When a traveler books a hotel through an online travel agency (OTA) like Expedia, the OTA pays the hotel some or all of the value of the booking, but the OTA may or may not have been paid the full value of the booking by the traveler. The amount the traveler is willing to pay upfront to secure the booking, and the amount the hotel will insist on receiving upfront from the OTA to hold the room, are functions of their perceived potential risks and rewards at the time of booking. By pricing based on certainty of travel, OTAs have become a tool for travelers and travel providers to hedge risk, in part through payment authorization and payment timing.
This need for variable timing and commitment of funds has created a durable use case for virtual cards as the instrument OTAs use to push funds to travel providers. Their ability to authorize for one amount and settle for another, as well as pay suppliers on day 1, then pay card providers on day 45, allows OTAS to manage final payment amounts automatically and bridge gaps in working capital.
However, as Hugh Thomas, Commercial & Enterprise Lead Analyst at Javelin Strategy & Research, sets out in the report The Virtual Economy: Measuring Buyer Industry Receptiveness to Using Virtual Cards, these sorts of cash management and automation challenges are not unique to online travel agencies, suggesting use cases for virtual cards in B2B payments in many other industries.
In this report, and its companion, The Virtual Economy: Identifying Supplier Industries Receptive to Virtual Cards, Thomas offers perspectives on other industries where virtual cards may be poised for a breakthrough based on factors like cash management, the need for automation, and vendors that already accept cards, setting out a new way for banks and networks to uncover use cases.
Not as Intuitive as Its Predecessors
Early card applications for B2B payments were fairly straightforward. Products like travel and expense (T&E) cards had a clear purpose and use, enabling staff to travel on business without reaching into their own funds. As the notion of spending with a card issued to a company became more broadly accepted, use expanded to indirect spending on things like maintenance, repairs, and operations, areas where purchasing cards, with strict controls on purchase amounts and locations, empowered other employees to pay on behalf of the company without raising purchase orders.
“You’ve got people on your staff that you need to go visit a customer, or you need to pick up some tools and cleaning materials,” Thomas said. “You don’t want them to go out of pocket, you don’t want to spend employee time raising purchase orders, and you’d like to manage those expenses and gain whatever benefit you can gain—from some chunk of whatever the bank itself is gaining by issuing the cards—in the form of things like rebates. So these things are fairly intuitive.”
With the emergence of virtual cards, businesses are now looking at card networks for making all kinds of payments, up to and including direct purchases of goods and supplier payments, leveraging card networks’ ability to message that a transaction is authorized, then later settle it. Cards also allow buyers to pay suppliers faster, then use card cycles to hang on to funds longer before they pay the card provider. Virtual cards also come with controls; such cards have maximum transaction limits, set within the parameters of what the business estimates the purchase order will cost, and virtual card numbers can also be set to work only for a given vendor or vendor industry.
“It’s only good to be used to make payment to that one supplier, conceivably on that day,” Thomas said. “It’s got all the benefits of a card wrapped on top of it, the recourse to charge back if you don’t get what you said you were ordering, and so forth. Now you have a solution that has a bunch of benefits to it, but also a bunch of costs to it where you need to be conscious of where the thing is best applied—and that is not something that’s immediately intuitive.“
Shortening the Payment Cycle
Delving deeper into using virtual cards as purchasing cards uncovers more use cases.
For example, a business may have a vendor it doesn’t plan to work with on a long-term basis. Instead of going through the typical know-your-supplier or know-your-customer checks, the company could simply pay the vendor with a virtual card.
This way, the business doesn’t give the vendor any banking information, avoids creating purchase orders, and eliminates significant costs in the process.
“The business case for cards begins to expand, and as that happens, you come to realize it shortens the payment cycle time and thus begins to get used even more broadly,” Thomas said.
Everyone Has Exigencies
As the B2B use case expands, it becomes clear that virtual cards are not simply an X-that-does-Y product.
To identify some of the best fits for virtual cards, Thomas used the OTA industry as a blueprint. He identified the defining traits of the target market for virtual cards. One characteristic he discovered: a high number of potential vendors.
“There’s a vast number of vendors for any OTA business,” Thomas said. “The number of vendors is basically equal to the number of hotels, car rental companies, airlines, and train companies in the world. Whatever they book, that’s a potential vendor to them, so the numbers are obviously in the millions. High volume seems to be something that drives this use case.”
Another characteristic of virtual card candidates is they require flexible and potentially slow incoming payments or, conversely, high days payable outstanding.
Taking the criteria gleaned from the OTA model into account, Thomas began to focus on the industries where virtual cards could make the most impact. What he found was these were often sectors which have complex supply chains, such as home centers, food manufacturers, or general merchandise stores.
“Another is the healthcare business,” Thomas said. “Healthcare payments have to go through so many different parties, and everybody’s got their own, ‘I want to be paid sooner exigencies’ or ‘I want to pay later exigencies.’ It’s obviously a data intensive payment process in healthcare, so it’s a great tool in that respect.”
Selling Opportunistically
For all the promise of virtual cards, businesses have very few resources they can rely on to guide them through the usage of virtual cards. This was the impetus for the Javelin report—to analyze the landscape and predict where virtual cards might emerge next as a solution.
“In all my time working with banks data, what I found was that the characteristics of suppliers being paid with virtual cards was vastly different from bank to bank,” Thomas said. “There were no two banks that looked alike. Now, if you made that comparison for a T&E product or a purchasing card product, the patterns would be very much largely the same.
Thomas notes that with virtual cards, there are some financial institutions that heavily over-indexed in healthcare, some in auto, others that are heavily indexed in utilities, and still others in OTA.
“That, to me, says there’s no uniformity among the banks for a product where everybody’s product is by and large pretty much the same,” Thomas said. “That suggests this is something that water has just begun to find its level on in terms of use cases for virtual cards—and that it’s being sold opportunistically, rather than with an eye to the typical exigencies of the industry in question
“It says that there just is not a common awareness of where it’s best used and how to determine the circumstances of where it’s best used,” he said.
