A longstanding topic of discussion in these virtual pages has been the steady (but slow) movement of firms, especially firms operating in the B2B arena, to embrace electronic payments, while simultaneously ditching paper invoices, stamps and envelopes. In an interview with MPD CEO Karen Webster, AOC Solutions’ Steve Tackett, senior vice president of product innovation, and Kevin Woods, executive vice president of global, strategy and business development, discussed the finer points of using virtual cards to keep the engines of commerce humming.
Webster: From where you sit, what are the biggest issues in businesses figuring out how to pay each other?
ST: The basic themes of any payment problem to solve have been the same for a long time and will continue to be this way for the future. Those themes are ubiquitous acceptance, ease of use and control. Those are the three big things that those in the industry are looking for, as well as what end users are trying to achieve. Facilitating those things are what we are driven to accomplish with our technology on a daily basis.
Webster: Where does the ability to move data with money fit into your three themes?
KW: Payments isn’t just about making payments anymore … Payment systems are more about the completion of the entire payments process and providing what the two parties want most — data, security, accuracy, useful technology. It’s all about ensuring that there is an end-to-end solution. The fact is: Both buyers and suppliers are seeking more usefulness in the overall payment process. Invoice and other information resides in both areas and in AP payments. Moving data with the payments is an absolute necessity for closure in the payments process.
Webster: The B2B payments ocean is huge, but checks are a default [payment system]. Firms still use checks to pay vendors. How do you get on this problem and chip away and solve it? How do you get the businesses to take the first step?
ST: In terms of the reasons why companies use checks, most of that is around two or three factors — the most important of which is control and the second is the effort to write a check, as opposed to enrolling in ACH or card. It’s pretty easy, and there is a lot of inertia behind checks and so that is what really continues to make that a major form of payments. The numbers are coming down; some of that is going to ACH, and some of that is going to cards.
And if you look at it like that, commercial cards have a form of legality that is similar to the control that you have with a check and also virtual cards. Exact match, for example, is a feature that requires the amount to exactly equal the control set. The same type of feature is available to control when the virtual card is used.
Webster: How do you get them over the cost side of accepting another method of payments — the idea that a check is free? How do you work through the economics?
KW: Buyers are used to traditional payment terms. Saying “net 30, net 45” on traditional checks, that’s where you are today. But, when offered an alternative to checks and ACH where terms may be better, such as a virtual card with no risk to them, where they can get paid faster, that interests them.
When buyers and suppliers realize that, in order to get benefits offered via normal pricing (card), where you have to have very large-ticket items to do it, there is hesitation. While suppliers may like the ability to drop the rates they pay, buyers who are looking at these forms of payments with associated rebates aren’t as excited. I think it all goes back to educational calls to that supplier — [teaching them] where the benefits lie … data, timeliness … or, where you don’t have to do anything, where you are getting paid in 48 hours, where you don’t have to enter a card solution … but it gives them a guaranteed payment and they get data with that payment so they can reconcile on their end. Sometimes, the ability to “just get paid” resonates with suppliers as it lowers their cost to do business. Automation can be a real cost savings to them.
Webster: Transact Global — Describe how that helps businesses and suppliers pay each other and transact outside of their own domestic markets.
ST: Suppliers and buyers benefit from transacting globally, but it’s the issuers who are among the parties that receive a lot of the benefit by using cards. None of the other solutions are end to end.
The other aspect of this is cost. International transactions have higher costs, and our platform is built to offset those higher costs. Transact Global is in the cloud and is disruptive. A virtual card, by its very nature, is something less than what people think of with credit cards today.
A virtual card has more control, fewer features. We do not have to produce plastic cards; we don’t have to produce paper statements. This translates to lower cost for us to build it and put it in the market and then lower costs to the banks that are buying it.
