What is a virtual card?

A virtual card is a payment method that is virtual rather than physical. It functions similarly to a traditional credit card but takes the form of a single-use 16-digit number and three-digit CVV code generated online, instead of a plastic or metal card that is received through the post.

Virtual cards are accepted anywhere traditional physical cards are used, but come with a range of features, controls, and benefits that make them uniquely valuable to businesses. They can play a key role in streamlining how business payments to suppliers or vendors are made.

Fitting into existing accounts payable strategies, virtual cards extend working capital solutions to tail-end suppliers who don’t tend to adopt supply chain finance or dynamic discounting. They also offer significantly improved security controls for businesses, minimizing the risk of fraudulent payments and maverick spend.

The concept of virtual cards isn’t especially new, with a range of institutional banks already offering virtual card products. However, newer virtual card solutions that integrate seamlessly with existing centralized ERP and accounts payable systems offer considerably more value to businesses looking to improve their ability to manage working capital more effectively.

How virtual cards work

Unlike traditional credit cards, which feature a single 16-digit card number and CVV code used repeatedly until the card’s expiry date is reached, virtual credit cards are generated digitally for each individual purchase.

In the typical supplier payment process, they act similarly to traditional credit cards, with a few key differences:

1. After invoice approval, accounts payable or an automated ERP system sends details of the required payment to the virtual card provider
2. A single-use account with the required controls is created, and the virtual card account details are sent to the supplier who is being paid
3. The supplier can enter the virtual card account details into their POS, and it is authorized by their bank almost instantaneously, making the funds available in their account
4. Settlement data is matched with payment instructions and buyer-side reconciliation is carried out automatically in the ERP system
5. The buying company pays the bank that issued the virtual credit in line with the virtual card terms, preserving working capital that would otherwise have been due on the invoice date

Once a virtual card payment has been made through the process described above, the associated account is defunct. The account details can no longer be used, and future payments will involve the creation of a brand-new set of virtual card details.

Key benefits of virtual cards

Improved working capital management

In challenging economic conditions, having more control over cash flow and holding on to working capital for as long as possible is a priority for businesses looking to build resilience or grow. Supply chain finance and dynamic discounting solutions enable this aim, but they typically exclusively target larger suppliers.

That leaves the tail-end of your supplier network isolated outside of your working capital management program. Virtual cards are a way of reaching them. They’re the ideal solution for onboarding the suppliers who you interact with in high volume, low value transactions. With a virtual card, you can pay these suppliers in a way they’re familiar with, while preserving your working capital for the length of the payment terms.

Unlike more complicated working capital solutions, rolling out a virtual card solution doesn’t involve significant negotiations. That means you can deploy a virtual card program on a short timeframe, capturing opportunities without compromising your working capital management strategy.

Reduced risk of fraud and maverick spend

Fraud, both internal and external, and maverick spend are damaging to otherwise successful working capital management strategies. Traditional payment methods, such as paper checks and cards on file, are both vulnerable to these risks.

Virtual cards offer greater control and security than the alternatives. Because they operate as unique, single-use accounts, pre-programmed to be charged for the exact amount necessary, they are immune to common fraud and spend control pitfalls.

Using a virtual card means that you can’t be overcharged, misplace your physical card, lose a check in the mail, or suffer from maverick spend. A virtual card can only be used to pay the invoice or group of invoices it’s generated for.

As virtual cards largely operate as a self-service payment method – in that it’s the supplier who’s due the payment that triggers it – they also minimize the liability involved with having to store supplier payment details internally.

Streamlined accounts payable process

Optimizing accounts payable processes can result in significant operational efficiency improvements. Virtual card programs that are integrated with existing ERP and accounts payable systems streamline the way accounts payable works.

Adopting such a program in place of traditional payment methods minimizes the manual burden on the accounts payable team. Sending checks and making payments manually using cards on file is labor-intensive, but the virtual card payment process is quick and simple.

Natural integration with a broader ERP also means that virtual card payments are reconciled automatically. Many virtual card providers also offer in-built cash analytics features, helping to analyze spend and track performance.

Integrating a virtual cards solution

Adopting virtual cards has the potential to revolutionize how you manage payments to small tail-end suppliers. These suppliers, who typically don’t subscribe to more substantial supply chain finance or dynamic discounting solutions, represent an opportunity to improve your working capital management strategy.

Taulia’s Virtual Cards solution integrates with your broader AP process and facilitates secure fuss-free transactions that work for both you and your suppliers. Implementing a virtual card program alongside other solutions aimed at larger suppliers can expand your working capital strategy’s coverage to include your entire supplier base. It’s the missing piece in your working capital arsenal that can make all the difference in your ability to build a strong and consistent cash position.