Higher interest rates pinch ME travel

With the global interest rates hitting historical highs – currently pegged at 5.4 per cent in the United Arab Emirates and similar in other countries around the world – and economists anticipating further increases in the coming months, many travel businesses in the Middle East are finding it harder to meet their debt commitments or raise further cash.

TT Bureau

One of the main credit needs for travel businesses, particularly hotels and airlines, is to fund the delay between the provision of services and receiving payment for them. However, this is often overlooked. While this may have been manageable in a low-interest rate environment, this can no longer be sustainable now. Many travel businesses in the Middle East are still paying higher than average interest rates for their credit, due to the poor credit records they gained during the global pandemic.

Spencer Hanlon, Global Head of Travel Payments, Nium, says: “We frequently see travel businesses waiting 60 days, and more, to get paid in the Middle East. At the same time, we see people funding that gap using credit cards, easily paying 12 per cent or more in annual interest rates. That means they are losing 2 per cent, and more of the value of their services, in just waiting to get paid!”

He adds, “If your bank put transaction fees up by 2 per cent per transaction, you would be angry, and rightly so. And with the current uncertain economic outlook, it is quite possible that even higher levels of interest rates are coming for the region.

What is the answer to this problem? Essentially getting paid more quickly, as slow collection affects the bottom line. “But why are so many travel companies so slow in collecting payments in the Middle East? This is a global phenomenon as far too many travel businesses are still using 1970s era legacy systems to collect payments, often arriving via old fashioned physical credit card payments or traditional bank transfers,” Hanlon says. “In this day and age, there is simply no justification for this. The secret to faster collection ultimately lies with a mixture of automated processes and the use of virtual credit card payments, or ‘VCCs’. This combination can significantly reduce costs and improve productivity by automating booking reconciliation and providing greater protection against failed and non-refundable supplier payments,” he adds.

Remedial measures

Nium recommends that companies take the following actions to get paid more quickly:

• Have complete visibility of all transactions: reconciliations should not be time consuming
• Speed up your processes: no more twice weekly payment schedules, those days are gone
• Ensure everything is easily controllable: you need to be able to specify precisely the currency of use, where the transactions can occur, and control the dates on which transactions can be executed
• Adopt modern fintech payment methods that are both instant and low in cost, most probably in the form of virtual credit cards (but other options exist)
• In short: automate all financial payments processes or you will forever be at the mercy of volatility of all kinds, be that interest rates, inflation, or booking cycles.