Virtual payment cards have been available for years, but have historically served niche use cases and gained relatively little traction in the broader payments ecosystem. But that’s changing.
Driven by the increasing digitization of payments, rising data security and fraud concerns, the changing nature of corporate spending patterns due to Covid-19–and simply a growing awareness of their many benefits–virtual cards are fast picking up steam in both business and consumer sectors.
For fintechs, neobanks and other financial services providers, there’s never been a better time to explore offering virtual cards to clients–but there are some important considerations to keep in mind and potential pitfalls to avoid in order to realize the full potential of virtual cards.
Read on to learn more about the five key questions to explore before starting on the path toward making virtual a reality for your business.
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Everything You Need to Know About Issuing Virtual Payment Cards
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1. What is a virtual payment card?
A virtual payment card is a randomly generated 16-digit number linked to a credit, debit or prepaid account, specifically created to fund a particular transaction or type of purchase. Crucially, virtual card accounts include no traditional physical card, but nonetheless can be used just like their plastic counterparts to make online and brick-and-mortar purchases–provided those transactions comply with preset parameters, such as merchant type and time period restrictions.
Virtual card numbers can be entered directly into a vendor payment gateway, integrated with corporate procurement and enterprise resource planning systems and loaded onto mobile wallets or other form factors. Because they exist solely in digital format and only can be used within finely controlled limits, virtual cards offer significant advantages over traditional cards in terms of security, speed of issuing, convenience, efficiency and cost saving, among other key criteria.
These compelling benefits have driven a growing number of financial services providers to expand virtual card offerings to clients in both the business-to-business (B2B) and business-to-business-to-consumer (B2B2C) sectors. As awareness and demand continue to proliferate, virtual cards are widely considered to be among the highest-growth-potential payment products currently available.
2. What is the market opportunity for virtual cards?
The market for virtual payment cards is significant–and growing fast. Global spending volume on virtual cards was estimated at $1.9 trillion in 2021, with that figure projected to skyrocket to $6.8 trillion in 2026, according to a projection by Juniper Research. Much of that growth will be driven by B2B spending, which will account for more than 70 percent of overall virtual card transaction volume in 2026, according to Juniper.
A separate study from Visa Business Solutions underscored the increasing appeal of virtual cards among businesses, with 93 percent of U.S. companies polled that already used corporate purchasing cards expressing interest in adopting virtual cards, along with 85 percent of organizations that didn’t already use purchasing cards.
What’s more, virtual cards tend to be particularly popular with fast-growing organizations, the Visa study found. More than 20 percent of respondents in the U.S., U.K. and Australia that already use virtual cards reported sales growth of at least 25 percent over the preceding two years. Meanwhile, nearly half of U.S. companies that use virtual cards planned to invest further funding in their business over the next 12 months, compared to just 27 percent of non-virtual card users planning to make the same investment over that period.
More than 20% of respondents that already use virtual cards reported sales growth of at least 25% over the preceding two years.
While interest in virtual cards was on the rise even before the onset of Covid-19, the pandemic spurred major changes in many businesses’ payments needs by decentralizing workforces and shifting spending patterns to a more digital-centric model. Those dynamics in turn increased the importance of convenience, control and security in enabling and managing corporate payments.
With many of the changes wrought by Covid expected to become permanent, the pandemic is widely expected to catalyze a surge in virtual card demand and market development over the near term. Meanwhile, payment networks, issuing banks and program managers are ready to meet the opportunity, steadily ramping up their ability to support fintechs looking to offer virtual cards to their customers in the business and consumer realms.
3. What are the advantages of virtual cards?
By nature of their digital-centric delivery and usage model, which requires no physical component, virtual cards offer a host of compelling advantages over traditional payment methods, such as plastic cards, ACH, wire transfer and paper checks.
The key attributes driving interest in virtual cards can be described as the “Four S’s:” Security, Spending Controls, Speed and Savings:
With payments fraud on the rise and financial data breaches becoming an everyday occurrence, virtual cards significantly reduce risk by eliminating the opportunity for a fraudster to get their hands on a physical card that might be lost or stolen. And because virtual card numbers only are valid for a set period of time and are limited to certain merchants, even if the digital card number is accessed illegally, there is relatively little chance that it can actually be used to make fraudulent purchases. Most likely, it will have already expired or be restricted, making it useless to criminals.
Virtual card numbers also are more difficult to link to any other personal cardholder data that could be used to commit fraud compared to traditional card numbers, which often yield a treasure trove of additional information fraudsters could exploit. And for merchants, the enhanced security of virtual cards means fewer chargebacks due to fraud–which can cost as much as $50 in fees per instance–leading to significant cost savings.
