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Posted October 27, 2021

What is a virtual credit card and how does it work?

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Why the buzz around virtual credit cards?

As a result of COVID-19, companies are looking to move away from old-fashioned methods of paper payments. A reduction in staff, a beleaguered postal service, and a desire for hands-free interaction with customers are some of the outcomes of life during a global pandemic. Even before the pandemic, a tool referred to as a “virtual credit card” was creating a buzz in the payments marketplace. Today, the use of virtual credit cards has become a commonly used form of corporate payment.

What is a virtual payment?

A virtual payment is a digitally tokenized card number. There are different kinds of virtual payments which include single-use cards, lodge cards, and third-party virtual cards. One of the most common kinds of virtual payments is a single-use account, wherein the holding company of the card generates a unique string of numbers, connected to a company’s bank account, which can be used for just one payment.

Seven reasons to switch to virtual credit cards for your payments needs:

1. Virtual cards offer tighter controls that minimize errors and reconciliation issues

Companies can set controls on single-use virtual payments that limit the amount, date, merchant, and even MCC codes, among other parameters. Here’s an example: if you send a single-use virtual payment to your office supply store, you can specify the exact amount that the merchant should process to receive payment (down to the penny), and you can limit the date range during which that virtual payment is valid.

2. There is less risk of fraud through single-use virtual card numbers

Single-use virtual card numbers are designed for one use only. After the virtual payment is made, the single-use number is invalid and cannot be reused. This reduces the likelihood of fraud because it is a one-and-done system, tightening the transaction time and significantly decreasing the vulnerability of the user account to outside, unauthorized interaction.

3. Virtual cards provide improved payment and remittance data

With virtual payments, you can choose to record additional information about the payment in the notes of the transaction, such as project codes or cost center info. Plus, this added data can be more robust than it typically is with other payment types (for example, ACH limits any added data to 80 characters).

4. Virtual cards allow enhanced data capture

In addition to the added data mentioned above, virtual payments also provide the ability to include customized data capture fields. For example, if you’re paying for a hotel expense, you can include a customized data capture field for the booking ID number.

5. With virtual credit cards you get streamlined and simplified reconciliation

Virtual payments include a full audit trail with real-time data analytics.

6. Virtual credit cards provide faster payments to suppliers

Suppliers can reduce days sales outstanding (a measure of the average number of days that it takes a company to collect payment after a sale has been made) and greater working capital (the difference between a company’s current assets and current liabilities) with the increase in speed experienced using virtual payments.

7. Virtual credit cards incur lower costs than plastic cards

Since virtual cards are digital, costs associated with issuing, mailing, and maintaining plastic cards are eliminated.

What kinds of virtual cards are there?

There are several varieties of virtual credit cards available today, with different strengths.

A virtual credit card (also called a “ghost card”) doesn’t come in the form of a physical plastic card and instead exists only as a card number. Virtual credit cards are issued to customers when they want to make an electronic payment without using their plastic card number or an existing credit card account. Virtual credit cards are typically used for transactions that take place online, and they can also be used for transactions over the phone or in other instances of card-not-present transactions. The virtual card number functions similarly to a token and can’t be traced back to another credit card or bank account. This keeps both the card information and the customer’s identity secure while allowing for controls on the transaction just as if the actual credit card were being used.

Virtual credit cards were introduced in the early 2000s and initially were limited in their use; they were primarily used by travel-related businesses and companies with fleets of vehicles. In recent years, however, a wide range of other industries have realized the value of using virtual cards for electronic B2B transactions.

Virtual cards can be single-use or what are called “lodge cards.”

What is a single-use virtual card?

Single-use means just that — it’s a virtual card number (from a single-use virtual account) that is valid for just one use. Once that single-use payment has been processed, the virtual card number becomes invalid. Single-use virtual cards have tight controls associated with them, such as the amount (which can be a range of amounts or one specific amount), expiration date, merchant, and even MCCs, among other parameters.

With amounts, single-use virtual cards can be authorized to use with one exact amount only (such as $100), or they can be authorized for multiple transactions that ultimately result in that one exact amount (such as five $20 transactions).

Single-use card payments are popular because vendors get paid faster and experience more efficient reconciliation in the process.

What is a lodge card?

A lodge card has an established credit limit for invoice payments and/or for goods and services. A lodge card number can be input into a POS terminal more than once, but transactions can never exceed the authorized credit limit. As with single-use and third-party virtual cards, lodge cards typically have controls that can be set for expiration dates, MCCs, etc. Given that lodge cards make transactions with the same virtual number over and over, they’re generally used sparingly and only with highly trusted vendors.

Whether you adopt single-use, lodge, or a combination of these virtual card types, each one offers customizable security, efficiency, and control necessary for electronic B2B payments.

When should businesses consider using virtual cards?

A case study for virtual card use in your accounts payable department

Virtual credit cards will improve your accounts payable system by providing transparency and efficiency to day-to-day processes. As cash management practices progress and the economy proceeds on its course of globalization, automation continues to expand within the world of bank accounts and credit cards. Automation is more efficient and more accurate than manual management. Traditionally, the accounts payable (AP) processes have been managed manually, an approach that is both tedious and error-prone. The lack of efficiency created by these archaic manual processes can lead to enormous risks for your company magnified by the inevitable possibility of human error. Consequently, the transition from human resources to automation is a welcome one in AP.

What is virtual AP?

Converting your accounts payable department to a virtual AP department would mean transitioning to electronic payments using single-use or lodge virtual cards. This move to virtual AP will lower costs, help you mitigate risk, and optimize discount administration and buyer/supplier collaboration. Improving your company’s AP technology will give you the ability to leverage payments and data, and with a bank agnostic framework, payments will be streamlined, saving time and eliminating inefficiencies.

