8 mins read

Payment Automation

What is a Virtual Credit Card and Why Finance Cares

by Yooz on 10.12.2022

What is a virtual credit card

Credit cards are a convenient way to pay your bills, as most consumers know. In fact, many of us don’t even bother to whip out a physical credit card anymore but instead use new and emerging digital payment methods. That trend is driven by convenience and the ease of shopping for products or dealing with merchants online, new habits developed during the pandemic and the success of smartphones and mobile apps such as Apple Pay that make transactions faster and easier than ever. In fact, when consulting firm McKinsey surveyed consumers in North America for its Digital Payments Consumer Survey, it found that 82% of us used “some form of digital payment in 2021, continuing a long-standing trend.”

But what about B2B transactions? Companies are also catching up to the trend, as they embrace payment automation as a core component of their digital transformation. While it’s true the majority are still relying on paper checks and ACH transfers, which both have significant downsides in terms of security and speed, a growing number of organizations are discovering the benefits of digital payments for their accounts payable process and their overall bottom line.


But what is a virtual credit card and what can it do for finance?


Strength in Numbers: Why Virtual Credit Cards Are on The Rise


Payment automation using virtual credit cards is a particularly innovative way not just to save time and money, but to cut down on risks such as cybercrime and fraud. In addition, it helps to gain valuable insights into performance management such as optimizing the cash flow and strategic planning.


Virtual cards are also referred to as ePayables, and as mentioned above, their use by businesses is clearly on the rise. Research data supports this, with The Association for Financial Professionals reporting in its 2022 AFP Payments Cost Benchmarking Survey that 73% of organizations “are currently in the process of transitioning their B2B payments from paper checks to electronic payments.” Payments by virtual card already make up close to a third of all B2B invoices being settled, ahead of real-time payments and debit cards.

And here’s another intriguing data point indicating that things are changing. When Yooz compiled its second The State of Automation in Finance report, it found that as of early 2022, one in five companies had already adopted digital payments and another 62% say they plan to switch to digital payments in the coming year.


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So Exactly What is a Virtual Credit Card?


You can think of a virtual credit card (VCC) basically as a credit card that has shed its (physical) plastic body. It still has a 16-digit number, an expiration date, and a security code - the issuer can even preset spending limits - but it only exists in the digital realm.

Even better, companies can create as many of those virtual cards as they need to, for instance a separate card for each vendor/customer, each project, or even individual departments or teams. Organizations, in other words, can slice and dice the payments part of their accounts payable workflow into an almost infinite number of virtual chunks to give them maximum flexibility, speed and security and enable them to pay every invoice on time, every time.


How Do They Work?


A virtual card is tied to a specific bank and often comes preloaded with a selected amount, for instance that due on a particular invoice or according to a predefined budget from which a vendor will draw down over time as they send their invoices. Besides the usual household names, new entrants or neobanks (a type of bank that operates exclusively online) also offer virtual credit cards to empower companies with a more fine-grained tool to manage their spending.

Once an invoice has been reviewed, approved, and the recipient is in agreement to use the virtual card, the AP team can set up payment and electronically authorize the release of a specified amount. The vendor in turn will receive immediate notification that the funds are available and the sender will be notified that the amount has been received.


Physical Versus Virtual Credit Cards


Unlike a physical credit card, a virtual card cannot be misplaced and doesn’t have to be stored in a central location so different team members can access them or, worst case, misuse or abuse them. Nor can it be easily stolen. Instead, an organization can create and assign any number of virtual cards to specific departments, projects, or team members who are authorized to approve and initiate payments. And unlike a physical purchasing card or regular credit card, the virtual cards are foolproof. As soon as a VCC payment has been processed, the specific card number is deactivated and therefore can’t be used again.


Virtual Credit Cards Versus Digital Wallets


As the word implies, a wallet is a central location to store items of value or various payment methods. The built-in app on a smartphone that holds virtual cards is one good example of what a digital wallet looks like and how much flexibility it gives their owners to stock it. Virtual cards are just one item (or rather items, since you can create as many as you like) that reside in a digital wallet, along with other new forms of digital payments, for instance cryptocurrencies coupled with smart contracts that reside on a blockchain.

Financial technology experts will agree that virtual cards happen to be the most cost effective, safest, and fastest way to settle B2B invoices right now. However, that doesn’t mean that newer payment methods won’t join them in the corporate digital wallet of the future.


