Payments for travel left the gate, even if passengers did not

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Consumers struggling to get an airline ticket or hotel stay refunded in the wake of the coronavirus shutdown may not realize it's possible the online travel agency or best-fare aggregator did not send their money to the airlines or hotels in the first place.

Instead, those middlemen may have spent the funds on other business needs.

That's not always the case, but it happens enough to cause confusion among travelers who are trying to recover any funds they can as the pandemic pushes the economy into recession.

"When you buy an airline ticket it does not sit in an account until you take the flight," said Bob Kaufman, CEO and founder of Minneapolis-based ConnexPay. "Broadly speaking, many of these companies take travelers' money and use it for other purposes other than paying for your ticket. The airlines themselves are guilty of it too."

It's a fundamental flaw for many "future delivery" businesses, and there is nothing in U.S. federal laws or general payment processes that stops businesses from taking a consumer's money and using it for payroll or to finance a marketing campaign, Kaufman said.

ConnexPay has positioned itself as an alternative payment processor that can eliminate the risk of misdirected funds. When ConnexPay processes a payment for a client — most often a travel agent, online tickets site or tour operator — it puts the money into its own bank, Citizens Bank in Boston, and holds it until it has cleared fraud screening and the payment has been authorized and cleared.

That step is missing in many other payment processes in the travel industry, in that a processor is likely to take the money from the consumer's bank and give it to the travel agency in a day or two, Kaufman contends.

"The travel agent will have the consumer's money and can choose what they want to do with it, as it is completely up to them," Kaufman said. "When it is time to actually pay the airlines for the traveler, in effect, they will use someone else's money."

As part of its services, ConnexPay also provides single-use virtual credit cards for clients to use to make payments to suppliers.

It's not as if all other players in the travel payments industry are aloof as to how the process works and where its weak points are — especially with the coronavirus pandemic creating an unprecedented air travel shutdown and an overwhelming flood of requests for refunds.

The use of virtual cards for online agencies to pay airlines has become more popular in the past year. Processors like Elavon added that service with a group of travel agency partners as a way for airlines to more readily accept single-use virtual cards to streamline the payment process. The general premise is that virtual cards improve fraud protection, chargeback protection and cash flow.

This economic pause has also allowed corporations to focus more on how they handle corporate travel and employee travel expense payments, which can be an area of fraud companies can no longer afford.

"For companies that are legitimate, generally the funds are held until travel actually happens," said Susan Horne, a senior associate with Strawhecker Group. "In some states, like in California, it is required that the funds be in escrow until travel happens."

Canada and parts of Europe also have laws on the books that mandate the holding of payments until the service — a flight or hotel stay — is actually rendered. The U.S. does not have a general federal law in place protecting the consumer's money.

Canada extended protections to consumers in 2019 related to obtaining refunds, but in late March declared the magnitude of the coronavirus pandemic to be such that airlines were not required to provide refunds, but instead could provide future travel vouchers good for a year.

Even though some travel companies and major airlines would hold the money whether required to or not, there are others that might not follow that guideline and "you don't know for sure what they are doing with the money," Horne said.

"If I were going to work with an independent sales organization in the travel business, I would want to make sure they hold the funds until that flight happens," Horne added.

ConnexPay sees that timing of a payment to an airline as the key element that can come back to haunt an agency, the airlines or banks when an emergency like COVID-19 hits.

"We feel about 58%, or more than half, of consumers are buying airfare through an intermediary, rather than through the airline directly, because they find everything they need on those sites," Kaufman said. "The money the consumer pays never comes out of our bank until it is actually time to pay the airline or hotel on behalf of the intermediary and we take the agency's commission out."

Despite the efforts of all involved, the "processing of airline payments has been a muddle for decades," said Steve Mott, a payments analyst and principal of BetterBuyDesign. "Refunds have been a particular point of annoyance with different rules, processes and responsibilities — and interchange costs have been an issue because they are generally accorded e-commerce rates, unless otherwise negotiated."

Single-use virtual card numbers could become a mainstream solution as well, but a Universal Air Travel Plan charge card for consumers may also surface in the future, similar to the one used for businesses for decades, Mott suggested.

Ultimately, the coronavirus and what it has exposed in airlines' refund policies and payment flow inefficiencies have made many in the online travel agency business take pause.

"CEOs see the aftermath of the pandemic as an opportunity to reset their business models," Kaufman said. "The weakest companies are already failing, as we've seen. The stronger online travel agencies will see the crisis as an opportunity to change in ways they never could have imagined."

Ultimately, Kaufman wants his company to help those travel agencies work to regain trust and avoid the permanent loss of customers because of refund disputes.

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