In the News: Kontrol CEO on Virtual Card Advantages, Challenges

Aug 23, 2018 2:25:21 PM

Business News

Kontrol CEO and payment industry consultant Scott Songer is quoted extensively this week in a great piece by John Carroll at TSYS about the advantages of virtual cards for B2B payments, and some of the challenges to their growth in the market.

"Virtual cards are no longer a new innovation," Scott says. "Volume is high and transactions are high."

Yet, as the author points out, "Despite the growth and benefits of virtual cards, there are still challenges and obstacles to overcome."

Primary among these is vendor acceptance of virtual cards. Perceived inefficiencies and associated fees on the vendor side, combined with a less-than-thorough approach to vendor enrollment by card providers, have been historical barriers to virtual cards completely overtaking other payment types. Kontrol, which takes a holistic approach to vendor enrollment, has had great success in working to break down these barriers, as Scott explains. Read the complete article below:

Virtual Credit Cards Are Faster, Guaranteed and More Data-Rich. So Why Haven't They Exploded Yet?

 by John Carroll

'With the surge in digital payments and mobile banking, consumers are paying less with paper checks than ever before. The same trend is true in the commercial, or business-to-business, space.

According to a Goldman Sachs report, 50 percent of payments by U.S. businesses are made by check, down from 81 percent in 2004. As the decline of paper checks persists, the growth of virtual credit cards continues to climb.

Despite the growth and benefits of virtual cards, there are still challenges and obstacles to overcome. The main issue is that some suppliers will not accept virtual credit cards from buyers because of perceived process inefficiencies and associated fees of roughly 2.5 percent of each payment transaction.

"The current system works great for buyers, but not so great for suppliers," says Scott Songer, a virtual payments card consultant with SilverStream Advisors, based in Hilton Head, S.C. "We have to make virtual cards friendly for the suppliers. That’s our next industry challenge if we want to maintain our current growth rate."

A virtual credit card is a 16-digit credit card number that's typically created for one purpose — to pay for a single, one-time business transaction. No physical card is involved. The virtual card number processes like a normal credit card payment does.

Songer has seen virtual cards evolve over time since their inception some 15 years ago.

"Virtual cards are no longer a new innovation," he says. "Volume is high and transactions are high. It's more about market adoption today and getting suppliers to use them."

Solving supplier anxiety

Today, most virtual credit cards are integrated into a buyer’s accounting system. It is an auto-generated credit card number that accounts payable departments (the buyer) can send to suppliers as a link contained in an email for accepting payments.

But to accept virtual cards, most suppliers need better technology and tools to overcome operational challenges and costs.

"Virtual card processing for suppliers is still very manual," says Songer. "That's the negative. We need to improve on that. It’s automated on the buyer's side, but not on the supplier's side."

Some tactics and trends emerging with virtual payments that make it easier on suppliers to accept them include buyer-initiated payments (BIP) and dynamic discounting.

A BIP is a type of business-to-business credit card transaction that requires very little action by the supplier. No point-of-sale terminals, other hardware or software is needed to receive payment. The supplier simply receives the payment as a direct deposit into its bank account along with an electronic notification of the deposit.

"BIPs eliminate the need for the supplier to manually process virtual card transactions," says Songer. "This adds significant efficiencies on behalf of the supplier."

Dynamic discounting describes a collection of payment terms that can be established between a buyer and a supplier to accelerate or delay payment for goods or services. For example, if the supplier elects to be paid earlier, they pay a higher processing fee. If the supplier elects to be paid later, they pay a lower processing fee. "This gives the supplier complete flexibility in regards to its payments timing," says Songer.


Top three supplier benefits for accepting virtual payments. Graphic: TSYS
 Graphic: TSYS

Benefits of virtual cards to suppliers

But convincing suppliers to take virtual credit cards from buyers instead of checks may be as simple as explaining the benefits, says Todd King, vice president, product management at TSYS.

"There's no holy grail on getting suppliers to accept virtual cards," says King. "You already have a large number of virtual card acceptors out there. It’s the non-acceptors that you have to continue to work on."

Below are the top three supplier benefits for accepting virtual payments:

Faster payments. "The biggest thing is usually around faster payments," says King. "Suppliers like getting paid in a timely manner." 

More remittance data. There is very little data that comes with a check. But with virtual credit cards, suppliers are provided with robust data that they can use to help reconcile their account receivables systems. "Every supplier could benefit from rich data, streamlined account receivables and reconciliation," says King.

Such data includes merchant name and address, invoice number and tax amount, plus line items such as description, quantity and unit of measure, freight amount, and commodity or product codes.

Guaranteed payments. With virtual cards a supplier is guaranteed to get paid, says King, unlike checks that could bounce or get lost.

These benefits aren't evaluated in basis points, but they're still meaningful advantages nonetheless, he says.

"What you see in the industry now is that virtual card acceptance is picking up steam. The more we automate and digitize payments, the more we reduce and eliminate checks," says King.

The annual commercial card growth rate is roughly 9 percent, according to a report by Research and Markets, and virtual card payments are driving the current growth trends. By 2021, virtual card spending is expected to surpass that of traditional purchasing cards and checks.

So while there are still obstacles to overcome, supplier acceptance appears to be on the rise as well.'

The statements and opinions of the writer do not necessarily reflect those of TSYS or Kontrol.

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