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Flip phone or smart phone? DVD or streaming video? These choicesseem obvious today, but the viability of every new technologyremains questionable until adoption reaches a tipping point thatconvinces people and industries to embrace change. Virtual cardsare now approaching that tipping point.

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To understand the advantages and ongoing evolution of virtual cards, consider what drove adoption ofphysical commercial cards in the first place. For the buyingorganization, commercial cards streamline the payment process,provide greater control over how and where purchases can occur,provide transparency into purchase activity post-transaction, andreduce expenses associated with paper check processing. Commercialcards also have value for suppliers, as they provide immediate andguaranteed access to funds, simplified processing, and valuableremittance data not necessarily available with paper checks, wiretransfers, or ACH payments.

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Virtual cards offer the same benefits as commercial cards, but“without the plastic”—in other words, without a physical creditcard present to facilitate the transaction. A virtual card paymentcan be initiated in either of two ways: First, buyers can receiveand approve invoices through their company's typical paymentprocesses, but then pay using a static virtual card account, a16-digit account number that is dedicated to one specific supplier.The other option is to generate a dynamic, single-use 16-digitnumber for each transaction. In either scenario, the account is notfunded until the buyer approves payment for the invoice.

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Large national banks and many regional banks in the U.S. offervirtual card payments. Growth in the financial technologymarketplace has produced many third-party solutions that integratevirtual card technology into payment platforms. To date, a limitednumber of institutions are able to support virtual card paymentsoutside of North America.

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Virtual cards can offer five key advantages over traditionalcorporate payment cards:

  1. Versatility. Virtual cards give buyers andsuppliers more choices for payment delivery and processing. In themost common approach, the buyer funds the card and the card systemgenerates an email notifying the supplier that payment is ready.The supplier then “pulls” funds from the card. In recent years,straight-through processing (STP) has enabled a buyer to initiatepayment, fund the card account, and then “push” the transactionthrough the card network and into the supplier's pre-designateddemand-deposit account. The virtual card system then generates anemail notifying the supplier that a payment has been made.
  2. Flexibility. In addition to the pull and pushmodels, virtual cards offer optional data files to buyers, to aidwith reconciliation. A virtual card payment can also be specified“exact-match” for a given transaction, which means the buyer canrequire the supplier to accept only the specific amount funded onthe card. This approach can help prevent partial payments andpotential reconciliation issues. Alternatively, buyers may chooseto pay multiple invoices through a single lump-sum payment,enabling the supplier to accept the lump sum or several smallerpayments from the single-card transaction.
  3. Control. Buyers can preapprove payments toknown suppliers, limiting transactions to those that meet specifiedcriteria around payment value, number of permissible transactions,and payment timing. Virtual card transactions can also increasesuppliers' confidence about PCI compliance, since virtual cardaccount information is retrieved via a secure email or URL,eliminating the need to store account information.
  4. Cost efficiency. Virtual cards provideenhanced remittance data that's easily integrated into accountingand enterprise software platforms. Processing an invoice from aknown supplier through the buyer's standard accounts payable (A/P)review processes captures remittance data in bulk. Once the invoiceis approved for payment, the card transaction is triggered. Thisprocess reduces manual effort within the payment workflow,improving productivity of both the buyer's A/P department and thesupplier's accounts receivable team.
  5. Better fraud protection. Both buyers andsuppliers are concerned about payment fraud—and with good reason.According to a recent survey by the Association for FinancialProfessionals (AFP), 78 percent of all businesses have fallenvictim to payment fraud. Two unique features of virtual cards helpreduce fraud exposure: First, the payment has already been approvedthrough the buyer's standard A/P processes before the actualvirtual card payment request is made. And second, if a payment isprocessed via a single-use virtual card, the card account number istied to that specific transaction and must be executed within aspecific time frame.

APIs and Automation Bring New Possibilities

Application programming interfaces (APIs)enable corporate treasury systems to connect to banking platforms.At one time, a company had to plug in to the bank and follow bankprotocols in order to use a bank payment product. Now APIs enableorganizations to integrate banking services into their financeprocesses in ways that optimize convenience and efficiency.

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APIs can be used to pullinformation from the bank's virtual card system into the company'sfront-end treasury software, and to push out card payments. Suchintegration streamlines invoice payments, on-demand purchasing, andfront-end call center communications.

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APIs can also deliver requests for new virtual accounts in realtime and provide secure access to account details, including the16-digit account number, expiration date, and CVV/CV2. APIscontinue to evolve, and they're poised to support the furthertransformation of virtual cards.

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Preferred Payments as a Working Capital ManagementStrategy

Many companies are seeking to improve working capital throughpayment automation. With virtual card technology, organizations canpay suppliers today and not settle up with their issuing bank formany days or weeks, deploying capital in other ways in themeantime. Additionally, buying organizations that use virtual cardpayments benefit from time and cost savings associated withprocessing paper checks.

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The key to working capital management with virtual card paymentsis supplier enablement. Working with their A/P departments,organizations are able to gain a data-rich view of their supplierportfolio and supplier payment trends, uncovering opportunities tostreamline the procure-to-pay cycle. By analyzing historicalpayment data, organizations can best target suppliers most likelyto convert to virtual card. From this segmentation, more specificoutreach strategies can be defined. Often, organizations will offerpreferred supplier status as an incentive to accept a virtual cardover a paper check.

