From the March Special Report issue of Treasury & Risk magazine

Paying Without Plastic

The use of virtual cards for B2B payments is picking up steam.

Sometimes less is more. Take virtual cards—credit cards without the plastic—which are seeing increasing use by corporates.

“We definitely see significant growth in virtual cards,” said Andrew Gelb, Citi’s North America head of treasury and trade solutions.

Gelb said companies like the rebates they get when they use cards to make payments, as well as the amount of data that is transmitted with card payments and the benefits the card’s payment terms can provide for the payee.

Nancy Atkinson, a senior analyst at Aite Group, a technology research and advisory firm, agrees that the use of cards for business-to-business (B2B) payments is growing, particularly the use of virtual cards. But the total numbers are still small, with cards making up just 2.5% to 3% of B2B payments. “Payers are particularly interested,” Atkinson said, because of the rebate that cards provide to the purchaser. “You can become a profit center instead of a cost center.”

Virtual cards consist of numbers like those that identify credit cards, numbers that are used to route payments through the card companies’ settlement systems. Companies that pay with virtual cards have a set of numbers that can be reused. Like regular credit cards, virtual cards entail the payment of an interchange fee by the company being paid.


Virtually 100 Percent Virtual

Sonoco, a South Carolina-based manufacturer of packaging products with $4.81 billion in 2013 revenue, replaced almost all of its procurement cards with virtual cards in 2011. Scott Cameron, Sonoco’s finance manager for supply management, said the company made the change after realizing that many employees weren’t complying with the requirement that they submit a purchase order before charging something to their cards. “A lot of times they’d call over the phone, order it, and then they’d enter a purchase order after the fact,” he said.

Sonoco’s CFO was uncomfortable with the lack of compliance, Cameron said, while the accounting department perceived risk in the more than 600 procurement cards being used in the company’s businesses in the U.S. and Canada, which had a combined credit limit of about $24 million.

Now that Sonoco uses virtual cards, employees who need to buy something submit a request in the Ariba e-commerce network. Once the request is approved, Ariba sends an encrypted message to the bank, which funds a virtual card and sends that information to Sonoco, which adds it to the purchase order and sends it on to the supplier.

“After a certain amount of time we go in and zero it out, and the number can be reused,” Cameron added.

The file from the bank has information that ties to the purchase order, so reconciliation is automatic, Cameron said. And virtual cards aren’t funded until a purchase order has been approved, which limits the potential for fraud. If a fraudster tries to use a number that hasn’t been funded, the bank rejects the charge, he said.

The company has no limit on the size of transaction that it will use a virtual card to pay for, but if the supplier does, Sonoco will pay by check. If a supplier objects to paying interchange, Sonoco pays by ACH or check, Cameron said.

“Some object to paying interchange on any amount,” he said. “Some suppliers prefer to be paid that way because they get their money faster.”


Advantages for Payers

Masco Corp., a Michigan manufacturer of home improvement and building products, started using virtual cards at one of its business units in March 2013, said Marcel Santiz, the company’s director of treasury.

Implementing the program went smoothly, said Santiz, pictured at left. “In fact, the virtual card process has exceeded our expectations fairly significantly.”

One plus for companies that pay via any type of card is the rebates they get back.

At both Masco and Sonoco, the rebates go to the department or business unit making the purchase. “They have to do the work, so they get the benefit,” Cameron said.

The advantages for payers include the fact that if a payment made using a credit card requires the filing of a 1099 form, the credit card company files the form, Santiz said. And there are no escheatment issues of the type companies encounter with checks, he said. “If [a payment] is not claimed, it will be returned back to us, so it doesn’t have to be escheated.”


What’s in It for Suppliers?

But what’s in it for suppliers, given that they have to pay an interchange fee?

Santiz said vendors like the “ease of payment application.”

“With a virtual card you can get an email with information about the payment in it as well as the remittance advice, all in one place,” he said. “There’s an advantage to the recipient there.” In contrast, the remittance information for an ACH payment might come in a separate email, he said, or it might not come at all.

Moreover, companies that are paid by card don’t have to hand over their account numbers as they would with an ACH transaction. “A lot of companies, especially the smaller shops, the mom-and-pop type shops, don’t want to give out their banking information,” Santiz said. “A virtual card means they don’t have to give that information out.”

Suppliers may also have a merchant account that earns them perks, such as reward points, he said.

Santiz notes that many of a company’s vendors may already be accepting credit cards. “It’s not hard for any one of the [card] providers to take a vendor master file and bump it up against the list of vendors already being paid by this method,” he said. “You can get a good idea of the kind of hit rate you’re likely to have.”

“There’s no reason that you shouldn’t pay a company like that by card,” he added. “Their profit margins price in that they’re taking credit card payments from customers.”

Interchange fees traditionally worked against the use of cards for big-ticket items, but credit card issuers now charge lower fees for larger purchases.


Virtual Cards for High-Value Payments

“In some cases, for specific high-value payment streams, the associations work with lower interchange rates,” said Citi’s Gelb, pictured at right. “We definitely see a trend toward more high-value invoice-based payments being done with virtual cards.”

But Mark Webster, a partner at consultancy Treasury Alliance Group, said that for companies operating on thin margins, paying an interchange fee can represent a substantial hit.

“Now, there is certainty of payment” for suppliers paid by card, Webster said. “And I’m not trying to say that there aren’t companies that are happy to take cards. But for large transactions, even with the adjustments the card companies have made to interchange fees, “it still becomes a very expensive transaction compared to a check,” he said.

According to Aite’s Atkinson, interchange fees are not as big an issue as they used to be. In the current environment, with many small businesses experiencing liquidity problems, “many will decide it’s worthwhile to pay the interchange and get the payment in two days instead of, say, 45,” she said.

Paying by card “isn’t going to be the dominant payment method, but it’s an important one and a way of [providing], essentially, supply chain finance,” said Dennis Sweeney, a managing director and treasury solutions executive at Bank of America Merrill Lynch. “I’m going to pay a vendor, and he can get that money now even though I haven’t paid my card company yet. It puts liquidity into the system, and that can be very beneficial in some situations.”


Read the March Special Report on Liquidity & Cash Management.

The March to E-Payments
SEPA Facilitates Making Payments for Subs
Cash Flow Management in a Basel III Worldo
Best Practices for Payments & Working Capital Optimization
The Year Ahead for Treasury: Promising Signs for 2014
Simplifying Global Account Structures for Payments and Collections

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