How Virtual Cards Improve the Entire AP Workflow


Since virtual credit cards are part of the larger process of purchase to payment AP automation, they are tied to other electronic records or digitized documents such as purchase orders, notes of goods received and invoices.


This tight linkage to the rest of the AP workflow means that VCCs provide a number of benefits including:


  • Enhanced visibility and control over payments because they provide detailed, timely data for expense tracking and forecasting. This data is stored and can be used to help with reporting for reconciliation, audits, and regulatory compliance.
  • Unlocking rebates as a new revenue source. Moving away from paper or eChecks coupled with the ability to schedule (in the case of reoccurring payments) and instantly pay can result in early or on-time payment awards. It can also mean the ability to negotiate better contract rates. All this can create a new revenue stream based on cash-back earned for every invoice paid. Your AP function can be not just a cost center but a value driver.
  • Increasing working capital. When your business can pay faster, it gives the AP team more time to hang on to larger payment sums. This strategy enables an organization to earn additional returns on working capital.
  • Reducing any risk of fraud. As we’ve seen, virtual credit cards are a highly specific form of digital B2B payment with usually a one-time, temporary card number. Payment security is also strengthened with custom set rules around the amount and expiration date.


What is a virtual credit card insert


Can Virtual Credit Cards Help Protect Your Identity?


Payment using virtual credit cards is a much more secure process that using other, physical options. There’s no need to share and thereby expose sensitive information such as bank account numbers, all of which is a requirement for initiating payments through the ACH network or by eCheck. Vendors who want to become part of your ePayables network only need to provide an email address to be onboarded.


What Industry Benefits the Most?


Using virtual credit cards is not an industry-specific phenomena. Any business that wants to save time and money processing and paying their invoices stands to benefit regardless. That said, virtual credit cards are a relatively new entrant in the digital payments space and are most often used for online or phone transactions. Also, their use is not tied to an automated process.

There are still some scenarios for B2B transactions in traditional brick-and-mortar settings where a VCC is not an option since not all bank issuers off them nor all vendors support or accept them. But again, this is rapidly changing as with all new technology that needs to spread from early adopters to the mainstream.

There are still some scenarios for B2B transactions in traditional brick-and-mortar settings where a VCC is not an option since not all vendors support or accept them. But that’s rapidly changing as with all new technology that needs to spread from early adopters to the mainstream.


What is the Issuing Process and How are VCCs Managed?


Issuing banks let an organization create new virtual credit cards right in a browser or via a specific application. It gives companies maximum flexibility to set the permissions and rules around initiating payments depending on the specific needs.

AP team members will see and be able to work with just those virtual cards in their familiar workflow interface, ready to let them do their job in a fast and secure manner. Setting up a new VCC should also be part of your AP approval matrix, defining and enforcing clear processes around who can create cards, set their value and expiration date, as well as assign them to specific accounts, vendors, or projects.


Why Now is the Time to Switch


With inflation running hot and supply chain insecurities plaguing most industries, investment into things that help control costs is the name of the winning game. Streamlining your entire purchase-to-pay workflow with intelligent AP automation plus VCC payments lets an organization achieve exactly that. When you combine the two you have the benefits of AP automation such as:


  • Reduction in processing costs per invoice by 80%.
  • Lowered cycle times from weeks to days or hours.
  • Minimization of the number of exceptions that require costly manual review.
  • Building a digital treasure trove of financial intelligence for smarter decision making across the entire organization.


You then enhance these benefits with those of virtual credit cards including:


  • Increased convenience thanks to quick and easy payments and notifications. This includes assigning, processing, and receiving amounts from anywhere at any time.
  • More security against errors, fraud, and theft thanks to limits on shared personally identifiable information, no visible information printed on cards, and even no physical cards themselves to steal.
  • Easier management, from tracking the cards to setting controls over spending limits and periods (such as the ability to close out automatically after one payment).
  • Lowered cost, including those from less required bank/processing fees, cash rebates, or the time and processing cost associated with paper checks.


What’s the Bottom Line for Adopting Virtual Credit Cards?


Virtual credit cards are one crucial tool in the toolbox to future-proof your company, making it smarter, more agile, and resilient to outside disruptions such as fraud and cyberattacks. It’s a trend that will likely only become more important as the share of digital payments in B2B transactions keeps growing. What’s more, with the increase in remote work environments businesses on becoming more dependent on mobile access to process, review, approve, and pay vendor invoices with a few taps or clicks. It’s a cloud-based workflow you want working for you.

When AP automation powered by AI and machine learning plus virtual cards augment human skills and expertise, the result is literally virtually superior.


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