Kount LogoBLog Against FraudKount Logo

Unique Fraud Challenges Faced by Online Travel Agencies

posted on: Wed Mar 29 2017

Unlike individual airlines or hotel chains, Online Travel Agencies (OTAs) have to fight fraud not just in one travel product category, but across multiple product lines: airfare, hotel, car, attractions, vacation packages, etc. That means fraudsters have many more opportunities to perpetrate fraud against OTAs. And fraudsters don’t generally care how many attempts it takes to commit fraud or what the final booking is. With the high value of airline tickets, hotel bookings and other travel products, it’s worthwhile to fraudsters even if they have to make hundreds of attempts, as long as they get a reasonable number to pay off. All they want are approved transactions that they can sell for direct gain, or to use to fund other criminal activities (human trafficking, drug trafficking, terrorism, etc.).airline tickets

Airline Tickets

How significant is the complexity that OTAs face? When it comes to airfares, OTAs may offer as many as 150 million different air route combinations. Why so many? Each individual route within the air product hierarchy acts like an “SKU” with a vast number of combinations possible, based on the origination of an air route as well as its final destination. Add to that all the potential connections or stops in between the origination and the destination, and you have an almost exponential proliferation of options (called segments). Just like an airline, OTAs need to account not only for the price of the ticket and all other attributes, but must also screen for good transactions vs. bad transactions, across origination, destinations and segments. And while one airline might have hundreds of thousands of segments to monitor for fraudulent activity, an OTA – especially one selling internationally – has to monitor millions and millions of transactions, i.e., millions and millions opportunities for fraudsters.

One technique fraudsters use when booking air travel through OTAs is to place an online order less than 24 hours before a scheduled departure time. That way, the fraudster can check in online almost immediately (as soon as the booking is ticketed by the airline). Even if the OTA successfully identifies the fraud before departure, they have to ask the airline to “off board” a traveler with a confirmed seat.  Most airlines, due to liability reasons, will not off board a passenger once they are checked in.

Since OTAs know that fraudsters try to use these shortened windows to book flights, OTAs will often scrutinize those types of transaction more carefully. To avoid this heightened screening, fraudsters may switch techniques and book travel much farther out. Then, they’ll call the airline directly to exchange the airline tickets for alternate dates, routes, times, etc. Fraudsters are often successful at this duplicity due to a lack of communication between the airlines and the OTAs. Unfortunately, the OTAs first visibility into the scheme may be when the OTA receives a debit memo from the airline (more on debit memos below).

But no matter how the air travel fraud is perpetrated, it’s difficult for OTAs to recoup their losses, due to the thin margins that OTAs typically earn on airline tickets. Let’s do the math: OTA margins are 5%-10% for airline fares, and ticket prices are in the hundreds and even thousands of dollars. As a result, it can require 30-40 additional “good” bookings to make up for the loss incurred with just a single fraudulent airfare booking.  And due to the nature of airline bookings, OTAs are typically not the merchant of record for most or all of their airline transactions. This adds complexity to the process of recouping fraudulent bookings.

Here’s why: for an individual airline processing transactions directly as the merchant of record, the average reporting timeline for a chargeback averages 30-60 days. Thischargeback timeframe typically provides a window for an acceptable level of success on representments. But OTAs – not being merchants of record -- do not have re-presentment rights. Instead, they have individual contractual agreements with airlines that require the OTA to pay the airline for any chargebacks, plus a service fee. These are called debit memos. Receipt of these debit memos takes much longer and so offer much less chance of success in recovery by the OTA, even from friendly fraud or service-related chargebacks. Why? By the time a consumer reports a chargeback to the issuing bank, who then passes to the airline, who then passes it to the OTA as a debit memo, 120-150 days can pass. Even though settlement entities like the International Air Transport Association (“IATA”) and the Airlines Reporting Corporation (“ARC”) work diligently with airlines to “pass” the chargeback/debit memo onto the OTA faster, the timeline is still twice as long as the normal chargeback reporting process for a merchant of record.  

Hotel Bookings

Now let’s look at hotel bookings, which are a bit more manageable for OTAs when it comes to fraud (at least, compared to airline bookings).

To begin with, there is much less complexity and therefore fewer opportunities for fraud, since hotel bookings usually involve a single location, rather than the multiple segments and routes associated with airfare bookings. In addition, OTA margins for hotel bookingshotel bookings average 25%, and transaction amounts are usually lower than airline tickets. That makes recovering from fraudulent transactions on hotel bookings not as problematic as with fraudulent airfare transactions.

Nonetheless, hotel bookings can still present OTAs with challenges. For example, bundled or vacation packages may involve an overall lower margin as an OTA will often sacrifice margin on the hotel portion of the bundle to offer a more attractive package. Then there is the direct correlation between hotel “class” and fraudsters. The higher the “rating” of the hotel based on consumer ratings and reviews, the higher the correlation to fraud. What’s more, fighting fraud on transactions for hotels that are located across multiple geographies can also present difficulties. It’s no secret that fraud in some countries is much higher than the overall average. Finally, when hotel booking fraud is discovered by the OTA, “recovering” the booking can be tricky. If the perpetrator is still checked in, hotel personnel may not want to deal with evicting the individual in order to avoid a physical confrontation. On the plus side, OTAs are the merchant of record for the majority, if not all, hotel transactions. This makes it easier for OTAs to make representments of chargebacks and recover losses on hotel bookings.

Want to learn more about fraud in the travel industry and how to fight it more efficiently and effectively? Download the white paper: Today’s Fraud Challenges Facing the Travel Industry. Discover how a multi-layered approach to fraud prevention – employing capabilities like Authentication, Device ID/Recognition, Deep Analytics and Chargeback Intelligence – can help your online travel and leisure business fight fraud better.

New Call-to-action