to the airlines due to how hard they’ve been hit by the coronavirus causing halts on air travel. Every airline has an acquiring bank behind them who processes their credit card payments and is responsible for covering the millions and millions in risk. Acquirers look at VR in a similar light.
Acquirers underwriting a vacation rental property management company must have knowledge regarding both the VR ecosystem in general and how the management company operates in specific. From a processing bank’s perspective, the farther in advance a property manager takes rental deposits, the longer they need to count on the PM to stay in business, stay fiscally sound, and to continue to provide the service at the level the guests expect. The more volume a PM processes on credit cards, and the longer in advance before providing the guest with the exact experience they expected, the higher the processor’s risk grows.
The risk is held at the acquirer/processor level because if anything goes wrong with the PM or the service they are providing, the processing bank is required to step in on the PM’s behalf and make it right for the cardholder. What can go wrong?
- the house doesn’t look like the photos the guest saw online
- the house is no longer available to rent
- natural disaster wipes out access or homes themselves
- PM goes out of business
In these situations, the guest can exercise their legal right to dispute the transaction in the form of a chargeback. Chargebacks are an annoyance when they come in one at a time to a healthy PM, but when they come in by the hundreds (or thousands) due to a serious issue, risk mitigation quickly becomes a high priority. Processing banks take on millions of dollars of risk with each approval of large property managers. A quick and dirty calculation of how much risk the bank is taking on YOUR account is to take your monthly credit card volume and multiply it by how many months in advance you accept rental deposits. What happens if you don’t have enough funds in the bank to cover all those advanced payment refunds in a crisis? The processing bank is required to cover it on your behalf.
All merchant processors, whether Payment Facilitator, MSP (Merchant Service Provider), or local bank, have risk policies designed to monitor and identify potential losses before they occur (or sometimes, as they are occurring). In one monitoring process, the acquirer will conduct a periodic account review (often annually, in normal times). They will analyze the processing history of the account, including refunds and chargebacks, and ask for updated financial information for the business to verify the business’ liquidity and financial stability.
Acquirers also have systems in place to analyze processing on a transaction by transaction basis. If there are any changes or anomalies, the transactions will be flagged and often investigated. One example of this would be abnormally large sales and/or refunds: if a donut bakery ran a $100,000 sale, they might reasonably pull that transaction aside and check in with the bakery before sending the transaction through the financial settlement system. Was it an employee error, a fraudulent charge, or a valid sale to a Simpson’s convention? (mmmmm donuts…)
Acquirers also look at unusual refund and chargeback velocity. Refunds with no previous offsetting sale can be a fraudulent way for crooks to steal money. With high refunds occurring due to the COVID‐19 cancellations, the acquirers are also needing to verify that merchants have the funds to cover the refunds they are processing. Which brings us to one of the biggest factors in risk and business health within the vacation rental ecosystem.
In the STR industry, it can be difficult during normal times for a processor with millions of dollars at risk with each merchant account to know which merchants are going under and which are financially sound. In the middle of a global pandemic, it is even harder. One of the strongest indicators is whether the property manager holds the advanced deposit funds until the stay occurs. Those who do, have strong reserves to meet unanticipated demands. Those who don’t, or those who feel the need to “borrow from escrow” to pay operational expenses likely do not have the liquidity to make it through a crisis. Regardless of what your own state’s real‐estate regulations require, thinking of your guests’ rental deposits as your GUESTS’ money – and therefore untouchable until the promised services have been delivered – is not only wise, it’s the only way vacation rental property managers are going to make it through this crisis.
ALL payments providers in this space – whether OTAs, payment facilitators, banks, or processors – are looking at the travel merchants right now and trying to determine how to best limit billions of dollars in potential losses. Property Managers should expect to hear from their payments provider and should be prepared to provide financial documentation that can support cash on hand relative to current exposure based on the payments they’ve accepted for bookings that haven’t happened yet. It’s important now, more than ever, to have a payments partner that can advocate for you, tell your story, and help keep your cash flow flowing. The property managers that are utilizing trust/escrow accounts are going to be the ones that get through the crisis we’re facing today and will be prepared for whatever the next one is.
HOW CONSUMER RIGHTS AFFECT VR RISK
Years ago, consumer rights were governed by Federal Regulation Z (Truth in Lending), which provided consumers the right to a full refund on transactions they claimed they were “not satisfied” with. Today, similar consumer rights are governed at the U.S. federal level under the Fair Credit Billing Act, as detailed here: https://www.consumer.ftc.gov/articles/0219‐disputing‐credit‐card‐charges .
The card brands (Visa, MasterCard, American Express, Discover) further regulate the process as it pertains their payment method. Each company has hundreds of pages outlining what a consumer/cardholder must do in order to invoke these rights after paying with a credit card, and what a merchant must do in order to prove that the payment is valid and should be honored.
Given the cardholder’s federally mandated rights, and because the card brands maintain that they are not a collection service but instead a payment method with which to transfer funds between two willing parties, the responsibility ultimately falls on the merchant’s shoulders to prove:
- the cardholder authorized the payment
- the cardholder read and agreed to all relevant policies
- the services were provided on time and match what the cardholder expected
In the VR industry, where payments are taken in advance and generally not in person, proving these things can be complicated.