Spend Matters welcomes this guest post from Mike Fortmann, vice president at Nvoicepay.
With the explosion in online and mobile banking, consumers are moving away from paper-based payments (cash and checks) and using a variety of electronic payment methods that are faster, more secure and more convenient.
The same thing is happening in B2B payments. According to the Goldman Sachs report “The Future of Finance: Redefining the Way We Pay,” nearly 50% of payments by U.S. businesses are still made by paper check. That’s still a lot, but it’s down from 81% in 2004, and is expected to continue to decline at about 3% per year.
What’s taking the place of paper for business payments? ACH, wire, p-card and virtual card payments. Each of these has a place in the payments mix, but virtual cards, or single use ghost accounts (SUGAs), may represent the biggest untapped opportunity.
SUGAs have been around for about 10 to 15 years, but they haven’t gained widespread adoption either because companies don’t know about them, or they have misconceptions about how to work with them. It’s actually pretty easy and there are a lot of benefits, especially for smaller suppliers.
P-card vs. V-cards
In its report, Goldman lumps p-cards and virtual cards together, but they’re actually two different animals. P-cards, or purchasing cards, are similar to consumer credit cards, but for business. You can use them to pay invoices, and a lot of companies do that, but there are issues with security and accuracy. Accounts payable has to read the 16-digit number from the plastic card over the phone and trust that the supplier will keep that information secure.
Calling people on the phone is also a cumbersome, error-prone way to pay invoices. There’s a lot of time and manual effort that has to go into reconciliation and dealing with discrepancies. P-cards should really only be used for giving employees easy access to buy low cost items.
Ghost in the Cloud
SUGAs are specifically designed for paying invoices. These “cards” exist only in electronic form. The buyer sends their payments provider a file and all the invoices are matched with card numbers that can be used by the corresponding supplier one time only for that specific amount.
SUGAs lend themselves much more readily to electronic payments than p-cards, and they offer the same kinds of rebates that p-cards and consumer cards do. They can even be structured in so that they don’t need underwriting, so they don’t impact the company’s credit.
Low IT Impact
With today’s cloud technology, putting a SUGA program in place is pretty easy. Integration isn’t required, just the ability to pull a payment file. Getting the program set up usually takes an hour or less of IT time.
The bigger misconception buyers have is that suppliers won’t accept virtual cards. In reality, in a well-run electronic payments program, buyers find they can make about 20% to 25% of payments by virtual card.
Suppliers Want It
There are suppliers of all sizes that are willing to pay for the convenience of virtual card payments. They also work well for smaller suppliers that want immediate cash, but don’t have the people and processes in place in their accounts receivables department to manage ACH payments. Those vendors usually just take checks. SUGAs give them another electronic option.
SUGAs can help buyers streamline processing and dramatically reduce the costs associated with paper processing. According to the Goldman report, the cost to process a card payment is under $3, before subtracting the revenue that the card rebate generates for the buyer.
The key to getting the most out of virtual cards is to make them part of a comprehensive electronic payments program that brings together all payment types including card, ACH and print checks within a single service, supported by continual supplier enablement.
Have No Fear
Many companies haven’t adopted virtual cards because they fear that they will disrupt their current accounts payable process, or because they have been through a failed bank card program. New fintech companies are stepping in to provide complete payment solutions that are easy to set up and will do one payment and reconciliation file with virtual card payments along with all other payments.
Checks are slowly dying in the B2B world. For now, most suppliers accept them, but that doesn’t mean they prefer them. For many, SUGAs are the most desirable way to pay due to security, accuracy, efficiency and rebates. Given their advantages to buyers, optimizing the “ghost in the cloud” should be a key part of any electronic payments program.