The payment companies making virtual cards big business

December 8, 2023 10:20 AM

The use of digital card payments is expanding, leading banks and payment companies to embrace virtual cards, an old technology that's having a resurgence.

Virtual cards are fully digital — there is no plastic. Virtual cards also have an account number that is distinct from the one assigned to a physical card, or even a dynamic number that can be changed to limit spending, so it's not simply using a traditional credit card to pay on a mobile app or website. The growth of e-commerce and rising complexity in corporate payments are drawing attention to digital cards.

The number of virtual card transactions is expected to rise from 36 billion in 2023 to 175 billion in 2028, according to Juniper Research, which released new projections in October. That compares with the global total of 678 billion traditional in-store or e-commerce card payments in 2022, according to Capital One.

Business-to-business payments are driving the growth in virtual cards, as firms look to cut costs while improving security, according to Juniper.

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Virtual cards can address economic and fraud concerns by providing more control; a virtual card can be issued to specific users with distinct parameters, according to David Shipper, a strategic advisor for Datos Insights.

"If you don't want a permanent card or if you want to support a specific purpose, a virtual card can make that happen faster and it can save the costs involved with a physical card," Shipper said. "It's good timing for virtual cards, there are a lot of use cases that are on the rise and others will come up."

Here are some examples of companies that have added or expanded uses for virtual cards in the past few months.

Kate Fitzgerald contributed to this story.

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SAP and Extend

SAP Concur announced a partnership in December with payment company Extend to power a virtual card for payments within Concur Invoice. SAP Concur users, which are typically companies that manage staff travel and entertainment expenses, can access virtual cards without registering for a new card or a contract with Concur. The initial issuers include Bank of Montreal, which is offering "virtual cards as a service" to its corporate clients.

The next phase of embedded payments is generating multiple virtual cards for business expenses, according to Andrew Jamison, CEO and co-founder of Extend. By issuing virtual cards for a variety of specific purchases, it's possible to put payments inside the same user experience for travel booking, supply chain management, payroll and other corporate functions.

"Much like what Uber has done for ride-sharing, Virtual cards are about generating that for business," Jamison said.

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Visa

The card network in October launched Visa AR Manager, an internally developed product that enables merchants to accept virtual cards. AR Manager, which began testing in November, retrieves user account details, initiates payments authorization and clearing and provides reconciliation data to a corporate user's enterprise resource planning system.

Visa contends that businesses are turning to virtual cards, citing Institute of Commercial Payments research that found 84% of merchants want to get paid more quickly, and are using virtual cards as a result.

But the speed of virtual card issuance does not automatically digitize other processing steps, which Visa contends can be particularly complex for supply-chain payments. Visa is trying to address this through AR Manager.

Juniper's research also notes that B2B payments are a major driver of virtual card growth, particularly for fleet operators and health care providers. Visa plans to widely deploy AR Manager in 2024.

This year, Visa also extended its collaboration with U.K. virtual card technology company Conferma for four years. The Conferma partnership develops new uses for Visa Commercial Pay, a corporate spend product that counts Wells Fargo, Umpqua Bank and others as clients.

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Mastercard

Mastercard's use of open banking to drive technology development extends to its virtual card program.

Open banking refers to using enrollment credentials for payments or online banking to enable data sharing between the enrolling party and other companies, usually involving a user's bank and third parties such as fintechs.

"Open banking is like a fabric that's a connecting tissue over parts of our business," said Craig Vosburg, chief product officer at Mastercard, in an earlier interview.

Open banking enables Mastercard to use tokenization to expand digital payments for contractors and gig economy workers, cross-border payments and other purposes. Many of these transactions rely on virtual cards, and part of Mastercard's diversification strategy is to enhance payment processing for clients by making it easier to pay without requiring a traditional card.

There are trends that contribute to greater use of virtual cards for the near future, such as a desire to control corporate spending, payments tied to buy now/pay later, save now/buy later or other products with short-term payment windows such as product trials or subscriptions. These types of payments can benefit from a single-use card that can be accessed digitally, said Shipper. "It simplifies transactions, and the merchants already accept the card brand."

Circle

Circle, Mastercard and the Australian fintech Stables recently launched one of the first stablecoin virtual cards in the Asia Pacific region. The card enables users to spend stablecoin balances across Mastercard's merchant network. Circle's USDC, one of the world's largest stablecoins, is the preferred stablecoin for this account. The card has debuted in Australia, and Circle plans to expand it to other parts of Asia, Europe and elsewhere in the coming year.

Stablecoins are designed to hedge against cryptocurrency volatility by backing the virtual coin with traditional assets such as U.S. dollars or euros. Mastercard is building its digital currency strategy, and supporting payments for stablecoins is a major goal for the card network. Circle, which is best known as a cryptocurrency company, has added more traditional payment methods over the past few years, making a virtual card a way to extend access to retail payments for USDC users. Stables envisions the virtual card partnership as a way to enable consumers to increase their use of stablecoins by accessing Mastercard's existing network.

BMO

In addition to its work with Circle in Australia, BMO partnered with Mastercard in August to enable U.S. and Canadian businesses to issue virtual cards to their employees' mobile wallets.

While travel makes up a large portion of corporate expenses, employees often have to purchase supplies or meals while on the road or in the office. Virtual cards can increase controls for that spending and provide more granularity when tracking corporate costs, according to BMO.

Mastercard cited an internal study that found two-thirds of corporate travel planners said remote or hybrid work is complicating business travel expense management, and 90% said virtual cards will become the primary way to book and pay for corporate travel within the next five years.

Chesapeake Bank

Chesapeake Bank introduced an option this year for its card customers to use an instant Visa virtual debit card in an attempt to reduce the waiting period for plastic card issuance, which can be up to two weeks for most cards.

A consumer uses the bank's website or mobile app to request a virtual debit card that is attached to their checking account. The card can then be enrolled in a digital wallet such as Apple Pay or Google Pay. The $1.3 billion-asset Chesapeake is trying to compete with larger institutions while improving its ability to reach people beyond its 16-branch network.

"Some customers wanted an additional debit card they could use to segregate spending or pay for certain things like kids' video gaming purchases, and with our solution they can instantly set up another virtual card number with the ability to turn it on or off within the app," said D.J. Seeterin, chief innovation strategy officer for Chesapeake, in an earlier interview.

Citizens

Larger banks such as Citizens Financial are also using virtual cards to speed issuance and to gain more insight into how its customers are paying.

The $228 billion-asset bank issued a virtual card that enables users to finance multiple purchases via Citizens' buy now/pay later product and make the recurring payments separate from other cards. Citizens has long offered BNPL, starting with financing purchases of Apple devices, and it's one of the banks looking to compete with the fintechs that specialize in BNPL lending.

By providing a virtual card for BNPL, Citizens can add a payment option that is tailored for a specific purchase or groups of purchases financed via BNPL, paired with the risk management and regulatory cover of a bank.

Kasheesh

Two-year-old startup Kasheesh introduced a virtual card this year that combines funds from other cards in an effort to help consumers access unused credit that they may not know about or may not have ready access to.

Kasheesh uses machine learning and Plaid's data aggregation to enable shoppers to spot funds on credit cards, debit or gift cards. The virtual card can access and combine those funds to make a payment.

The virtual card is positioned as an alternative to BNPL. Instead of adding credit for a purchase, Kasheesh scans for available funds at checkout. The firm contends that its customers are gradually boosting their credit scores as a result.

"We saw a gap where consumers struggled to pay without putting their credit score at risk," said Sam Miller, CEO of Kasheesh, in an earlier interview.