Most other issuer processing platforms were built in the 80s and 90s, and a lot of the pricing is still based on 90s-era telecommunications costs. Because the market is a monopoly in the U.S. and an oligopoly in other regions, issuers and their customers get no relief — until now.
Webster: Business changed over the last 20 years, but the B2B side of payments has only recently seen a lot of innovation and interest in adopting these new types of technologies. What’s been behind the momentum that you’ve been having, and what’s been the perfect storm that has caused the market to come with you rather than against you?
ST: What built momentum in the company was virtual cards, providing tremendous tech advantage to partners to use virtual cards in comparison to the competition, who were slow to understand the benefits of virtual cards and even slower to invest. We’re talking about banks here. Banks are risk management businesses; it’s in their DNA to be slow to change. As momentum began in the domestic U.S. for us, with the help of multinational channel partners, we made the jump to a larger platform globally. The market is going the same direction our portfolio is going, which validates AOC’s strategy.
Webster: Which sectors are embracing this? Who seems to be going for it? What problems are solved for them? And what other sectors should pay attention?
KW: Health care, physical hospitals and clinics/facilities. The number of payments they want, the control they want and the security they want — from a reconciliation standpoint — it has done wonders. Also, higher education and primary education. Those industries that have thousands and thousands of invoices that are paid daily.
ST: Online travel was one of the very first places where virtual cards took root. Hotels, for example, struggle with cash and don’t typically accept checks. They even have a tough time with debit cards. Much of that communication is online, and so that is a natural match for AOC’s product set with real-time communications directly to the end customer.
The other place where it really got a start was maintenance and repair transactions, and they can be complex. You have to give a form of payment first, but there is an estimate, and you have to give a form of payment again, and then, sometimes, all those numbers [the estimate and the final payment] don’t all match. There are a lot of different players in this industry — the end users and the insurance companies — and the reality is that you want to make sure the merchant cannot overcharge the card. Or, if the merchant tries to overcharge, then it causes an event where the merchant has to reach back out and communicate about that increase.
Data is the thing that everybody talks about but that very few are able to deliver on in a very meaningful way. When I say meaningful, I mean that everybody wants it, but very few can produce it on the merchant side. Similarly, buyers can rarely consume data and do anything with it. It’s a chicken/egg issue with considerable expense on both sides to resolve.
That’s where virtual cards come in. If you look at what virtual cards do best in class, the best in the world … you have a single virtual card number, that virtual card number ties directly to a purchase order or travel or reservation name (in different industries, there are different names), but this is the identifier that says this is the activity that has been approved by the organization, which will tie one to one to that virtual card number. You tie that into the financial controls and the activity control, around that card number, and that is what we get back to. A virtual card has all of the controls and benefits of a check but is easier to administer.
While they put it under a different name, if you really look at what’s going on, for instance, with Apple Pay and tokenization, these are single-use credit card numbers. Which is exactly what a virtual card is. As you move away from plastic and more toward the electronic means of communicating with the merchant, then that need for a single account number for lots of transactions with low control (aside from just a credit limit for many transactions) becomes obsolete in nature, and you are able to have a tool — whether you are talking about merchant control, financial controls or activity control — that can really make sure that it is going to the right party, for the right amount and without worries about fraudulent use.
Webster: What will payments look like in three to five years?
ST: If you look back 15 years ago, payments were largely driven by bank brand and treasury. What we’ve seen in the past 10 years is that the bank brand is less important. Price, service and tech — technology is where a lot of the competition is happening today.
If you do not have the best technology in payments, you are being forced into a price game. If you look through that lens, it’s easy to understand why we are making the investments that we are making. For example, in virtual cards, and why we are trying to stay ahead in the arms race. If you look at the market share that the top five banks had in B2B 10 years ago or 15 years ago and compared to what it is now, what you see is the unfolding of the middle market, where national, regional and even smaller players are able to compete and regularly win against big bank brands and treasury relationships with superior technology. And we’re empowering them to win by providing a powerful technological advantage.