How blockchain could change the hotel industry

Independent hotels have complained about the unfairly high commissions charged by Online Travel Agents (OTAs), such as Booking, Expedia, Agoda, Tophotels, LateRooms and more. According to hoteliers, their rates make up as much as 25% of the booking revenue per guest. This article focuses on possible solutions to the problem.

The price hotels and guests pay to online booking sites

Douglas Quinby, Senior Vice President of Research at Phocuswright, a research company, was saying:

“2016 was the first year when OTA lodging bookings exceeded total hotel website gross bookings,” further adding the forecast for the year of 2018: “hotels continue to ratchet up the pressure on online intermediaries.”

The analyst is right. The other day, the Daily Mail conducted a survey among hoteliers. They were furious!

“Оnline booking agents are parasites that force prices up,” Beppo Buchanan-Smith, of the Isle of Eriska Hotel and Spa in Scotland, didn’t mince his words. “The two biggest websites, Booking.com and LateRooms.com, charge a commission of 15 to 25 percent of what the customer pays. Hotels have to raise room prices to cover their losses.”

Ian Davies, of Ellingham House in North Wales, gets more specific about numbers, saying:

“One guest paid £950 through an online booking website, of which £220 was commission.”

Chef Chris Chown, of Plas Bodegroes in Pwllheli, north-west Wales, hits the boiling point:

“They have the industry by the throat and take over your business. I am terminating my contract with Booking.com.”

According to hoteliers, Booking can lock out access to customer’s information, thus preventing direct contact. Alternatively, it can force hoteliers not to use their own websites to undercut Booking.com. Meanwhile, the market power of OTAs over hotels is extremely irregular. The higher a hotel’s dependency on customers from aggregator websites, the worse the conditions foisted on the owner. The commission rates paid by larger chains, such as Hilton, are significantly (10% to 15%) lower.

The global hotel industry is currently valued at $500 billion per year. Back-of-the-envelope estimates show that up to $125 billion in unnecessary costs are annually shared by hoteliers and guests.

What makes OTAs so popular?

To begin with, it’s a lack of trust in the hotel industry (especially independent hotels). According to a Phocuswright study, travelers choose OTAs as they are more trusted. “Trust” is built by a number of details. User-friendly interface, variety of choice, convenient search with relevant results, various booking options, multiple reviews, photos, and articles. This makes the customer feel fully protected.

Only big hotel chains can afford substantial marketing budgets. Certainly, tiny hotels launch a website to attract guests, too. But when it comes to updating the website with seasonal offers, filling it with quality content, getting it to the top of search engines — small businesses do not have sufficient funds to cover even this minimum. Unlike OTAs, which spend large sums of money on advertising in Google, Yahoo, Yandex, and Baidu. Booking.com alone spends $8 billion a year promoting itself, Reuters reports. This guarantees that their websites are always ranked high and visible on the search engines.

This results in the full dominance of OTAs in small hotel bookings. It is these latter that suffer from extravagant rates and top-down pricing.

Who is to pioneer blockchain launch in the industry?

“Independent hotels are going to represent the biggest pool for blockchain distribution since they typically pay a lot more through traditional distribution channels!” says Harvey Norman, Hospitality Advisor and Director at HospitalityTechGuru. “However, there will be the cost of installing the new technology that hoteliers need to consider before giving up traditional ways altogether. This will include hiring the right talent, investing in new tools and training the right people <…> Since the bitcoin will disturb the medium for OTAs <…>, hoteliers are expecting to face some resistance. However, most experts agree that it will be a win-win situation for hotels and OTAs.”

Igor Chugunov, CEO & Founder at CREDITS blockchain platform, objects:

“There are low entry barriers to the blockchain system. Any device can be connected to a blockchain in just a few clicks and through the purchase of tokens. This option will be available even to the smallest market players. Yet what we thus need is an off-the-shelf solution — a decentralized solution with a user-friendly interface for the convenience of non-experts.”

All-in-one application

The functionality of the CREDITS platform allows it to serve as the basis for a decentralized application (DApps) for all-in-one hotel management service. Booking, loyalty program, real property and inventory accounting included.

“Imagine all of these outdated hotel management systems, such as Booking Engine, PMS, and Channel Manager, amalgamated to form a united blockchain diary,” says Igor Chugunov. “Recording all orders from the hotel and OTA portals as well. Recording all points earned by guests under their loyalty programs. Encryption makes these processes more secure. Entries can’t be falsified or deleted. The public key recorded using the application enables all open data to be viewed: transactions, previous bookings, reviews. The authors of entries are not disclosed. It is the private key that opens up access to confidential information.”