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Consider the example of a buyer that purchases copy paper fromthree different suppliers. One of the three suppliers is willing toaccept a virtual card for future payments, while the other twoinsist on receiving either paper checks or ACH payments. The buyermay choose to shift more purchase volume to the supplier thataccepts virtual card payments, to gain the working capitalbenefits, while the preferred supplier benefits from faster andmore efficient payments.

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A supplier's interest in virtual cards will depend on itsorganization type and size. The benefits may be obvious for largesupplier organizations since they can scale cost savings andefficiencies by integrating virtual card payment acceptance intotheir accounting or enterprise software platforms. But most buyershave diverse supplier portfolios made up of organizations ofvarying sizes, payment types, and terms.

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Understanding your suppliers'incentives—from cost and time savings to improved cash flow—canhelp your company lay a foundation for migrating suppliers tovirtual cards. Once suppliers satisfy basic card requirements, suchas accepting credit cards for invoice payments and keeping cardinformation on file, a treasurer can look at ways to build avirtual card program that will bring significant benefits to bothparties in the transaction.

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However, corporate treasurers and A/P teams need to understandthat card acceptance is not a one-size-fits-all proposition. Theoptimal payment method may vary from one supplier to the next.Virtual cards can be very effective at maximizing paymentautomation. A best practice for buyers is to structure paymentterms in their contracts so that virtual card acceptance isrequired, or at least viewed as a preferred payment type.Additionally, buying clients may want to leverage discountedinterchange programs (supported by some issuers) to drive larger orcost-averse suppliers to card.

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Companies that successfully steer suppliers to virtual cardpayments generally follow three steps:

  1. Classify suppliers, starting with A/P spend.While some suppliers may be easily convinced to accept virtualcards, there may be room to convert others by negotiating terms and setting uniqueparameters. Many companies rank their suppliers using granulardata, such as high-level merchant category codes (MCC—a four-digitnumber assigned by card networks to a business based on the goodsor services offered by the business) or North American IndustryClassification System (NAICS) industry codes, such asmaintenance/repair/operations (MRO), construction, and legal.
  2. Analyze spend to shed light on how each supplier istransacting with the company. This exercise also helpsidentify specific suppliers that receive payments via multiplemethods. This helps to define where there are opportunities toconsolidate payment methods. Many companies define their migrationgoals and timelines, such as migrating 20 percent of theirsuppliers to virtual card within 12 months.
  3. Launch a new strategy using the baseline analysis fromsteps 1 and 2 as a foundation. It's crucial to involvesenior management and peers to gain feedback, buy-in, and approval.Most companies create a supplier communication plan and gathermetrics on a regular basis to track progress.

A best practice would be to establish a baseline communicationabout preferred payment types to be shared with any new supplier asit begins to interact with the business. As part of a largerpayment-terms strategy, positioning virtual cards as a preferredpayment type up front (before any transactions occur) is a solidway to promote payment automation. Additionally, buyers shouldregularly examine their A/P spend by payment type, looking foradditional opportunities to convert check payments to card.

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The Card Landscape

Virtual card issuers offer a broad range of payment features andtechnological sophistication, from push/pull and exact-matchtransaction processing to API connectivity that can drive newlevels of automation for a buying organization. Companies seekingthe most flexible virtual card program should evaluate issuers onthree basic areas:

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Supplier pricing strategies—An issuer thatprovides alternative pricing may open up lines of communicationwith suppliers, especially those that are sensitive to standardinterchange rates.

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Technology infrastructure—Issuers should offerevolving API capabilities, as well as standard send-paymentnotifications via email, or “pull payments,” and supplier-processedSTP “push payments.”

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Program support—Ongoing supplier enablement andretention services are critical for migrating suppliers to virtualcards. They should include on-boarding, education, support service,and ongoing data analysis.

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Because virtual cards are on the leading edge of paymenttechnology, integrating these evolving solutions into the paymenttoolkit means embracing change. That change may require effort, butthe benefits can be substantial, from budget and operationalefficiency to supplier goodwill, discounts, and revenue sharing.Looking to the future can transform treasury and A/P departmentsfrom cost centers into strategic functions that make theircompanies more competitive and differentiated in their markets.

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Jeannette L. Bugg isglobal head of B2B card and payables solutions for Bank of AmericaMerrill Lynch. She and her team manage the end-to-end strategy anddelivery for Bank of America Merrill Lynch's business-to-businesscommercial card and payables offerings. Bugg regularly works withclients, card networks, merchant acquirers, and fintechs toestablish innovative ways to build value to organizations and thepayments industry as a whole.

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“Bank of America Merrill Lynch” is the marketing name forthe global banking and global markets businesses of Bank of AmericaCorporation. Lending, derivatives, and other commercial bankingactivities are performed globally by banking affiliates of Bank ofAmerica Corporation, including Bank of America, N.A., Member FDIC.Securities, strategic advisory, and other investment bankingactivities are performed globally by investment banking affiliatesof Bank of America Corporation (“Investment Banking Affiliates”),including, in the United States, Merrill Lynch, Pierce, Fenner& Smith Incorporated and Merrill Lynch Professional ClearingCorp., both of which are registered broker-dealers and Members ofSIPC, and, in other jurisdictions, by locally registered entities.Merrill Lynch, Pierce, Fenner & Smith Incorporated and MerrillLynch Professional Clearing Corp. are registered as futurescommission merchants with the CFTC and are members of the NFA.Investment products offered by Investment Banking Affiliates: AreNot FDIC Insured • May Lose Value • Are Not BankGuaranteed.

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