Virtual cards 101: Simplifying commercial payments

From e-commerce to tap to pay to person-to-person transactions, everyday payments have largely been digitized. But business-to-business payments — more complex, often involving more authorization and oversight, and in many cases, higher amounts — have been slower to catch up. Cumbersome methods like wire transfers and, in the U.S. in particular, paper checks, still rule the day, but they are prone to errors and relatively slow. 

1. not physically existing as such but made by software to appear to do so.

2. carried out, accessed, or stored by means of a computer, especially over a network

To keep pace in this age of instant experiences and immediate validation, businesses of all kinds are turning to virtual cards to bring the ease, security and efficiencies of digitization to their operations. So what are virtual cards exactly, and how do they work?

What are virtual cards?

Virtual cards are a growing payment option in B2B payments. They are temporary card numbers randomly generated and linked to a funding account that has an established line of credit. They are typically used for a specific transaction or for a specific period of time. They are often integrated into accounting, enterprise resource planning and expense management systems to streamline back-office processes, including automating reconciliation.

How are virtual cards different from traditional payment cards?

Virtual cards are different in that there is no physical card, but otherwise they work in a similar way for purchases, with a 16-digit card number, an expiration date and a three-digit CVC code. Some virtual cards can even be added to mobile wallets for tap-to-pay functionality, just like digital versions of consumer credit or debit cards.  

How do virtual cards work?

Virtual cards work like traditional payment cards, but the businesses using them have more control over spending. They can customize parameters, and the cards can be linked to specific business units or projects for improved monitoring, reconciliation and invoice management.

Virtual cards can be generated instantly to use for online payments — no waiting for the physical card to arrive in the mail.

What are some of the controls offered by virtual cards?

Virtual cards offer businesses the opportunity to customize spending controls, including limits on budget, the length of time it can be used — a day or a week, for example — and where the card can be used, say by designating specific merchants or only certain merchant codes. For example, a virtual card issued to cover the costs of a client dinner could not be used to buy a new outfit at the nearby shopping mall.

What are the benefits of virtual cards?

The benefits of virtual cards are the same as those of plastic cards – convenience and security, to name a few – but on top of these, they also offer spending controls and more flexibility through new payment use cases.

These advantages apply to both sides of commercial transactions. For merchants or suppliers, accepting virtual cards can bring payment certainty and help to reduce days sales outstanding, which refers to the average number of days it takes a company to collect payment for a sale and is an indicator of working capital.  

Unlike traditional checks, which are still commonly used in business-to-business payments in the U.S. and generally take at least one working day to settle, virtual card payments are settled almost immediately, accelerating cash flow. Merchants also benefit from more detailed payment data, which can help them on their journey to automated reconciliation.

For buyers, the controls of virtual cards are critical, reducing creep in budgets and ensuring funds are being spent appropriately. In addition, virtual cards reduce the risk of fraud or misuse because they can only be authorized under specific parameters, after which the number is deactivated. They can also offer more detailed monitoring, as the unique card number used in each transaction means it can be tracked with more precision, and easier reconciliation because the additional data allows for one-to-one payment match.

Some virtual cards can also convert currency in real time, which can be beneficial for companies with international supply chains. To extend the use cases for virtual cards beyond online and over-the-phone payments, mobile virtual cards — where the card is stored in a mobile wallet and used for contactless payments — bring the ease of tap-to-pay retail payments to corporate transactions.

Why do businesses use virtual cards?

Businesses use virtual cards for a growing number of circumstances — anywhere there is a need for increased efficiency and greater control, flexibility and security. Here are some of the ways Mastercard is unlocking the benefits of virtual cards across a wide and growing array of industries.

Accounts payable

Many businesses manage thousands of suppliers and tens of thousands of invoices. Virtual cards, which include rich payment data, can improve cash flow on both sides of the transaction, because they offer faster payment and simpler reconciliation by connecting orders, invoices and status of payments. That, in turn, can strengthen relationships between buyers and suppliers. The transaction-level data tied to each virtual card, including the data, amount, item and merchant, can be automatically entered into an accounts payable system without tedious and error-prone manual entry, to enable greater efficiency and accuracy.