The increased controls and visibility offered by a virtual AP system will help you mitigate risk internally and prevent potential fraud. With virtual payments systems and tools, your company will achieve margin improvements and discount advantages from optimized payables.

The advantages that come with implementing a virtual accounts payable program benefit the buyer and supplier in the B2B payable structure.

How will moving to a virtual payments AP system benefit the buyer and supplier?

The buyer gets:

  • Direct cost savings
  • Discount capture
  • Safe-secure execution
  • Payment transmission
  • Flexible payment options
  • Financial transparency

The supplier gets:

  • Flexible payment options
  • Electronic settlements
  • Timely payment options
  • Safe-secure acceptance
  • Remittance information

Virtual AP providers often develop strategic partnerships with payment companies like Mastercard® or Visa® and can offer a payment solution enhanced by the power and credibility of that payment network. This kind of partnership will provide your AP department with an already existing, efficient, and seamless way to pay for invoice-based spend. These virtual AP programs provide more flexibility and a greater variety of options than traditional models while offering the security and efficiencies found with virtual cards.

The most efficient and seamless way to pay suppliers for invoice-based spend is with virtual credit cards. Virtual credit cards offer access to broad acceptance via the payment network and provide highly customizable security controls. With strategic supplier enablement, buyers will be able to facilitate accelerated supplier participation and allow for maximum program results.

A virtual AP system can manage expenses with the following benefits:

  • Flexible issuing options: One-time or recurring virtual payments through a secure web portal
  • Simplified reconciliation: Easy to coordinate and manage purchases with a robust and accessible account management portal
  • Seamless ERP integration: Easy integration with existing GL accounting systems to save even more time and avoid errors
  • Better data visibility: Real-time access to transaction information and reporting flexibility through the AP web portal
  • Multi-channel supplier enablement: Comprehensive campaign strategy and execution through a dedicated supplier enablement team to maximize program enrollment

By using the virtual credit card, AP departments are able to realize comprehensive integration and complete terms management

Almost all companies use some form of an ERP (accounting) system to help manage AP. Most companies are looking for a seamless way to process their payables liabilities, regardless of payment type (check, ACH, card). While very few financial institutions or third-party software providers offer a seamless and automated way to support these payments, smart integrated payables solutions provide a comprehensive way to process supplier payments, regardless of payment type.

Three ways integrated payables can optimize payments:

  1. Multiple forms of payment: Virtual cards, ACH, SIP, check
  2. Fully automated file transfers
  3. Closed-loop reconciliation

As businesses seek to improve cash flow, supplier terms management can be a valuable strategy for improving and optimizing the cash conversion cycle. Virtual credit card AP and managed payables solutions will deliver a seamlessly integrated, fully automated solution using all payment modalities – including virtual cards, EFT with discount administration, or check – and will connect buyers with suppliers through a simple pay file integration. Managed payables reduce manual processing and facilitate comprehensive supplier/terms management to maximize margin improvement, efficiency, and control for powerful payment optimization.

How can managed payables optimize payment?

  1. Multiple forms of payment, including EFT with discount and check with Positive Pay
  2. Both buyer-initiated pay and supplier-initiated pay virtual account payments
  3. Complete terms management
  4. Single payment file
  5. Full payment optimization

Virtual credit card payments improve the efficiency and effectiveness of the AR and AP processes. A virtual card number (VCN) stands in for the details of the remitter and translates that information for the B2B customer’s account statement.

Why choose the virtual credit card as your payments method?

Virtual credit card payments offer significant benefits to companies including some of these most recognized advantages:

  • A VCN provides information to facilitate the automatic reconciliation of payments, saving time compared to manual reconciliation. The number of disputed entries is also reduced, allowing for better settlement processes and a reduction in the number of debtor days.
  • The minimal amount of manual inputs reduces error rates and improves debtor management and cash flow for the company.
  • The electronic processing of invoices and payments facilitates improved operational efficiencies.
  • Printing requirements are reduced, resulting in less waste.

Electronic payments, transfers, and automatic deposits are not just for the convenience of the consumer. By adopting virtual credit card payments, businesses can take advantage of lower processing costs, gain internal control through automated account reconciliation, and mitigate risk with less paperwork.

VCNs are a fairly new method of payment within business payables, and corporations are quickly seeing the benefit of using them in place of ACH payments and checks. According to multiple finance experts, quoted in a recent Forbes Magazine article, virtual cards are quickly becoming ubiquitous in the B2B environment. They are cheaper to process than paper checks or ACH, are more secure, and in some cases provide revenue-generating cash back or rebates.

“Virtual credit cards generate cash rebates for the companies that use them, while also adding an enhanced level of security and fraud protection to the accounts payable process,” says Tom Rogers, CEO of Vendor Centric, a consulting firm that helps companies manage and mitigate risk with vendors.

If you haven’t yet looked into virtual payments for your business, now may be the perfect time to explore. Talk with one of our consultative experts to learn about how to pay your vendors with single-use virtual card payments.

By making virtual card payments in your Accounts Payable department, you will realize benefits such as reduced fraud risk, improved payment, and remittance data, and lower costs.

To learn more about WEX, a growing and global organization, please visit wexinc.com.

Editorial note: This article was originally published on February 8, 2021, and has been updated for this publication.

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Nori Gale

Nori is a digital content marketer for WEX and is based out of our Portland office. Nori joined WEX in 2019, bringing over 20 years of creative experience in digital marketing and content writing. Nori is focused on enhancing our thought leadership messaging and driving more meaningful engagement on WEXinc.


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