The cards offer corporate buyers another tool to boost working capital, but some vendors balk at interchange fees.
Virtual credit cards are generating buzz among treasury teams looking to improve working capital management by extending payment terms while allowing smaller vendors that don’t participate in supply chain finance programs to be paid sooner. That lets buyers hold their corporate cash longer and invest it at today’s attractive interest rates.
- “As rates have increased, and even while they now fall, the value of extending the life of payables has substantially increased for buyers,” said Jerry Olivo, who leads NeuGroup for Payments Strategy. He said virtual cards have been repeatedly mentioned by members of the group as a priority.
- Increased interest is also being fueled by more B2B vendors accepting the cards so they can be paid early. “The number of vendors that accept the payment terms has improved,” said one treasurer at a recent meeting of NeuGroup for Life Sciences Treasurers.
Reality check. However, the vast majority of B2B sellers do not accept virtual card payments, in large part because of interchange fees they must pay that are higher than for other card transactions and may exceed 3%.
- “Vendors don’t like extended payment terms or the alternatives such as virtual cards, as either way their profitability is impacted,” Mr. Olivo said. “Members cite that as a contributor to the slow uptake of the cards.” Another factor hampering use: many merchants lack the technology needed to enable acceptance, according to payments software company Versapay.
- That said, virtual card use is expected to grow substantially in coming years. Total transaction volume will reach 175 billion by 2028, up from 36 billion in 2023, according to a forecast by Juniper Research. And Allied Market Research expects dollar volume to increase at a compounded annual rate of 21.5% between 2024 and 2032.
Virtual card basics. Here’s how one NeuGroup member whose company uses virtual cards explained them: “A virtual card is a one-time credit card number for a specific amount, unique to the specific vendor transaction, with a relatively short expiration date, that is sent to the vendor.
- “The vendor needs to process through their merchant portal in order to get paid. There are better controls around this process versus giving out a single credit card number to all vendors where you wouldn’t be able to restrict how much the vendors charge, for example.”
- A recent session of the payment strategy group touched on other advantages of virtual card programs, such as low processing costs and the potential for rebates paid to buyers by some card providers, taken from the interchange fee. Some members see virtual cards as a potential replacement for traditional payment methods like checks and wire transfers. But others mentioned the potential for sellers to raise prices to pay the fees.
Working capital benefits. NeuGroup Insights’ interest in virtual cards rose after reading a recent exchange of knowledge on one of NeuGroup’s online communities. One member of NeuGroup for Global Cash and Banking, exploring working capital programs, asked peers about using credit cards to pay suppliers early while extending payment terms.
- Another member shared that his company’s working capital strategy includes extending payment terms with vendors. “However, if the vendors want to get paid immediately, we offer both supply chain financing and virtual card payments. The recommended option is dependent on the amount of the vendor spend,” he explained.
- In a follow-up email, the member said virtual cards would be used for smaller payments and supply chain finance for larger invoices, an arrangement the procurement team worked out with the bank that handles both programs for the corporate.
- A different member said the virtual card program his company is launching could boost its days payables outstanding (DPO) between 25 and 55 days with a vendor that leaves the payment terms intact. When a transaction occurs during the credit card payment cycle accounts for the range. And the boost to DPO shrinks if the vendor insists on early payment.
Time and commitment. Some corporates have encountered obstacles to using virtual cards other than a lack of vendors who accept them for payment. One member said their company, like most interested in the cards, considered engaging the bank it already uses for regular credit card transactions. But the member ultimately decided not to move forward.
- “We attempted to complete the templates for their virtual program,” they said, referring to the bank. “The main challenge was their request that we provide a list of all vendors we paid in a year, including their addresses. It is a massive listing, so it is doable if a company uses one instance of ERP.
- “Since we are constantly acquiring new companies, the information sits on multiple ERPs. Ultimately, you want to move a substantial number of vendors to make it worthwhile (the more volumes, the more rebates). This project requires the time and commitment of treasury, AP, procurement and contracts teams.”
- Investing that time and effort seems to be a price many corporates are willing to pay—or at least to study and consider—as their digital transformations progress and B2B payment options advance and mature.
