Why The Summer Olympics May Be An Epic Test For Airbnb

When the Summer Olympics commence in Rio de Janeiro in August, athletes with dreams of gold will not be alone when it comes to being put to the test and showing the world whether they have what it takes to emerge from the pack. The Games will also test Rio itself. With roughly 500,000 visitors expected to visit during the Olympics, merchants who cannot keep up with the swell, may find themselves on the losing end of what could otherwise be a boon for business and public relations.

Such notable players with a lot to gain or lose are vacation rental platforms like Airbnb and HomeAway – particularly Airbnb, which was named the official alternative accommodation services supplier for the Summer Games back in March 2015 and, in turn, will presumably have had a year-and-a-half to prepare for the big event.

But not because they may run out of inventory to rent, but because their payments platforms may not be well suited to the cross-border payments challenges that face them once citizens from all over the world descend upon a single destination, en masse. And a single destination that is characterized by some very idiosyncratic payments methods.

PYMNTS recently caught up with Nagarajan Rao, SVP and Global Head of Business & Product of Transpay, a payment solutions provider in the sharing economy. Rao discussed the challenges of regulated global money movement — especially when magnified by a large event like the Olympics. The focus of our discussion was primarily on Airbnb, due to its Olympics partnership.

International transactions are difficult to begin with, Rao said. “Cross-border payments is a very complicated business for a lot of companies,” he said. “This stands true especially for marketplaces that are growing literally like wildfire around the world,” like Airbnb, he said. From the prospective of a payments provider himself, Rao said the most important aspect of a viable long-term solution is being able to accommodate all the different regulations and complexities of each individual country a particular business is operating within. He added that he thinks a lot of payment providers are presently “ill-equipped to provide a solution.”

A major challenge Airbnb faces, Rao said – especially in a heavily-regulated country like Brazil – is that the platform uses costly third-party providers for payments. This means, he said, hidden fees for both hosts and guests. And when there are hidden fees, he said, there becomes the disintermediation issue – disintermediation outside of the platform, that is. A satisfied host and guest combination, he explained, can go rogue and leave a platform to avoid fees if they want to do business again down the road. “In the future, there is a risk that someone who stayed with them once can always go back to them and actually stay with them again, bypassing the Airbnb or the HomeAway platform,” he said.

When hosts welcome international travelers to Brazil for the Olympics and book on Airbnb or HomeAway, Rao explained, they will be charged foreign exchange rates, transaction costs (along with international fees), and additional deductions such as in-country costs – “which is typically a part of the transaction, which nobody sees,” he said. In the end, both the host and the traveler take a hit, he said.

“You’re looking at anywhere between 10 and 20 percent loss in transaction value if you’re using multiple third parties to do this. And on top of it, the cost of this disintermediation is a big, big issue,” Rao said. He further explained that in this sort of freelance business model, there is a trend among freelancers of attempting to remove themselves from the platform and, once established, operate outside of it. In the case of an Airbnb host, he said, “If you’re to be doing repetitive hosting, you might think, ‘you know what, I might just go around this and start doing this myself.’” This practice, he said, obviously isn’t in the best interest of the future of Airbnb and its kindred offerings. “So you’re risking 20 to 30 percent of your business to payment providers, who also can enable hosts to work around you,” Rao said.

The solution, Rao said, is for the fees to come down by better adapting to each local market instead of a blanket approach. “It is very important for platforms like Airbnb, like HomeAway, to understand that prepaid debit cards and bank wire transfers or SWIFT wire transfers are no longer the most effective way to move money around the world. They are very expensive for the receiver and are also extremely slow, taking anywhere from 3-to-7 business days to reach a host.”

To do this, Rao said, the payment and payout experience need to be embedded on the booking platforms themselves, and the local hosts should be paid directly into their local bank accounts in their local currency. “Ultimately, it’s all about creating a seamless direct connection to the local country that complements the immersive user experience that these websites pride themselves on,” he said.

Building platforms that are tailored to work directly with individual local currencies and within local parameters is crucial because, Rao said, “regulation is tightening its noose.” More requirements, he said, mean that new international business relying upon cross-border payments will have an increasingly difficult time succeeding, let alone launching. “We believe that regulation is the most important aspect of our business,” he said, adding, “And being able to understand and adapt to regulation, and then being able to match that to the current market and the needs are going to be the driving factor in the cross-border space.”

It’s a whole new game

Platforms like Airbnb, and even Uber for that matter, were not even in existence five years ago, Rao pointed out. So, even though hosts and drivers may grumble about paying fees and they may not be entirely satisfied with how they are currently being paid, he said, “they keep on doing it, because these are the only options available out there.” Eventually, Rao said, this will come back to bite the platforms.

“I think there are notable hiccups that have to be solved now,” Rao said. “The problem is that the perception that everybody has is that, ‘Oh, if I have to pay someone internationally, it’s just normal for me to think that I’ll be paying 10 to 20 percent of the money I’m receiving, at cost, because that’s what everybody is just used to now. People don’t think twice about it.” With the evolution of services, he said, they will.

In the next couple of years, Rao said, the biggest change in the industry will most likely be around the push to develop simplified APIs. When it comes to cross-border payments, he said, there is a lot of complication around data collection, compliance, and auto-execution. Marketplaces have largely focused on simplifying the global credit card acceptance process. Now that this is heading in a positive direction, marketplaces are shifting their attention to creating a seamless payout experience. “This means, utilizing an API with a direct connection to hundreds of emerging and developed markets around the world – simplifying that – and embedding the user experience onto the marketplace,” he said.

To do this, he said, players will need to build infrastructure and licensing and compliance capabilities. “It’s really how far you are in the game now and how far you can go in the next couple of years,” he said.

The Rio Olympic Games begin in just five months. How much Airbnb and similar freelance-based companies stand to gain from the Games remains to be seen, but the competition to remain atop the heap will seemingly come down in large part to adapting to cross-border regulations and fees.

TO READ THE FULL X-BORDER PAYMENTS OPTIMIZATION TRACKER, CLICK HERE