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Virtual Card Payments — What You Need to Know

A virtual credit card is a disposable, electronic payment option that mimics a traditional credit card without any of the spender's direct account information.

Cash is no longer king. At least, that's what data from the Federal Reserve System seems to indicate.

In its 2022 Findings from the Diary of Consumer Payment Choice, the Fed discovered that only 20 percent of consumer payments made throughout 2021 involved cash — an 11 percent drop since 2016. Instead, the most common payment type was by debit card (29 percent), followed closely by credit card payments (28 percent). At the same time, the 2021 Federal Reserve Payments Study found that along with the decrease in cash, check usage was also on the decline, losing ground to both card and automated clearing house (ACH) transactions.

Of course, the global pandemic and related lockdowns contributed to this shift with fewer in-person transactions. Conversely, online and virtual transactions increased despite the overall spending reduction. And many companies began experimenting with new, innovative, consumer-facing, and business-to-business (B2B) payment options like in-person contactless credit cards, digital wallets, bank-sponsored peer-to-peer (P2P) payments, and virtual credit cards.

What Is a Virtual Credit Card?

A virtual credit card is a disposable, electronic payment option that mimics a traditional credit card without revealing any of the spender's direct account information. Instead, each virtual card features its own 16-digit card number, an applicable card security code (CSC), a short-term expiration date, and a preset spending limit.

Service providers routinely distribute these cards in one of two formats. For a single-use card, once the virtual payment has been processed, the account number deactivates, and the account details cannot be used again. Whereas with a lodged card, the virtual card number is dedicated to a specific seller and can be reused so long as the transactions stay within clearly established credit limits. These types of cards are commonly used with highly-trusted vendors or partners where purchases are routine.

How They Work

Virtual card payment services are typically provided by a bank or similar financial institution that already offers traditional debit or credit cards, with these virtual cards set up as supplemental payment mechanisms on the existing account. So when an account holder wishes to protect their personal account information during an online transaction, they can instead request the creation of a virtual card to oversee the payment.

The 4 Leading Benefits of Virtual Card Payments 

While virtual cards might demand a bit more oversight — particularly in managing more significant volumes of time-sensitive card numbers — many businesses find that their various advantages outweigh any increased monitoring burden.

Common benefits from virtual card payments include:

  1. Hardened Security

Since the virtual card numbers are either single-use or dedicated to an individual business, the likelihood of a card number being stolen is greatly decreased. But even if a criminal obtains the virtual card number, the set spending limit restricts the potential impact, protecting the bulk of funds attached to the account. Similarly, the short-term expiration date typically assigned to virtual cards also makes the fraudulent purchase less likely to succeed.

  1. Streamlined Transactions

Virtual payments eliminate many of the delays associated with more traditional options, supporting real-time account transfers. So rather than waiting for a check to arrive in the mail or for an ACH transaction to clear, vendors that accept these purchases can strengthen their cash position and maintain more accurate accounts.

  1. Detailed Remittance 

When not using a credit card for an online payment, buyers often rely on wire transfers or ACH transactions. However, the available space for remittance information with either of these methods is severely limited. Wire transfers offer only 140 characters — the length of an old-school Tweet — while ACH provides a mere 80 characters to record the relevant information. Virtual payments face no such limitations and can provide a wealth of payment data that allows both the buyer and seller to pinpoint the transaction by the date, amount, or item. Further, each virtual card number can serve as a unique payment identifier for easier traceability. 

  1. Simplified Control 

Unlike physical corporate cards, virtual cards can be generated instantly and exist in more than one location. Rather than waiting for a piece of plastic to be imprinted and mailed to your business, you can electronically generate the card and deliver it to an employee or vendor in moments. And by empowering each of your relevant team members with access to their own transaction-specific virtual card, they no longer need to share or hunt down who is in possession of the physical card.

Even better, this improved accessibility doesn't come at the cost of budgetary controls, as managers can precisely limit spending.

How Virtual Cards are Changing Accounts Payable 

Beyond personal online purchases, virtual card payments have become much more common in B2B transactions. In fact, according to a 2020 survey conducted by the Association for Financial Professionals (AFP), while only 32 percent of respondents were actively using electronic payment methods, 60 percent anticipated doing so in the future. And this shift is having a noticeable impact on accounts payable.

Working Capital

As already discussed, virtual cards help accelerate payment processing, which translates to an increased percentage of on-time payments. Similarly, the precise credit limits enable purchasers and vendors to avoid time-consuming irregularities, like overpayments or duplicate payments—the result: a more accurate cash position for both organizations.

Rebates

Like traditional credit cards, many virtual cards offer similar cash-back or other rebate opportunities. So by offloading your traditional, check-based B2B payments to this electronic method, you can supplement your revenue. Further, as your business grows, so will the frequency and size of your purchases, leading to larger rebates that your company can leverage to offset payment processing costs.

Strategic Automation

People are slower than computers. So if you can eliminate a tedious, manual process from your accounts payable (AP) — like receiving, depositing, and recording paper checks — it only makes sense to do so. And with no-touch, virtual card payments, you can leverage the automated, real-time transactions to free up your staff for more strategic efforts, such as analyzing the financial metadata captured by your electronic payments.

By identifying trends and irregularities within this information, you can better plan for routine expenditures, inform contract negotiations better, and isolate and reduce wasteful spending.

Process Payments Like an Expert with Invoiced 

If your business is interested in shifting its B2B transactions to a virtual card payment strategy, consider scheduling a demo of the Invoiced Payment Acceptance solution. The integrated, branded payment portal can simplify and standardize your payment channels, allowing your customers to choose the method that best fits their needs — whether ACH, direct debit, traditional credit card, or virtual payment.

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