Commercial cards continue to grow
According to a recent report, U.S. Commercial Credit Cards Market Forecast, 2016-2022: Growing at a Healthy Pace by Steve Murphy, Director, Commercial and Enterprise Payments Advisory at Mercator Advisory Group, commercial card spending in the United States is increasing for both traditional and virtual card solutions. He reports that in 2017, the U.S. commercial credit card volume for mid-to-large corporations showed a YoY growth of 9.3%, which is approximately a 10% improvement from the prior two years. This growth corresponds with macro trends in corporate travel budgets, technology innovation, and corporate adoption.
Although U.S. commercial credit volume is increasing, suppliers and buyers continue to hold on to paper instruments. According to the report, in 2017, 40% of B2B payments were made with checks. Checks are often perceived by suppliers to be reliable, cheaper, and time efficient in comparison to commercial cards. Such a perception is flawed as check payments are highly manual processes with an increased rate of human error, increased susceptibility to fraud, and ultimately cost inefficient. Cue the opportunity for a variety of commercial card products, which for the purposes of this article we will refer to generally as virtual card payments.
Virtual card payments have a strong use case
According to Mercator, virtual card-based platforms capture only 6% of commercial payments, yet there is a strong use case for this solution. Virtual cards benefit cash cycle management solutions in four areas: supply chain financing, e-Procurement, invoicing and accounts payable. At the treasury level for a buyer, commercial credit card products increase working capital, which extends often mission-critical days payable outstanding (DPO), captures possible early-pay discounts, and accelerates supplier payments. Virtual cards integrate with digital procurement systems which allow for additional flexibility and for cost management. At the stage of invoicing there is a virtually unlimited level of remittance detail allowing for easier and automated reconciliation, especially in comparison to checks, wires or ACH. For accounts payable, virtual cards reduce the cost of low-value purchase orders, reduce transaction costs and allow for on-time payments to suppliers.
The pull model can be a pain
According to Mercator, the pull (supplier-initiated) virtual card product model has gained approximately 20% CAGR over the past several years but it presents significant pain points to the supplier community, especially high-velocity card acceptors such as large billers. For suppliers accepting virtual card payments, the process can be difficult. The supplier must have human resources available to receive e-mail-based card payment notifications and manually extract the card and remittance data and then manually process the payments and post the transactions. This manual handling of multiple virtual card payments is cost ineffective, invites human error and poses PCI compliance risk for the supplier. Remittance information is often transmitted in varying non-digestible formats which further complicates accounting. Simplicity and automation are the keys to accessing this model which will reduce resources and costs.
Suppliers’ misperceptions of card acceptance costs
Perhaps the largest obstacle to an even broader adoption of virtual cards has been the negative “knee jerk” reaction by suppliers to the perceived cost of card acceptance. However, new interchange rates published by the card networks specifically for B2B transactions, coupled with the recent introduction of technology platforms designed to optimize the cost of acceptance, have changed the card pricing landscape by ultimately leveling the playing field between card acceptance and traditional payment methods.
A solution to friction reduction
As recommended by Steve Murphy, friction can be resolved by developing a straight-through processing experience for suppliers. FinTechs that also serve as independent sales organizations (ISOs), payment service providers (PSPs) and payment facilitators (PayFacs) such as Boost Payment Solutions can help suppliers manage their pull payment process and remittances through card-based lockbox solutions to ultimately reduce transaction costs and ease reconciliation.
“One of the key elements that has been a big obstacle for much larger growth of commercial cards has been supplier acceptance,” Boost’s Founder and CEO Dean M. Leavitt explained in a recent interview with Steve Murphy. “Boost focuses on understanding what those challenges are and what the objections might be on the part of the supplier.”
Boost currently offers two products named Boost Intercept® and Dynamic BoostSM. Intercept is an automated, straight-through solution for suppliers processing virtual card payments while Dynamic is a rules-based platform focusing on customizable discounting and interchange pricing flexibility across the buyer, supplier, and issuer domains. Boost is U.S. based and plans to expand their Dynamic BoostSM product internationally in the next 18 months offering their solutions to a wider audience.
“The credit card infrastructure that was built 70 years ago never envisioned the use of large scale B2B payments on the credit rails. The infrastructure was built to support a chance encounter between a consumer card holder and a retailer,” Leavitt noted. “What we’ve done is look exclusively at the B2B industry and make the appropriate adjustments so those rails can now accommodate the large B2B transactions and the requirements that each party has in order to accept cards.”
Conclusion
The commercial card market continues to grow, especially in the virtual card arena. Virtual cards have multiple benefits across the supply chain, but for suppliers, their use still results in a highly manual process due to the proprietary nature of varying formats which could increase risk for PCI compliance. Taking advantage of remittance data is an important component to virtual card data but it must be translated into a readable enterprise resource planning (ERP) format for ingestion. ISOs and PSPs like Boost Payment Solutions are able to bridge the gap between issuers, buyers, and suppliers by offering straight-through solutions for processing virtual card payments.
