What is a virtual card payment and what’s its impact on accounts payable?

By 2028, virtual card transactions are expected to reach close to $175 billion globally, an increase of 30% from 2023.

There is a reason (or rather, several reasons) why virtual cards are showing such strong promise, especially since they ride on the same principles as traditional credit cards.

Bottom line, more businesses are using virtual cards because they are convenient, safe, and relatively low cost in terms of fees.

But what’s the bigger story? What exactly are virtual cards, why are they becoming so popular in the B2B sector, and how do virtual card payments work?

Let’s dive in.

What is a virtual card?

A virtual card is a digital credit card with a unique, randomly-generated 16-digit number that is used only for a specific transaction. Essentially, a virtual card is a type of ‘temporary’ credit card, ideal for online payments, and for other payments in which a credit card is not present. 

Virtual cards as a B2B payment method are becoming increasingly popular. This is partly due to the fact that virtual cards offer increased control over payments. Businesses can set limits on spending with virtual cards based on several parameters, such as the amount, the date or time period of the payment, or the specific merchant or payee to whom the payment will be made.

In 2022, business transactions accounted for 70% of the global virtual cards market.

How do virtual cards differ from physical cards?

Virtual cards and physical cards work in much the same way, enabling the customer to pay via credit, rather than cash or check. However, there are key differences – the most notable being that a regular credit card is a physical card, while a virtual card is digital only. Even so, both physical and virtual cards can be added to mobile wallets, so customers can use the contactless tap-to-pay method with their smartphones for both card types.

Physical cards have a permanent 16-digit number, expiry date and CVC security number, while virtual cards have a randomly-generated 16-digit number that is completely unique, as well as a unique expiry date and CVC number. Virtual cards are created and used only for one specific payment, while physical credit cards can be used anywhere and anytime, as long as the cardholder does not go over their set limit.

How virtual cards work

Virtual cards work much the same way as physical credit cards. Like traditional credit cards, the virtual card has a 16-digit number, expiry date and CVC code, which is provided to the business for the payment. 

Businesses that accept credit cards can typically also accept virtual card payments. Virtual cards are available from most credit brands and banks, including Visa, Mastercard, American Express, Chase, Capital One, Citi and many more.

When a virtual card is created, it is assigned a randomly-generated number, which is used for a specific, one-time payment. The virtual card is connected to the customer’s actual credit details, however these are hidden from the business or payee via tokenization. Tokenization is a security method that gives sensitive information a unique identifier (‘token’), which is encrypted so it can’t be accessed or revealed. This makes the virtual card payment process highly secure and safe.

Types of virtual cards

There are several types of virtual cards that are suitable for a range of purposes. Let’s take a look at each in turn:

Benefits of using virtual card payments

No payment method is perfect. Rather, each has its benefits and drawbacks, depending on the need and user. For businesses, using virtual cards to pay vendors and expenses comes with several pros that outweigh the cons. Here are the key reasons why a business may choose to use a virtual card to pay and get paid:

Best practices for protecting your virtual card

While virtual cards are a safe choice, you can take further steps to prevent misuse and fraud, and protect your business spending:

• Limit the payment amount: Assign appropriate limits to virtual cards to control spending and avoid unauthorized purchases. This is particularly important for businesses that provide multiple cards to large numbers of employees.
• Choose single-use virtual cards or merchant-specific cards: Limit virtual card use to one-time transactions or specific merchants. 
• Set real-time alerts: Turn on notifications for virtual card transactions to monitor activity and keep track of day-to-day usage of virtual cards.
• Use a trusted virtual payment solution: Choose a payments platform like Melio that supports virtual cards as a payment method. The built-in security features give you even more peace of mind that your virtual card payments are monitored, recorded, and safe.

Impact of personal credit on business credit card approval

Especially for small or new businesses, personal credit may have a strong impact on the process of getting approved for a business credit card. This is because many business credit cards require a personal guarantee, meaning the card issuer reviews the personal credit score of the applicant to determine creditworthiness.

A higher personal credit score increases the chances of approval for a business credit card.

Virtual cards are usually issued by the credit card provider, so approval is based on the same criteria as the primary business credit card. After the business card is approved, virtual cards can be issued to employees without needing further personal credit checks. 

Essentially, virtual cards enable businesses to provide a kind of ‘business credit card’ to their employees, without needing every team member to go through personal credit checks. 

The impact of virtual cards on accounts payable

For many businesses, accounts payable is complicated, involving dozens of invoices and payments that need attention at any given time. Larger businesses may have multiple employees paying expenses as part of their day-to-day activity.

Virtual cards help to streamline accounts payable by removing much of the manual workload. Each virtual card transaction includes detailed payment data, such as the amount, date, and merchant, that integrates automatically into the accounts payable systems, making it much easier to track business spending. This leads to greater efficiency, fewer errors, and quicker reconciliation of transactions. The quicker payment process also enables businesses to hold onto larger sums for longer, increasing working capital. 

Also, many virtual cards offer cash-back rebates, which can offset payment processing costs. Choosing a virtual card with benefits and perks, such as travel points, can also get better returns for regular business expenses. 

When it comes to accounts payable vs accounts receivable, virtual cards are also an effective way to get paid by customers. With Melio, businesses can choose to receive all their payments with single-use virtual credit cards, regardless of how the customer pays. This even reduces processing fees, with no extra charge above the standard POS processing cost.

Virtual cards are the new reality

As the world continues to digitize, more businesses are looking for feasible payment options that are reliable, fast, and secure. More than almost any other method, virtual cards tick all the boxes.

Whether paying invoices or receiving money from customers, virtual cards are fast becoming the payment method of choice for businesses small, medium, and large.