Treasury Today Country Profiles in association with Citi

Outlook bright for virtual cards as demand soars

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Demand for commercial cards globally is growing but one segment, virtual cards, is experiencing especially strong growth, with the corporate market attracted by the visibility they offer and ease with which they enable reconciliation.

Issuing banks and their corporate customers have used commercial cards for years but recently there has been a proliferation in card types, with increased automation of back-office payables capabilities a major driver.

The commercial card has expanded into areas like T&E Cards, P-cards, central travel accounts and executive cards. And now we are seeing the use of e-payables and virtual cards shoot up, with some businesses doubling or even tripling their virtual card spend.

Corporate expense management solutions provider Fraedom, recently acquired by Visa, predicts that, as the types of commercial cards on offer continue to evolve, spending on them will grow to reach US$582bn by 2020, an increase of 71% over 2013 spending levels.

Virtual cards – non-plastic accounts typically tied to accounts-receivable systems and represented by a digital token – are the new kids on the block. They currently account for only a small proportion of most issuers’ commercial card portfolios. But their growth has been in triple digits for some issuers, as organisations look to them to improve business processes and exert tighter control over payments.

A study of the US card market alone by Accenture Payment indicates just how quickly virtual cards are finding favour in the market. Corporate cards, purchasing cards, and virtual cards account for US$523bn of US commercial card volume in 2018, up 10% from last year, according to the research. Virtual cards, however, are by far the fastest-growing of the three commercial card categories studied. Of the 2018 total, virtual cards, will account for US$169bn in spend, up 24% from last year, says the study.

By 2022 the combined card volume is expected to rise to US$763bn with virtual cards accounting for nearly half of that spend. Virtual card spend on mobile devices alone is forecast to grow by 43% to underpin a market of US$42bn in 2022.

Fraedom itself has seen demand for virtual cards rocket. Last year it experienced 15% growth in commercial cards solutions overall, while demand for virtual card solutions grew by a hefty 195%.

Cashless future?

So, what’s driving this growth in demand for virtual cards? Nick Campbell, Head of Product Strategy and Innovation at Fraedom says the “consumerisation” of commercial banking is playing a big part. He points out that people are using less cash in their daily lives with a 2017 survey in the US finding that 50% of people carry cash on them less than half of the time when they are out. Instead of cash, people are opting for more modern payment methods such as digital wallets within mobile devices: “The concept of using virtual cards is therefore familiar to most employees. And because they are so used to and enjoy this kind of approach as consumers, many are demanding the same payment experience in their business life.”

Another important driver is businesses recognising that virtual cards can deliver a host of direct benefits. One is the ability to reduce credit exposure through limiting the number of plastic cards issued to employees. Businesses can instead move to a request-based process with a virtual card issued to employees when spend is required. With the addition of card controls, a business can further restrict spend to the approved criteria within the request.

Campbell adds: “A process based on pre-spend request ensures that a business has visibility of spend before it happens, therefore significantly reducing erroneous expenditure and back-end expense management. Furthermore, integration with an Expense Management System (EMS) speeds up the process as expense claims are automatically sent to the right people – giving them full visibility of expense management.”

Expanding use cases

But the long-term growth predicted for virtual cards will also depend on an expansion of the kinds of business use cases available. Campbell believes that if virtual card usage is to continue growing at pace in the business arena, it is important that providers promote them outside of the traditional travel use-cases. That means educating businesses on the merits of virtual cards and driving their use for a wider range of spend needs that are currently only serviced through traditional plastic cards.

Such a scenario will deliver further opportunities for fintechs in particular to change the thinking and acceptance of virtual cards within the business market. “By promoting use among smaller, growing businesses who are looking to manage cash flow and retain tighter spend controls, fintechs can also promote best practice expense management processes to an innovation-thirsty market,” says Campbell.

With the long-term prospects for virtual cards looking bright, it seems reasonable to Campbell to expect that the consumer who never wants to carry cash today will also never want to carry debit or credit cards with them in the years to come. In line with this trend, the actual term ‘virtual card’ may be short-lived, he says, noting that the use of the word ‘card’ can be regarded as misleading in a digital age.

“Branding may change to virtual or online accounts and will effectively involve access to payments throughout a user’s digital wallet. Ultimately, whatever name is chosen, the benefits of virtual cards both for businesses and business users, cannot be ignored. Businesses gain through enhanced control of the expense management process, increased payments security, a more consumer-focused approach and reduced opportunity for fraud, while users get a more intuitive, convenient way of managing their expenses. The name ‘virtual card’ may not endure but the concept is here to stay.”