Corporate travel

Business travel has rebounded, but many companies are still struggling with complex and outdated expense and reimbursement processes. Virtual cards can be used to book travel and cover the cost of entertaining clients, with customized controls to manage spending and seamless expense reconciliation with enhanced data. And with mobile virtual cards, frequent flyers and road warriors can simply tap to pay for hotels, meals or incidentals where contactless payments are accepted. Mobile virtual cards have an additional layer of security called tokenization: Any card stored in a digital wallet employs an encryption technique that substitutes the card’s account number with an alternative card number called a token, so the actual account details are never shared during a transaction.

Depending on company policy, business travelers equipped with virtual cards may not have to keep track of piles of physical receipts. Virtual cards also eliminate the need to pay with a personal card and wait for reimbursement.

Virtual cards can also be issued to job candidates to cover spending during the recruitment process, or to pay for moving expenses or temporary housing for employees who are relocating.

Trade shows, events and conferences

For event planners, it can be difficult to manage the budgets for many projects and vendors at the same time — and it’s easy for costs to balloon. Virtual cards can simplify payments and reporting and help keep events to a specific budget via controls while still offering the flexibility to add money to a budget if needed.

Health care and insurance

Anyone who has visited a doctor in the past few decades knows that medical billing is complex and slow. It’s no different for the doctor’s office or hospital dealing with claim approvals and payouts. Health care providers often face bottlenecks in settling claims with insurance companies because of paper-heavy legacy systems in place that delay payments, triggering cash flow challenges and increasing borrowing costs. By embedding virtual cards into the claims-processing platforms that connect insurance companies to healthcare providers, everyone benefits from faster payments, greater visibility into claim status and easier reconciliation.

Fleet management

For fleet managers looking for ways to manage costs for fuel and maintenance and ensure drivers are adhering to company policy, mobile virtual cards can be linked to a specific vehicle to track fuel usage, for example, or even to specific gas stations with whom the company has preferential partnerships. The detailed transaction data can help fleet managers make more informed decisions, including ways to reduce fuel cost, manage drivers and optimize routes.

How can businesses integrate virtual cards into their systems?

Businesses can launch virtual cards directly through their issuing bank, but to get the most benefit, they can work with their technology software providers to integrate the cards into their digital business platforms, like enterprise resource planning or procurement systems, which can further speed up and simplify the way they work. Embedding payments into these platforms can reduce friction and transaction costs and offer greater data and insights, value-added services and even the ability to access credit and financing.

When virtual cards are accessed through the tools a business uses day to day, the payment can become a natural extension of its operations. Managing B2B payments used to require jumping between multiple business platforms, but embedding virtual cards opens the door to new, more convenient experiences where payments are seamlessly woven into the platforms that enterprises organize their business around.

What should you look for when selecting a virtual card provider?

When selecting a virtual card provider, look for the ability to integrate with existing systems, extensive reach, robust card controls and a great end-to-end user experience.

One of the greatest advantages of virtual cards is their ability to be embedded within a company’s existing workflows, such as the systems they use for accounting, treasury or procurement. By selecting a provider with many software integrations, businesses can easily bring virtual cards into their existing tools to unlock efficiencies and improve back-office processes.   

Looking for providers with extensive global card acceptance networks is also important for optimizing where businesses and their employees can use their virtual cards. With more virtual cards being enabled for mobile wallets, it is important to consider a provider with a large global footprint of contactless-enabled locations.

It’s also important to choose available controls based on a business’s needs. For instance, if a business is looking to improve travel and entertainment compliance and ensure that employees stay within a spending allowance while traveling for business, consider prioritizing a provider that offers robust spend controls.

Selecting a provider that enables virtual card transactions to be processed straight to their bank or acquirer — without the need to manually pore through emails, which is a risk-prone, slow and manual process — is also key. The ability to deliver a fast, secure end-to-end payment experience is where the future of B2B payments is headed.