In addition to helping protect against fraud, the spending controls available for virtual cards enable businesses to proactively monitor and control legitimate purchases, including employee travel and expenses. Because funds are pre-allocated at the time of issuance and assigned for particular merchants or uses, spending managers have a full view of how much is being spent ahead of time, rather than after the fact.
That rich data visibility not only helps avoid surprise expenses and helps you budget more effectively but also ensures all employee spending is accurately reported and reconciled, which helps increase expense management efficiency and can aid negotiations with suppliers.
For payment providers, quickly getting a card into the hands of newly acquired customers has been shown as one of the most powerful and important levers to convert signups into long-term, engaged users. But the fulfillment process for a traditional physical card can take days or even weeks while a plastic card is printed and shipped–a lag time that often stalls momentum and causes the customer to lose interest.
Virtual card issuers can cut the fulfillment time to essentially zero by instantly issuing a virtual card to a customer’s mobile wallet via push provisioning–enabling them to begin transacting immediately, providing the early engagement that has proven so crucial to long-term loyalty and lifetime value. The potential financial rewards are significant; according to Bain & Company, an improvement of just 5 percent in customer retention can drive up to a 25 percent increase in overall program profit.
An improvement of just 5% in customer retention can drive up to a 25% increase in overall program profit.
Business owners can reap a bevy of direct financial benefits from using virtual cards to make purchases and pay suppliers. One important advantage comes in the form of improved cash flow management and enhanced working capital access compared to ACH or paper check payments.
That’s because virtual credit cards provide a significant float period–the time between which a supplier is paid and the money actually leaves the coffers of a business. Because virtual credit card balances don’t need to be paid off until the end of the billing cycle, companies can make payments and still have up to several weeks to maintain funds, which can be leveraged as working capital–an advantage particularly useful to smaller businesses, which typically have shallower cash reserves than larger companies.
Spending on virtual cards also can generate direct income for the payer in the form of incentives or cash back rebates from the card issuer or processor, turning payments–traditionally solely a cost center–into a revenue generator.
4. What are the potential use cases of virtual cards?
Virtual cards can be leveraged in a number of ways to optimize payment processes for business and consumer end-users. Some of the most common use cases include:
Supplier Payments & Procurement
Companies can use virtual cards to pay suppliers and vendors more quickly, efficiently and accurately than manual methods such as a paper check, ACH or wire transfer. A virtual card number can be generated for a single procurement purchase or for regular payments made to a particular vendor, offering the ability to easily track and control spending on a granular level across a supply chain.
Virtual cards can play a crucial role in enabling drop-shipping, in which an online merchant needs to quickly source a required item from a third-party vendor in order to fulfill an online order.
Employee Travel & Expenses
Virtual cards serve as an attractive alternative to traditional physical corporate T&E cards, offering companies the ability to set spending limits and automatically capture data from travel and expense purchases, eliminating the need for manual expense reporting, which is notoriously time-consuming and prone to human error.
Virtual cards also are much faster and easier to deliver than a traditional corporate card when time is of the essence, such as for an upcoming trip. Meanwhile, employees who don’t need a permanent corporate card can instead be issued a virtual card for a specific trip or time period, obviating the need to front their own funds and wait for reimbursement.
Gig Worker Payments
The instant issuance functionality of a virtual card is perfectly suited to support the payment needs of the fast-growing gig economy. Companies such as on-demand delivery providers can onboard new gig workers and instantly issue virtual cards to workers’ mobile wallets, which then can be used to make required gig-related purchases.
Workers also can receive their earnings via virtual card, enabling quick access to wages without the need for a traditional bank account. The gig economy has been expanding at a 17.4 percent Compound Annual Growth Rate since 2018 and is expected to reach $455 billion in 2023, according to a study by Mastercard–presenting a major potential growth channel for virtual cards in the years ahead.
E-commerce Meets Buy Now, Pay Later
Providers can offer consumers virtual cards for use when shopping online to increase security and protect users’ financial data. Virtual cards also can be used to enhance the functionality of Buy Now Pay Later services–one of the hottest trends in consumer payments.
BNPL suppliers can support purchases made at non-partner online merchants by instantly issuing customers virtual cards to finance such purchases, thereby significantly extending the reach of their services to non-partner retailers. Some BNPL providers even enable such virtual cards to be loaded onto mobile wallets that can then be used to make contactless in-store payments at any brick-and-mortar retailer.