This decentralized diary will become a new booking mechanism and a new database to store the hotel lists, all hotel information, guest reviews, transaction history, the details of loyalty programs. Customers will easily find their perfect room.

Robert Cole, founder of RockCheetah, a consulting firm, draws the future, “Let’s take the example of a guest who needs adjoining twin rooms with an ocean view from a high floor. Typing in this query in the blockchain app will show all hotels that would offer the right combination of rate, upgrades and rewards which may be offered by hoteliers. The authenticity of all records is guaranteed.”

Smart contracts for booking

Even in the context of automation (automatic update of room availability on the hotel’s website), many booking phases are run manually and are thus ineffective and unreliable. The blockchain will ensure that all transactions are governed by smart contracts encoding the rules of commercial relations between the parties. What is it going to look like in real life?

“A guest or an OTA sends a request to book a certain room specifying, among other things, his or her virtual wallet,” explains Eugeniy Butyaev, CTO & Co-Founder at CREDITS. “A smart contract automatically verifies the hotel room availability, checks whether or not the necessary funds are held in this wallet. If the existing terms and conditions are complied with, the smart contract remits money from the wallet, records the transaction in the register, updates information about the purchase of this room on all websites, and sends a reservation reference to the guest. It is also known as the digital room key. Guests can simply press the virtual unlock button on the smartphone or any other gadget app to unlock the door of their room. If any damage is found in the room or the minibar has been totally emptied, the smart contract will withdraw funds from the guest’s deposit account even after checkout. No hard-copy paperwork throughout the transaction cycle. All-encompassing digitalization.”

Smart contracts also guarantee protection against fraud, such as fake orders (on the customer side) or duplicate room listings (on the hotel side).

All loyalty programs on the same blockchain

Customer loyalty experts Collinson Latitude have calculated that “61% of travelers are looking for loyalty programs with a broad range of rewards.” According to the statistics provided by corporation IMI, “68% of customers demonstrate loyalty to the hotel brand which offers the highest number of rewards.” Marketing experts from Mintel agency report that “guests are losing interest in loyalty programs if they find them difficult to use.”

It sounds like a reasonable solution for small hotels to attract new guests and convert them into loyal clients. However, they face obstacles along the way. Currently, the boundaries of the loyalty program are clearly delineated by the business which owns any given program. Putting it another way, loyalty systems are independent and unrelated. It is the blockchain that could bring them together under the same roof, thus improving the performance of each program by several orders of magnitude.

“Increasing numbers of new hotels, cafes, stores, rental agencies get connected to the chain through the all-in-one app. They are thus integrated into a single loyalty program and become business partners,” says Eugeniy Butyaev. “A tourist earns loyalty points by providing his or her identification number (naturally, recorded on the blockchain). They’re awarded for repeat bookings, purchases, breakfast, taxi, positive references, inviting friends. In fact, these points are internal system tokens. They can be exchanged for fiat money or other cryptocurrencies or spent in different public places.”

Meanwhile, travelers’ preferences could become absolutely transparent, making the effort involved in handling them exponentially more targeted. The situations where spa services are offered as a reward to a very busy guest on a business trip will become a thing of the past.

Barriers to blockchain implementation

According to Robert Cole, founder of RockCheetah, the adoption of this new technology in the hospitality industry is finally dealing with two problems. Integration with legacy systems plus low speeds on the blockchain. For example, a traditional reservation system is capable of processing 250,000 transactions per second. Lower speeds are simply unacceptable.

The CREDITS platform is able to solve both. It can serve as a basis for third-party developers to program their stand-alone service with due regard for legacy system integration and to create their own token. The maximum rate achievable with the CREDITS platform is more than 1 million transactions per second. The alpha version has already shown the speed of 488,000 transactions per second. The transaction commission rate will be $0.001 at most.

In lieu of an afterword: the first industry steps towards the blockchain

In early March, His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, the Crown Prince of Dubai, announced the creation of a huge and fully blockchain-based marketplace for tourism and the hotel business, which is promoted by the government. According to a new press release, the marketplace will become fully functional two years from now. A smaller-scale project is being developed under the aegis of Australia’s travel agency Webjet. TUI Group is already leveraging smart contracts for entering into agreements with freelance (tour) guides.