Are virtual cards the future of B2B invoice payments?

Despite all the promises that virtual cards for B2B invoice payments would replace business checks, issuers haven’t achieved the kind of growth the industry predicted years ago. But as companies continue to digitalize their business-to-business (B2B) payments, virtual cards, buoyed by their appeal for embedding reams of invoice data alongside transactions, still offer financial institutions (FIs) plenty of opportunities to capture new volume.

The challenge is convincing buyers of corporate goods and services of the appeal of virtual cards. As an alternative to paper-based checks, virtual cards have been a lucrative payment stream for issuers, but their high costs for vendors (the payees) looking to accept invoices have hindered growth. Payees have often balked at interchange fees of 3% or higher, making large-ticket items unpalatable and smaller volume transactions relatively expensive compared with payments made through the Automated Clearing House (ACH).

Virtual card adoption continues to gain momentum despite headwinds in the B2B invoice space. Even so, it represents only a fraction of the estimated tens of trillions of dollars in B2B transactions that still flow through ACH, checks and wire transfers each year, according to payments consulting firm Windward Strategy. For issuers, the opportunity lies in shifting more of that payment volume to virtual cards.

What are virtual cards, and how do they support B2B payments?

Virtual cards still hold untapped potential. A virtual card is a 16-digit account number that’s typically created for one purpose: to pay for a business transaction. There is no physical card, and processing works just like any other card payment. Plus, companies can instantly issue virtual cards to employees’ phones.

Virtual cards also allow firms to:

• Control spending limits over a given time period
• Track expenses more easily
• Pay for travel and entertainment purposes (e.g., bookings)
• Pay for subscriptions and online purchases

“We continue to see an incredible evolution of virtual card use cases,” Todd King, VP of B2B Solutions, FIS® Total Issuing™ Solutions said. “There’s certainly a desire to continue to use more virtual cards and push that vehicle. We see it with increasing usage.”

Virtual cards have believers among accounts payable managers. Nearly six in 10 (59%) of these managers said they use virtual cards to manage risk and control, according to a 2024 survey of 200 professionals by Versapay.¹About six in 10 (56%) said they use them to instantly create and issue cards to employees, and 52% said they do so to avoid unwanted charges by limiting cards to a single use.

What are the benefits of virtual cards for vendors and accounts receivable teams?

To address concerns about higher interchange fees, issuers should emphasize the efficiencies vendors stand to gain. Vendors tend to underestimate the cost of accounts receivable management and check reconciliation. The median cost of issuing a paper check for a business is $2 to $4, according to a study by the Association of Financial Professionals.²Accounts receivable teams also must spend time chasing down payments.

Virtual cards, by contrast, introduce efficiency in payment flows. Virtual card payments are also guaranteed, unlike ACH or checks, which can bounce or be reversed. As a result, there’s much less collections work. Funds are also reconciled automatically, eliminating the manual work with general ledgers. Virtual cards also come with comprehensive remittance data, such as invoice number, purchase order number, payment amount, date, contact information, line-item details and notes. The information is typically delivered via email, a secure portal or supplier network, or integration with enterprise resource planning software.

Besides higher fees, issuers face other obstacles related to virtual card usage. One major challenge is the perception that integration of the technology is more complicated than other payment options. Secondly, fraud monitoring is often thought of as more difficult to track compared with other commercial cards. But fears about fraud with virtual cards are overblown, especially with respect to checks. Single-use or limited-use numbers limit risk, as do predefined dollar limits, merchant category restrictions and expiration controls.

Another tool in the FI playbook is offering buyers rebates, similar to cash-back programs on retail cards. This helps counter the competition with ACH and checks and creates stickiness with customers.

“Overall, issuers must show their [virtual cards] value to customers,” Todd said.

What B2B payment alternatives can FIs offer when virtual cards aren't the right fit?

For companies that still resist the switch to virtual cards, FIs can offer value-added services that generate revenue.

Listed in order of decreasing profit potential, these options include:

• Commercial payment network (CPN): With a CPN, a company can control what discount rate is charged to their merchant. In this case, the buyer and supplier negotiate a rate. The system uses ACH rails to fund the transaction, but typically these products provide an accounts payables interface that makes it easy to manage on the front end for the payer. So, payers save versus using a straight virtual card. Historically, these programs used a closed-loop network with a private label BIN and merchant acquirer.
• ACH payments: ACH for B2B is by far the fastest growing segment. One form of ACH for companies features cash concentration and disbursement (ACH-CCD), a type of transaction used primarily for single-use and recurring B2B payments, as well as transfers between corporate entities. It’s a way to move funds electronically between different accounts, often for tasks such as paying vendors, direct deposits or consolidating funds. But ACH payments' lack of detailed remittance data can make them a less attractive option for vendors and payers.
• FedNow and real-time payments (RTPs): These RTPs focus on speed, and that’s not necessarily a plus for payers, given that the transactions are irreversible. Some banks are also hesitant to migrate to this method because they would need to process instant, fraud-free transactions around the clock.

How can issuers increase virtual card adoption in B2B payments?

Whichever method customers choose, any digital B2B payment represents an improvement over paper checks in cost, efficiency and fraud exposure. So even though virtual card volume has grown in recent years, the market still represents a significant untapped opportunity for issuers.

In the sales process, the key to overcoming objections will be highlighting the efficiency of moving toward digitization of paper checks. If companies forgo the virtual card path, issuers still have options to help win over clients and strengthen customer loyalty.

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