Consumer-facing companies can use virtual cards to quickly and cost-effectively deliver incentive and loyalty payments, insurance claims compensation and other types of payments to their customers. Payees receive their funds immediately via instant issue to a digital wallet and can start spending right away, creating a positive user experience that helps improve loyalty and drive long-term engagement.
5. What are the key capabilities to look for in a virtual card technology platform?
While virtual cards are powerful tools that offer many advantages to financial services providers and the end-users they serve, it’s important to note that not all virtual card platforms are created equal.
To leverage the full functionality of virtual cards, it’s crucial to ensure that the platform powering a virtual card program has strong integrations in place with card-issuing banks and the payment networks needed to process virtual card transactions.
Beyond those alliances, a virtual card platform must have the technological capacity to enable key features such as:
Efficient card funding
Granular spending controls
Data integration and flexible customization
This will enable providers to effectively meet users’ needs and quickly adapt as those demands change and grow.
Some important things to look for when choosing a virtual card platform enabler are:
Virtual cards, like traditional cards, must be issued by a licensed bank. For a non-bank fintech looking to offer virtual cards, joining with a processor or other platform partner that already has existing alliances with such institutions offers a much more efficient and faster way to get a program up and running than seeking out a direct bank partnership.
Likewise, as virtual card transactions run on payment network rails, platform partners with established relationships and integrations with network providers can offer direct access to those networks. Digital wallet integration also is an important factor as the use of virtual cards via mobile channels continues to gain ground.
Galileo Financial Technologies offers clients direct integration with payment networks including Mastercard, Visa and Discover, more than 20 card-issuing banks, as well as leading mobile wallet providers, including Apple Pay, Google Pay and Samsung Pay.
Fast and Flexible Funding
Because the streamlined funding aspect of virtual cards is key to their value proposition, it’s crucial the technology platform backing a virtual card program is capable of powering robust functionality in that area. While early iterations of virtual cards required card programs to hold a large amount of funds in a reserve account or apply for an unsecured line of credit, more modern tech approaches enable nimbler funding mechanisms that tie up less capital and are available to a wider swath of clients.
Galileo’s real-time funding capability leverages the company’s Authorization Controller Application Programming Interface (API) to enable funding to become part of the transaction authorization process–meaning the necessary funds to make a purchase become available at the time of the transaction and don’t need to be allocated ahead of time. Instead, virtual cards can be issued with zero balance and funded as needed real-time from a reserve account with significantly lower deposit requirements–freeing up more working capital and improving cash flow for businesses.
Spending data stemming from purchases is highly valuable for businesses, which can use it to track costs, make budgeting decisions, negotiate better deals with suppliers and more. But companies can only leverage those capabilities if they can easily access transaction data and effectively integrate it with all of the relevant systems where it might be useful throughout their business. In virtual card frameworks that don’t offer direct connectivity to such systems, that potentially powerful spending data is siloed, and must be manually exported–which is much less efficient, time-consuming and prone to error–and all too often is simply left to languish.
Galileo’s APIs enable data from virtual card transactions to integrate easily into accounting, enterprise resource planning, expense management systems and more. Data flows directly into those systems automatically, allowing for integrated reporting and a real-time, holistic view of spending which can be used to guide business decisions based on the most complete, up-to-date information available.
With virtual payment cards so well-suited to serve an array of user and provider needs, the number of potential applications of such products are sure to continue growing. That’s why it’s crucial for virtual card programs to operate on a flexible technology platform that can easily accommodate innovation and expansion into new use cases.
Closed-system tech platforms offer rigid, tightly defined functionality that is difficult–if not impossible–to build upon, severely limiting the opportunity to customize and develop new virtual card offerings and keep up with the evolving market.
Galileo’s open API-based platform offers the flexibility to design customized functionality and innovate for new capabilities and use cases. Clients can leverage Galileo’s extensive library of APIs and developer sandbox to craft and test unique applications that fit the needs of their virtual card customers today, and will continue to serve those needs as they evolve, helping stave off competition from new entrants and solidify long-term client relationships.
By enabling a bevy of benefits, savings opportunities and operational efficiencies, virtual cards offer a compelling value proposition to a range of B2B or B2B2C audiences and sectors.
Fintech and financial services providers who align with the right platform partner can leverage the full power of virtual cards to win new business, drive increased engagement and develop deep, lasting client relationships, reaping significant financial rewards in the process.
Learn more about how Galileo can help make virtual cards a reality for your clients.
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