Though credit cards were not originally designed to address the needs of corporate payers, advances in commercial card technology have positioned the payment tool as one that’s gaining traction in the accounts payable department.
The ability to pay suppliers more quickly, without letting go of an extra few days of capital float, is quite attractive to both vendors and corporate buyers. Advances in data aggregation connect both sides of a commercial card transaction to richer information for reconciliation, reporting and analytics purposes. With cards so prevalent in the consumer payments space, businesses are often happy to adopt a familiar payment tool.
However, the commercial card is, of course, not without its drawbacks, namely the dreaded interchange fees that have limited vendor card acceptance for years.
Oded Zehavi, CEO and co-founder of Mesh Payments, said that when it comes to domestic payments, cards may not necessarily be the right choice. Interestingly, though, in the cross-border payments context, card technology — specifically, virtual commercial cards — can be an effective solution to the challenges and friction points of global B2B payments.
“In the domestic space, a check and ACH are still kings, and cards in any shape or form haven’t yet found the right use reasons to make a difference,” he told PYMNTS in a recent interview. “But in the cross-border space, it’s a different ball game.”
He highlighted the clunkiness of wire transactions, which, despite their drawbacks, continue to be a prevalent rail in global B2B payments. One of their biggest drawbacks is their rigidity, he said, whereas virtual cards can be adaptive and flexible to meet the unique needs of various markets and businesses.
This, he noted, is Mesh’s entryway to the market of cross-border B2B payments. The company recently announced a partnership with Visa in an initiative that will focus on supplier acceptance of Visa virtual prepaid commercial cards in emerging markets around the world, enabling small businesses to more seamlessly accept electronic payments from their large corporate customers.
There are two key aspects to the firm’s effort in reducing virtual card acceptance friction. First, Mesh works with a company’s existing payment acceptance platform. Second, it deals with the ever-present hurdle of interchange fees, which Zehavi said can be addressed by increased data collection from both payment and nonpayment sources.
Collecting this information, he noted, not only promotes automation in the accounts receivable process, while mitigating the risk of errors and failure rates, but lowers the interchange cost.
Over the course of the credit card’s history, Zehavi explained, the interchange model has brought a major disadvantage to suppliers, making pricing among the largest challenges to commercial card adoption. FinTech service providers have brought attention to this challenge, and the ability for Level 2 and Level 3 interchange data to lower interchange fees.
Today, with B2B transactions reaching the thousands, tens of thousands or even millions of dollars, those small-percentage interchange fees can quickly make a dent in a supplier’s bottom line. While it’s not entirely clear why Level 2 and Level 3 data lowers interchange fees, the industry has generally come to understand that collecting this data is essential to boosting transparency, and lowering the risk of a transaction failing or falling victim to fraud.
Having a service provider like Mesh automatically collect more robust information can not only lower interchange fees, but lower risk for both buyer and supplier, support more robust analytics and position cards as a way to address the friction of legacy payment tools. Once the interchange fee hurdle is overcome, virtual cards can be valuable in the cross-border B2B payment context, noted Zehavi.
“Virtual cards, with the correct adaptations, can eliminate challenges with bank wires,” he said, “and the trend is that more and more small and large businesses are understanding this concept.”
Virtual cards’ ability to adapt to various scenarios enables the technology to offer enhanced management of foreign exchange (FX), for instance, he added, “without the need to build a complex infrastructure, and thereby minimizing the FX exposure.”
Without a third party to support both the issuing and acceptance of virtual cards, the payment tool is unlikely to take off in any context — domestic or global. Yet, according to Zehavi, with a “new breed” of FinTech service providers and financial managers, more businesses are eager to embrace payment tools that can adapt to the particular needs of one payment scenario to the next.
Moving forward, he continued, this will be the force driving B2B payments innovation.
“I expect that the new leaders in the B2B payment space will need to build flexible platforms that will be able to adapt to the growing number of unique use cases,” he said. “A payment service provider that will not have a strong technological infrastructure will not survive the growing competition.”