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Nathan Kellar, Senior Director Distribution US/CAN + Global Wholesale, Marriott International*, HSMAI Global Distribution Advisory Board Member
Virtual credit cards were intended to streamline third party payments and although they accomplished that task, they have also quietly created one of the most persistent sources of leakage in hotel distribution: breakage…the leftover, uncollected balances sitting on VCCs after cancellations, no shows, timing issues, configuration limits, taxes, FX variances, front desk errors, or mismatched systems. Hotels earn the revenue, but too often, they never see all of it.
What Is Breakage?
Breakage is the unused prepaid value on a virtual card issued by a third party distributor. When the card isn’t fully charged for a plethora of reasons, the amount left on the card sits unused.
Under accounting rules (ASC 606), distributors could choose to treat the remaining balance as revenue once redemption becomes unlikely. That framing alone sets up an extensive list of industry tensions. This topic was recently discussed by the HSMAI Global Distribution Advisory Board.
Revenue or Liability?
Some argue breakage should be treated as a liability. In many cases, hotels aren’t being actively notified of uncollected funds, and the partner has not taken meaningful steps to help them identify the payment owed. Others point out that distributors have historical data showing predictable breakage levels, which is why some treat it as revenue.
That difference drives behavior and in some cases causes misalignment. Two buckets emerged from the discussion:
- Identifying existing breakage
This includes reconciling partial charges, mismatched taxes and fees, improperly processed cancellations, or charges that never ran. Some partners are open to working diligently to ensure properties are paid while others have historically been less cooperative in implementing system-wide resolutions. - Preventing breakage through better configuration
Charge windows are a major culprit. Short validity periods, tight pre/post stay charging rules, or product types that don’t match VCC parameters set hotels up to miss revenue. Some providers are proactive, allowing automation to help hotels charge cards proactively.
Across both categories, hotels see wide variability depending on the partner and their motivation.
What Hotels Are Actually Seeing
Several members described breakage reaching meaningful financial levels when examined through forensic audits. A common estimate cited is roughly $13,000 per property per year. For an industry hyper focused on and concerned with net operating profit, that is real impact.
And that’s before factoring in reconciliation vendors, which can take up to 25% of recovered funds. Layer in security risks, PMS and extranet access concerns, along with inconsistent tax handling, and the picture gets even more complicated.
Front Desk Errors: The Elephant in the Lobby
Many breakage scenarios start right at check-in. A missed “swipe”. Incorrect tax coding. A cancellation noted verbally but not systemically. Hotel’s own those errors, but partners also own the design choices that make errors more likely.
Automation is emerging as one resolution, but not all PMS connections support it.
Some operators are shifting away from VCCs altogether. Direct billing and direct bank transfers are being tested as alternative methods to eliminate VCC related leakage; however, even these options can reintroduce breakage if not configured correctly.
There was an appetite to discuss industry level standards around:
- Best practices
- Technology standards
- Training
- Incentive and partner alignment
Ultimately, successful partnerships depend on optimizing performance, including profitability, meaning a smarter, more transparent, and more aligned approach to VCCs is overdue.
Questions for your team:
- What is the best way to educate hotels on breakage and improve awareness?
- To what degree do OTA partners have a responsibility to ensure hotel suppliers get paid fully?
- How does this impact a hotel’s net profit?
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* This article reflects the collective views of the individual HSMAI Global Distribution Advisory Board members, and not the views of the author alone or Marriott International.