In the consumer world, the use of paper checks has been steadily declining, from 46 percent of payments in 2003 to just 13.4 percent of payments in 2015. Check payments have largely been replaced by debit and credit cards. In contrast, business check use remains stubbornly high, with businesses reporting in 2016 that they still make over 50 percent of their vendor payments by check.
Credit cards—specifically virtual cards—can be a valuable tool in business’ quest to eliminate the antiquated process of issuing paper checks, offering lower processing costs, better security, and additional financial benefits.
So why aren’t businesses paying more vendors by card?
Companies that have implemented card programs realize that not all vendors will accept payment by card, for a variety of reasons: low margins, pre-negotiated early payment discounts, and other contractual obligations.
However, for many vendors, there are strong reasons to accept card as a form of payment, so most businesses could be paying a lot more vendors by card than they are now.
To do so, they need three things:
Why virtual cards?
Since Diners Club introduced the first corporate card in 1975, there has been a slow but steady introduction of new card products to meet different business needs. The choices can be confusing, and part of the reason card adoption is low is that a lot of companies pay vendors with card products that were designed for another purpose.
Corporate cards, first introduced in 1975 by Diners Club, offer convenience for employees that travel and entertain clients, and give companies the ability to put parameters and controls around where employees spend money and how much.
Card issuers today offer corporate cards with a lot of different perks that companies can choose from to keep travelers happy—access to airport lounges, free internet in the air, and so forth. Smaller companies will often use their corporate cards for everything. But that’s not ideal.
As companies get to $50 or $100 million in revenue, they usually want to separate T&E expenses from purchases of indirect goods. Purchasing cards or P-cards evolved in the 1990s for that purpose. They don’t have all the bells and whistles of corporate cards, but they give companies an easier way to have control over high-volume, low transaction amount purchases.
For example, if you wanted to buy a pad of paper from Staples, a lot of companies would require you to have a purchase order. But, issuing that purchase order could cost more than the item itself. The idea was to use the purchasing card to for these small ticket items to let people get what they needed quickly, and not bog down the purchase order process.
On the back end, p-card reporting is more robust than typical T&E products. There are tools that help the finance team and accounting team reconcile, and more room for detailed transaction information, such as a PO number.
Card issuers today offer purchasing cards that can be customized only to be used for a specific merchant category code. For example, if they only wanted to let employees buy at Dell, Facebook, and Google, a lot of the card companies can restrict usage to only those merchants.
Neither of these products were intended for paying invoices, but thanks to another program pioneered by Diners Club in 1984—Club Rewards, the industry’s first rewards program—AP seized on corporate cards, and later P-cards to pay vendor invoices.
There’s no reason they can’t be used that way, but there are a few problems with doing so. First, someone in AP has to have a piece of plastic. That’s a risk. Then, they call someone at the vendor and give them the card number over the phone. If they pay that vendor often, maybe they have a card on file. That’s also a risk.
The other problem is that paying with plastic doesn’t scale. Phoning in credit card payments is an exception to the traditional AP workflows for check, ACH, and wire payments. So, although you get points and rewards, it results in manual work for AP. If you were to consider the soft costs of paying someone to call in credit card payments or enter credit card numbers on websites and then do the manual reconciliation on the back end, well, those indirect costs start to eat into any reward you are receiving from your card provider.
Around 2009, we started to see virtual—or ghost—cards. There are several types of these, but they all share one commonality: there is no plastic card. To use, AP creates a randomized single-use, 16-digit card number along with a CVV. This card number can then only be used for a single transaction to a specific vendor for an exact amount.
If you send a remittance to a vendor for $100 through a virtual card, the vendor can't charge the card for $101 or $99 for that transaction. And, if the card number ever falls into the hands of someone other than the intended recipient, it can’t be charged at all.
That dramatically reduces the possibility of payment fraud, and introduces the opportunity for some partial automation, since you can do batch processing for single-use card payments much the same as you would for ACH or check payments. The recipient gets remittance advice along with the card information, and then the payment can be input into their system like a regular card transaction.
This is the right card product for paying invoices. But, it does create another workflow for AP to deal with, along with enablement challenges, since most banks that offer these products will only enable your largest vendors.
That’s where a lot of companies are now—doing some card payments, along with ACH, wires, and a whole lot of checks. The irony is that if companies just stuck to checks, there would only be one process to contend with instead of four. But, in today’s world, paper processing is not a viable long-term option.
The ultimate solution is automating all payment types, including card payments, in a single workflow. When people in AP think of payment automation today, they still think of different types of electronic transaction processing, but that’s only partial automation.
True automation is pushing a button and off goes the payment, and you never have to think about it again. Suppliers are continually enabled, with the payment automation company collecting, maintaining, and securing the data.
Ghost cards have an important role to play, as the payment type of choice for all vendors that are enabled for card. Not every vendor will want to absorb the discount fee, and that’s okay. They can usually be enabled for ACH and paid that way, but vendors who can’t be enabled for either are paid by check as a last resort.
That’s the best practice going forward: Complete end-to-end automation. Paper checks will eventually go away. Corporate cards and P-cards may stay in people's wallets for in-person transactions. But in AP, you receive an invoice electronically, it gets approved electronically, and it gets paid electronically. There are no more piles of checks to sign, and no more folders with checks paperclipped to paper invoices. There are no plastic cards in AP and no more card numbers written down on slips of paper. That's what the future of B2B card payments looks like.