For years, much of the travel industry debate has centred on the battle between traditional tour operators and Online Travel Agents (OTAs), with endless discussion about who owns the customer relationship, who has the best technology stack and who can dominate Google search results. But in reality, one of the biggest strategic advantages in the accommodation sector has very little to do with hotel inventory or website design. The real power increasingly comes from controlling the cash collection process and becoming the “merchant of record” for accommodation bookings.
This is where companies such as Booking.com, Expedia Group and Airbnb have quietly evolved beyond simple travel distributors and become something much more powerful. In many ways, they now operate as hybrid travel and fintech businesses, because the real profitability increasingly comes not just from commissions, but from controlling the flow of billions of pounds of customer money moving around the globe.
One of the most important things many people outside the sector fail to understand is the massive difference between selling accommodation-only products and selling traditional package holidays that include flights. In the UK, flight-inclusive package holidays fall under ATOL regulations and various customer protection rules designed to safeguard travellers if an operator collapses. As a result, much of the customer money collected by a traditional tour operator is heavily restricted. Funds often need to be ringfenced, held in trust accounts or protected through financial bonding arrangements, meaning operators cannot simply use that customer cash freely to fund growth or investment.
As I discovered when I launched On Holiday Group and later served as chairman of Alpha Rooms, the cash flow from our accommodation-only division provided the capital to expand the business rapidly and to invest in Google and brand advertising, since although margins are lower than selling packages, using customer cash is subject to few restrictions in this sector.
The key is to be the accommodation-only merchant businesses that collect cash from customers on behalf of hotel partners, because customers are used to paying in full when booking late deals, and you can often negotiate to pay the hotels a month after the customer’s departure, creating large working-capital stretch balances. Unlike banks, they do not pay interest to access those funds, and unlike traditional package operators, much of the money is not trapped in trust structures.
The scale of this becomes extraordinary once you look at the numbers involved. Industry analysis suggests that Booking.com alone is holding somewhere in the region of $8 billion of traveller money at any given time, while Expedia Group may hold even more. This effectively gives these businesses giant revolving credit facilities funded almost entirely by travellers themselves. That free cash flow can then be used to invest in artificial intelligence, technology development, acquisitions, marketing expansion and even stock buybacks without the need to constantly raise external capital.
This is one reason the merchant model is so strategically powerful and why the largest accommodation platforms have become so dominant. The bigger the OTA becomes, the larger the float of customer money it controls. The larger the float, the more aggressively it can invest in technology, customer acquisition and market expansion. This then attracts more hotels onto the platform, which in turn generates even more bookings and therefore even more customer cash float. It becomes a self-reinforcing financial flywheel that smaller competitors find incredibly difficult to compete with, meaning the bigger player gets bigger and the rest are gradually squeezed out of the market, which is exactly what happened to Alpha rooms over time.
What makes the model even more lucrative is that the payment layer itself has become a major source of profit. Once an OTA becomes the merchant of record, it controls both sides of the financial transaction. It decides which currency the customer pays in and which currency the hotel supplier ultimately receives payment in. Sitting between those two transactions creates enormous opportunities to profit from foreign exchange conversion margins.
A customer in the UK may book a hotel in Spain and choose to pay in pounds sterling. The Spanish hotel may ultimately receive payment in euros. In the middle sits the OTA, which controls the conversion process. Most travellers barely notice the 1% to 3% exchange rate spread embedded in the booking price, but when you are processing tens of billions of pounds’ worth of international hotel reservations every year, those small margins quietly add up to hundreds of millions in additional high-margin profit, and even more money can be made by treasury departments buying currency in advance if rates drop temporarily. This is, of course, calculated gambling and carries risk, but it’s used to make up 30% of Medhotels profits when Hime Perry ran the business.
This is why many of the world’s largest travel businesses increasingly resemble financial technology companies wrapped inside travel brands. The customer may think they are simply booking a hotel room, but behind the scenes, the OTA is managing global payment flows, foreign-exchange conversion, fraud prevention, payment verification, and cash-flow optimisation on an enormous scale. The travel transaction itself is almost becoming the trigger for a much larger financial ecosystem.
Ironically, many hotels originally embraced the “Pay via Booking.com” style merchant model because it solved genuine operational problems. Hotels were tired of dealing with invalid credit cards, payment fraud, no-shows and collection administration. Allowing the OTA to handle the payment process simplified operations and reduced risk. However, in doing so, much of the accommodation sector gradually handed control of the payment layer to the OTAs, and with it, one of the most profitable parts of the value chain.
Today, many independent hotels are not just dependent on Booking.com and other OTAs for customer acquisition, but also for payment processing and even cash-flow timing. Meanwhile, the OTA is generating commission income, financial float income and foreign exchange profit from the same transaction. Once you fully understand these economics, it becomes much easier to see why merchant models are so attractive and why the biggest players in accommodation distribution have become so difficult to compete against.
The next decade of travel innovation will almost certainly be built around this financial infrastructure. Although preparation for AI Search and constant testing of user interfaces are important, many businesses forget the basics of optimising travel distribution, payment processing, foreign exchange management, and financial engineering into one integrated global platform.
I always advise travel businesses to act like travel agents but operate like banks, maximising customer cash that sits outside trust funds. Selling flight-inclusive packages may boost margins and increase stickiness, but often at the expense of funding growth through the use of customer cash. The optimum solution is often to operate both products, but to keep them within separate trading companies to keep them outside the focus of UK ATOL regulators.
The rules are the rules, but like most things, there are a few exceptions that can advise you have to work legally outside of them.
Email me at se@steveendacott.co.uk if you want to know more. Although I charge handsomely for my time, I have never had a client who did not achieve a very healthy return on their investment.