Virtual Cards and Early Payment Solutions
PETER JACOBSTEIN, Chief Strategic Partnership Officer, The Interface Financial Group, February 10, 2020
B2B Virtual Card (V-Card) payments are attracting a lot of attention right now — from incumbent commercial payments providers and from fintech who want to challenge their dominance. Accenture estimates Virtual Card B2B payments were $207 billion in 2019, or 36% of total U.S. commercial card spend . The excitement around V-Card has spurred a wave of M&A activity among payment providers: in late 2019, American Express acquired the payments business of Acom. NvoicePay was acquired by Fleetcor. MasterCard has its own investment in payments provider AvidXchange.
What is Virtual Card?
Virtual Card is a form of B2B payment that uses existing credit card rails to move money between buyer and supplier. It’s “virtual” because there is no physical credit card involved — just a string of numbers for one-time use.
V-Card issuers tout a number of benefits for both supplier and buyer:
For Suppliers: money moves quickly through the card payment system and can be used to effect early payment of invoices. And any supplier that currently accepts credit cards can take payment through V-card.
For Buyers: The V-Card number is single-use, and has a configurable maximum payment value and an expiration date, both to reduce fraud. Additionally, Buyers often receive a rebate on from the issuer on V-Card purchases, providing an effective discount on purchases.
Today’s Virtual Card Marketplace
A number of “Payments as a Service” (PAAS) providers have grown up to service the B2B payments market — providing mass payment capabilities for corporate buyers. These companies integrate with ERP and Procure-to-Pay networks to provide last-mile money movement through check, wire, ACH, and card. Many of these payment companies go even further, offering Supplier Information Management services for their customers; they will contact suppliers individually, verifying key details including banking information and payment preferences. For most PAAS providers, V-Card is central to the business model.
What’s the Catch?
V-Card is a fast, easy, readily available payment source. It provides built-in security. And a growing number of PAAS companies are dedicated to providing (and promoting) the service. So why isn’t everyone using V-Card?
In a word: cost. V-Card fees, borne by the payment recipients, are similar to those of traditional credit cards — in the range of 2.0%-2.5%. Many suppliers consider that to be a high price to pay for convenience, versus being paid through (costless) check or ACH.
As a result, supplier acceptance of Virtual Card payments is limited. Generally, only small suppliers, or those who do most of their business by credit card, are willing to accept V-Card payment. Larger suppliers — and even smaller suppliers with large transactions — usually won’t take payment by V-Card.
What’s a Buyer to Do?
V-Card isn’t a bad opportunity for buyers; it’s just not a big one. Rebates aren’t likely to amount to much because of limited supplier uptake.
For this reason, savvy buyers looking for additional savings from Accounts Payable often turn to early payment solutions like Dynamic Discounting and Digital Supply Chain Finance. Both these solutions can work alongside V-Card payment — providing an additional opportunity for Buyers when Suppliers won’t accept V-Card.
Dynamic Discounting is buyer-sponsored early payment — the buyer offers to provide early payment to a supplier in exchange for a small discount – typically 1.0%-1.5% for 30 days. Using Dynamic Discounting, the buyer receives a discount on purchases, and the supplier gets access to working capital at rates that are often far better than what they could get from a bank (especially for small- and mid-sized suppliers).
Digital Supply Chain Finance is essentially the same service, though funding is provided by a third-party (typically a bank or fintech). It’s used by buyers when they wish to continue providing early payment opportunities to their suppliers but don’t have excess cash to make early payments.
Buyers use Digital Supply Chain Finance as a service to their suppliers — it ensures continuous access to early payment opportunities for their suppliers. Additionally, some buyers receive a small share of the discount charged by third-party funders, giving them a return similar to that of V-Cards.
The Bottom Line
With the growth of financial technology, Accounts Payable has become an area of opportunity for corporate buyers. V-Card offers a new opportunity for savings through rebates, but its acceptance among suppliers is capped by high fees. Savvy buyers are adding early payment solutions to their Accounts Payable mix – providing both a savings opportunity and a benefit for their critical suppliers. These solutions can work together as part of a smart mix of benefits for buyers and suppliers alike.