The global Covid-19 pandemic touched every business vertical in some way. Few felt the pain as acutely as the travel industry, though.
According to the International Civil Aviation Organization, global air traffic dropped by more than half in 2020, from 4.5 billion passengers in 2019 to 1.8 billion. The organization estimates the industry suffered a $370 billion financial loss due to the pandemic.
Even now, as vaccines have slowed new Covid cases, millions of would-be travelers are still avoiding air travel. For some, the confined space of an airplane will simply be off-limits until the pandemic is history. The American Hotel and Lodging Association concluded that the impact of the pandemic on the travel industry was nine times greater than that of the September 11 terror attacks.
This loss of income is not the only problem facing merchants in the travel industry, though. Customers demanding refunds or other compensation for canceled flights and events meant that industry players also had substantial expenditures, right when they could least afford it. And the damage goes even deeper than that.
Chargebacks Threatening Airlines and OTAs
Chargebacks were a problem in the travel space long before the outbreak of COVID-19. Now, however, they have become a seemingly insurmountable hurdle, both for merchants and the financial institutions who work with them.
Tens of thousands of travelers had plans abruptly canceled. In many cases, they learned that there wasn’t always a readily available plan to reimburse travelers. Cardholders made reservations, deposits, and payments with airlines and online travel agencies (OTAs) that were now closed, bankrupt, or simply too low on cash to supply a refund.
Under these circumstances, most customers were instructed to file a dispute with their issuing bank. This is a proper and legitimate use of the chargeback process. However, it has had the unfortunate side effect of normalizing chargeback requests in the travel space.
An entire segment of cardholders who may have had limited knowledge about chargebacks suddenly learned that customer disputes were a convenient, no-hassle way to secure a refund. This opens the door for the threat of friendly fraud going forward.
Chargeback Losses Due to Friendly Fraud
According to the 2022 Chargeback Field Report, about two-thirds of merchants cited an increase in post-pandemic chargeback abuse (commonly called “friendly fraud”). Of those, the average respondent noted an increase of 28 percent.
The travel industry already accounted for roughly 1 in 8 chargebacks issued in 2019, according to Chargebacks911 internal data. Worse, all indicators suggest that cases of friendly fraud will continue to climb long after the Covid crisis has passed. This is a compounding problem, which is bad news for the travel space in the mid- to long-term.
As cardholders get more comfortable with abusing the chargeback process, they may start to do so deliberately. What we’re seeing a lot of in the travel space right now is a practice called “double-dipping;” the cardholder requests a refund from the airline or OTA, then turns around and files a chargeback. They get their money back twice, while the company is on the hook for the added losses.
This adds up quickly, costing travel industry merchants millions of dollars in revenue every year. That would be bad enough on its own, but then you have to consider that each friendly fraud chargeback can also result in:
- Lost opportunities to recapture revenue due to now-vacant seats.
- Lost opportunities for ancillary revenue, like in-flight sales.
- Higher overhead from wasted processing costs and other expenses.
- Costly chargeback administrative fees.
What Can Travel Do to Fight Friendly Fraud?
Card networks like Visa and Mastercard have offered some relief for travel merchants. The threat posed by chargebacks still looms over the industry, though. So, how can airlines, hotels, and OTAs safeguard their revenue?
Travelers are still leery about making long-term travel plans. At the same time, merchants in the travel sector can anticipate a surge of friendly fraud challenges just over the horizon. Luckily, these risks can be mitigated to some degree by focusing on three fundamental, customer-centric service strategies:
#1. Flexible Cancellation Policies
Flexible cancelation terms can be a great asset, considering the lingering uncertainty about the future. Having the option to change or cancel a trip can encourage fliers to make a reservation without fear that they’ll lose their money if something unpredictable happens. In the event of a cancelation, merchants could provide the option of either a refund, or credit vouchers redeemable for future flights, perhaps with a free upgrade.
The important thing is keeping policies transparent. Travelers should understand the full picture before booking. They should not be surprised by hidden fees when travel plans change.
#2. Open Communication
In most cases, cardholders who contact the bank aren’t actively trying to get something for free at a merchant’s expense. The cardholders simply want their money back. Merchants who communicate effectively with customers and reassure them about the process are much less likely to see chargebacks.
This advice extends to financial institutions as well. Alerts services and programs like Rapid Dispute Resolution provide a window in which to resolve a dispute before it progresses to a chargeback. Suspicious cases that show signs of deliberate chargeback abuse can be more readily identified and subjected to the representment process.
#3. Engaging in Chargeback Representment
The representment process lets merchants fight back against illegitimate chargeback issuances. It can’t undo the damage to one’s chargeback ratio. However, it can allow the merchant to recoup funds, and send a message to other potential chargeback abusers.
Unfortunately, the representment process is complicated and time-consuming. Representment requires compelling evidence to prove that the cardholder’s claim was invalid. With ticketing-related chargebacks, this often means proving that the legitimate cardholder is the one who that used the service.
Of course, a travel agent or other representative may not always be able to verify this. And, with the added complications of Covid-19, more cardholders are filing chargebacks because of travel restrictions or other unusual complications. This can make representments even more complex.
In Conclusion…
The effects of the virus outbreak will probably linger in the travel space for many years to come. Post-pandemic fallout will impact the industry through next year, at the very least.
Airlines, OTAs, and other merchants in the travel space are already seeing a lot of chargebacks, and not all of them are legitimate. Chargeback abuse will only increase with time, even as COVID cases decline. Merchants should focus on preventing chargebacks whenever possible, and fighting invalid claims through representment.
