Everything You Need To Know About Virtual Card Payments

Published on April 2, 2024

Online and virtual transactions continue to increase, and many companies have begun 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 — last but not least — virtual card payments. 

Below, we’ll break down virtual card payments, how they work, where you can use them, the benefits, and how they impact accounts payable.

What is a virtual card payment?

A virtual credit card payment is a disposable, electronic payment option that mimics a traditional credit card without revealing 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. Virtual cards are essentially used for “cardless” payments but can be used just like a physical credit card.

Service providers routinely distribute these cards in one of two formats. 

  • Single-use card: Once the virtual payment has been processed, the account number deactivates, and the account details cannot be used again. 
  • Lodged card: The virtual card number is dedicated to a specific seller and can be reused as 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.

Why is it important to provide the option to pay with a virtual card? 

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 Federal Reserve System 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 declining, losing ground to both card and automated clearing house (ACH) transactions.

The global pandemic and related lockdowns contributed to this shift, which resulted in fewer in-person transactions, pushing the imperative for businesses to offer online and virtual payment options.

How virtual card payments work

Virtual card payment services are typically provided by a bank or similar financial institution that already offers traditional debit or credit cards. These virtual cards are 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.

While similar to physical credit cards, there are a few key differences to note for virtual card payment processing:

  • Once an invoice is approved, the accounts payable department or an automated ERP system shares payment details with the virtual card provider.
  • A one-time-use account is generated with specific controls, and the virtual card details are sent to the supplier for payment.
  • The supplier inputs the virtual card details into their point-of-sale system, and their bank promptly authorizes the transaction, making the funds available.
  • The ERP system automatically matches settlement data with payment instructions and conducts reconciliation on the buyer’s end.
  • The purchasing company follows the virtual card terms and pays the issuing bank, thereby retaining working capital that would have been due on the invoice date.

Where can virtual cards be used?

Virtual cards can be used for any entity accepting traditional credit card payments. Chances are, most of your vendors already accept virtual card payments – simply reach out and confirm that it’s a payment option. If you don’t have an easily accessible point of contact, check if the vendor accepts other digital payments like debit or credit cards, bank transfers, or other payment services like Venmo or PayPal; if they do, they will likely accept virtual cards. 

Similar to physical cards, virtual cards can be added to Apple Pay or Google Pay for contactless payments. Some virtual cards allow for ATM cash withdrawals. Many reputable brands like Visa, MasterCard, Capital One, and American Express support virtual cards. Ensure you know the type of virtual card you have and whether it’s single-use or lodged to ensure proper usage. 

7 benefits of virtual card payments 

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

Common benefits from virtual card payments include:

1. Enhanced security

Since the virtual card numbers are either single-use or dedicated to an individual business, the likelihood of a card number being stolen or a supplier’s bank account being exposed 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 makes the fraudulent purchase less likely to succeed.

2. Streamlined transactions

Virtual payments eliminate many 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 virtual payment can strengthen their cash position and maintain more accurate accounts.

3. Detailed remittance 

Buyers often rely on wire transfers or ACH transactions when not using a credit card for an online payment. 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 limitations and can provide a wealth of payment data that allows the buyer and seller to pinpoint the transaction by the date, amount, or item, speeding up reconciliation for your A/P team. Further, each virtual card number can serve as a unique payment identifier for easier traceability.

4. Improved accessibility

Unlike physical corporate cards, virtual cards can be generated instantly and exist in multiple locations. 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. 

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

5. Reduced processing fees 

Virtual cards offer significant cost-saving advantages because they don’t require manual workflows that can cause mistakes or delays. Their short expiration periods make the transaction process quicker. Like other digital payments, virtual cards cut out the time and costs of using checks, fixing errors, and handling payment problems. They also work well with automated accounts payable systems, saving money for buyers and suppliers.

6. Better spend management

Another benefit of virtual card payments is enhanced accountability, allowing you to assign specific cards to employees and suppliers, simplifying expense tracking without manual efforts. You can empower your staff by providing instant payment access with virtual card payments and eliminate the need for tedious receipt tracking and expense reports while maintaining spending control. Virtual cards streamline spend management by offering full visibility into transactions and preventing accidental overspending through pre-funded cards.

7. Improved working capital 

During economic challenges, it’s vital for businesses to manage cash flow and retain working capital longer. Traditional solutions like supply chain finance and dynamic discounting mostly benefit large suppliers, leaving smaller ones behind. Virtual cards offer a solution by helping manage high-volume, low-value transactions with smaller suppliers efficiently. They allow for familiar payment methods while safeguarding working capital. Unlike more intricate options, implementing virtual cards is straightforward and quick, ensuring you can seize opportunities without disrupting your working capital strategy.

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 actively used electronic payment methods, 60 percent anticipated doing so in the future. And this shift is having a noticeable impact on accounts payable, benefitting A/P in various ways:

Improves working capital and cash flow

As already discussed, virtual cards help accelerate payment processing, replacing the slow process of printing and mailing checks with immediate transactions, which translates to an increased percentage of on-time payments. When your business can pay faster, your accounts payable team can hold on to larger payment sums for longer. Quicker payments extend your days payable outstanding (DSO), helping you improve capital and increase cash flow. Suppliers also benefit from reduced DSO, and faster payments foster better vendor relationships, potentially leading to early payment discounts and cost savings. 

Earn cash-back rebates

Many virtual cards offer similar cash-back or other rebate opportunities like traditional credit cards. You can supplement your revenue by offloading your traditional, check-based B2B payments to this electronic method. 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.

Reduces manual labor 

If you can eliminate a tedious, manual process from your accounts payable and accounts receivable — like receiving, depositing, and recording paper checks — it only makes sense to do so. 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.

Simplify payment processing with Invoiced 

Switching to virtual card payments is a significant step towards simplifying payment processing, but it isn’t the only solution. With Invoiced Accounts Receivable and Accounts Payable automation software, you can revolutionize your invoice management process. Our software enables you to effortlessly process virtual card payments, ACH, direct debit, credit card payments, and more while providing flexible payment options. Automation can help you streamline your operations, and your A/R team can focus on more strategic tasks. 

Using our tools, Invoiced clients experience a vast improvement in payment speed: 

  • 11 days faster payment processing with our Auto Pay feature
  • 8 days faster collection with our Automated Invoice Chasing
  • 14 days faster payment with direct debit and credit card options

If you want to simplify payment processing and get paid faster, see how Invoiced can help and schedule a demo today.

Published on April 2, 2024

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