Virtual Card Programs Part I: What Exactly Are They?

Corporations remain under continuous pressure to reduce costs and improve operational efficiencies. One of the easiest ways to do this is by migrating payments from check to electronic. However, I am seeing more and more corporations taking the migration to electronic payments a step further by implementing virtual card programs which can turn their A/P departments from cost centers to revenue centers.

The attractiveness of card program rebates have provided the motivation to use PCard and ghost cards in the A/P arena, albeit with mixed results.  Providing a ghost card number to select vendors is one thing – providing it to all of your vendors is another.  Concerns over fraud, control, and reconciliation have led to the development of single use virtual cards.

Virtual card numbers are just that – virtual!  Like ghost cards, there is no plastic involved.  However, unlike ghost cards, virtual cards are unique card numbers that are tied back to a real card number. The real card number allows the issuer to control overall credit limits and perform billing. 

What makes virtual cards ideal for A/P applications is that they can be generated when needed (on a batch or real-time basis) and allow the payer to specify the maximum credit limit (to the penny) as well as when each card number expires.  Most of the time they are single-use, meaning that once the full value of the virtual card has been charged, the card number is deactivated.  Typically the cards have a short time-to-live, often expiring at the end of the month following the one in which they were issued.

Virtual cards offer tremendous security and reconciliation advantages.  As they are issued for a specific dollar amount, suppliers may not charge more than the limit on the card.  For example, Supplier A sends an invoice to their customer for $2,000.  A week later, the same supplier sends another invoice for $3,000.  When the supplier receives the card number for the first payment, they might be tempted to process it for the $5,000 total.  However, because the virtual card number was issued for $2,000, the $5,000 transaction would be declined.  In addition, because it is single use, it may not be used for any more purchases once the $2,000 has been charged. 

Additionally, virtual cards may also be configured to allow multiple charges (up to the limit on the card).  For example, a card with a $1,200.57 credit limit can be configured to allow only one charge for exactly $1,200.57 or for multiple charges totaling $1,200.57.  The behavior of many suppliers has shown that they prefer to enter multiple charges, each associated with a single invoice, when receiving a single payment for multiple invoices.  This improves their A/R reconciliation and improves the relationship between buyer and supplier.

Reconciliation is vastly simplified with virtual cards because each payment is now associated with its own unique card number.  Most virtual cards allow additional data elements to be passed to the issuer when the virtual card number is generated.  Those additional card numbers often include data commonly seen in remittance details, such as – invoice number, purchase order number, reference number, etc.  The issuer can provide these additional data elements back to the payer in their statement, making automated reconciliation a reality.  The suppliers and their associated merchant acquiring banks no longer need to pass this data back to the issuer.

Stay tuned for Virtual Card Programs Part II where I will discuss how corporations can earn rebates by migrating their vendors to virtual card programs.

Are you currently using virtual card programs or thinking of migrating your vendors? I’d like to hear from you.