By now, virtual cards have established use cases in key industries like healthcare and travel. In these industries, both buyers and sellers see value in the cards’ ability to automate payments, accelerate payment timing, deliver incremental data, offer buyer and seller controls, and mitigate fraud and credit loss concerns.
While these industries continue to deliver healthy spend volumes, identifying new industries with similar payment instrument needs has been a challenge, one now exacerbated by a slowdown in spending growth.
A new paper, The Virtual Economy: Identifying Supplier Industries Receptive to Virtual Cards, takes a macroeconomic perspective on areas where these cards may be poised for a breakthrough. Hugh Thomas, Lead Analyst of Commercial and Enterprise at Javelin Strategy & Research, looks for the first time at the factors that can lead to certain industries being open to this payment method. A companion paper, The Virtual Economy: Measuring Buyer Industry Receptiveness to Using Virtual Cards, looks at similar issues from the buyers’ side.
Setting Forth the Criteria
The research arose from the idea that certain criteria, common to a given industry, make virtual cards a better option for a supplier to get paid. Thomas found that the software business, for example, is ripe for increased use of virtual cards.
Several factors go into that assessment: The software industry has a complex buyer base, waits substantially longer on average than other industries to get paid, incurs higher bad debt losses, and its need to access working capital is higher than average. These are characteristics it shares with existing use cases like online travel providers and the healthcare industry, where virtual cards are already commonplace.
“As an example, a big buyer like Google, might buy software and code from a variety of small providers from all over the place and take longer on average to make payments due to approvals and licensing agreements” Thomas noted. “A high volume of low value, data intensive payments means they tend to take longer both to be paid and to pay, characteristics that look a lot like the healthcare industry. And they can exert terms on their suppliers. If you look at a big player likeSalesforce.com, you can infer something like 340 days payable outstanding based on last year’s financials. They can pay their bills slowly because they’re a big customer effectively, and they negotiate that into their terms.”
Unprecedented Research
But Thomas’ research didn’t just assess the manners in which buyers and suppliers prefer to make payments within these industries. He used four metrics to establish an industry’s receptiveness to virtual cards: working-capital needs, bad debt, buyer base pull (a measure of buyer base complexity and average desire to pay with cards), and current acceptance rate. To quantify these traits, Thomas drew on three national datasets, as well as prior work measuring buyer receptiveness to using virtual cards.
“There are a few different ways that you can use the data if you’re if you’re a provider in this space trying to bring on more suppliers,” Thomas said. “The model we’ve created will give you a measure of supplier industry propensity to accept, but it will also give you an idea of what’s driving the propensity, so you can customize messages based on payment acceleration, bad debt reduction, or process automation”
Hitting the Nail on the Head
Thomas knew the research hit the nail on the head when the primary established use cases for virtual cards lined up precisely with his criteria.
“Once we started scoring for longest time to get paid or most complex payable processes, OTAs, healthcare and wholesale utility payments bubbled to the top in terms of most receptive industries,” he said. “That’s where they’re already resonating today. Our model is surfacing high propensity in all the industries where you’d expect to see it based on known uses today. If the model is highlighting the existing exemplars, that obviously reflects well on its ability to find new high potential supplier industries.”
The work breaks new ground in terms of the quantitative perspective it brings to identifying new opportunities for the commercial card industry.
“I’ve worked in this business for more than 20 years and I don’t think there has been a study like this done before,” he said. “I’ve never seen the IRS data used this way to identify industry level financial practices, paired with Bureau of Economic Analysis and census data to identify industry counterparties. Integrating these different datasets make for a powerful tool to understand the market.”
The Importance of Credit
A key benefit of virtual cards for suppliers is in how they shift the cost of managing credit to card issuers, away from the suppliers themselves. Virtual cards also offer recourse to things like chargeback mechanisms, a useful tool for buyers, particularly when dealing with new suppliers..
“It’s the classic use case for credit cards in that respect,” Thomas said. “Situations with early days’ relationships between buyers and suppliers, the frequent need to adjudicate credit for new customers, the high cost of onboarding new suppliers, all of these create greater utility for virtual cards, and are things we sought to identify in our modeling”
Cost is the primary reason that suppliers are often resistant to accepting virtual cards. There can be costs associated with setting up a system to receive those payments seamlessly as well as to process them. The models behind the buyer and supplier propensity studies have been designed to highlight industries where acceptance costs are the same or lower than getting paid by other means, either by getting suppliers paid faster, reducing bad debt, or reducing administrative costs.
Moving in the Right Direction
A key challenge for virtual cards, and commercial cards in general, is that they are repurposing a payment systems designed to handle retail transactions for use in B2B payments. The exigencies of these two different types of counterparties are very different.
Even so, the payment industry is getting more accepting of virtual cards every day. Circumstances are ripe for use cases to explode among suppliers.
“Everything seems to be moving in the right direction,” Thomas said. “You’re seeing the networks create more interchange rates designed seemingly to better match the value that’s being realized by using the cards. You’re seeing lower merchant discount rates for merchants that are willing to provide Level 3 data coming through. There is a realization that’s the one-size-fits-all retail model for credit cards is not applicable with B2B transactions like this. We think the sort of insights we’ve built here can only help providers get smarter, and help grow their cards within the B2B payments ecosystem.”
