Virtual Cards Close Middle-Market Cash Flow ‘Unpredictability Gap’

Virtual cards are at a tipping point.

That’s the sentiment expressed by several finance leaders in the B2B space, as the current environment of stubborn inflation and strict access to capital affects the payment needs of every company, especially the middle market. When access to working capital is paramount, virtual cards can provide an element of security and certainty.

“Too many middle-market companies are waiting for payments and then having to chase them,” Paul Christensen, CEO of B2B payment solution provider Previse, told PYMNTS. “I think if you can remove the waiting and chasing for suppliers, you will unlock the usage of virtual cards. I believe we’re at a tipping point where virtual cards can go from its current estimate of 2% of [accounts payable (AP)] spend to 5% to 10% of total spend and beyond. We’re talking about trillions of dollars of spend that the networks and the issuers can unlock and make the whole ecosystem much more efficient. What’s needed is good data and good technology. There’s a lot of uncertainty, and people do not know when they’re going to get paid.”

Joint research from PYMNTS Intelligence and Previse, collected in the “Uncertainty Report,” found that 60% of middle-market firms said there are challenges in managing the day-to-day ebb and flow of B2B payments.

Commercial transactions are still mired in paper-based processes, as checks are still firmly entrenched and as invoices are still being manually approved (and snail mail persists as a way to get payments to suppliers). As Christensen observedfor these companies, with annualized revenues of between $100 million and $1 billion, customers, especially larger ones, “might want a different electronic invoicing system to use, or a different supplier portal that must be logged into.”

As a result, the middle-market players — who have fewer resources at their disposal — find that their payment processing costs are higher, said Christensen. The push/pull between buyers and suppliers is an eternal one. Buyers want to hang onto their cash as long as possible, while suppliers want to be paid as soon as possible.

The impact is significant, as the PYMNTS/Previse data showed. In a typical month, middle-market businesses receive 7.4% of their B2B payments late.

All of this presents uncertainty at a time when working capital is critical.

“For those of us who provide payment solutions to companies, we need to make it easy for middle market companies to use a fit-for-purpose solution,” American Express President of Merchant Services Colleen Taylor told PYMNTS as part of the conversation with Christensen. “And because they don’t have big technology budgets, they want access to the tools that are going to give them that certainty and that transparency. But it needs to be easy to implement. It needs to be something that can integrate with the accounting platforms and give them that working capital benefit that they’re looking for through efficiency and digitization.

The Benefits of Automation and Virtual Cards

According to American Express data, nearly two-thirds of businesses saw improvements in days sales outstanding (DSO) metrics when they used accounts receivable (AR) automation, which Taylor said is akin to tokenizing payments for better security — and where straight-through processing helps accelerate the payments cycle and reduce errors.

Virtual cards can offer additional avenues to improved payment flows, Christensen said. The research showed that 80% of middle-market firm CEOs are interested in accepting virtual cards, while most of them said they would pay up to 3% of the invoice value to get paid in a timely (and even early) manner. The suppliers have the certainty of payment, which improves their own cash flow lifecycle management. Taylor said that virtual cards are already seeing wider use in corporate travel and expense use cases and in paying contractors.

“We’re seeing virtual cards being integrated more fully into the accounts payable processes,” of middle market companies, she said.

American Express has its own proprietary AP solutions that allow card members to upload an AP file and have all manner of transactions paid by virtual card. Virtual cards also have the advantages of being easily replaceable or cancellable and can be tailored to have specific spending limits.

“There are a lot of security features that you can build into these cards,” Christensen said.

Christensen and Taylor also tackled one of the features of automated AP/AR systems: electronic invoicing. No matter the vertical, or the solutions being deployed, chief financial officers must make efforts to invest in invoice automation.

“Without those investments, your DSO and [days payable outstanding (DPO)] performance will be less favorable — and it will hit the bottom line” and delay the delivery of goods and services, Christensen said.

As Christensen said, automating back-end processes “and investing in digitizing payments bridges uncertainty gaps, improves processes and security … while offering visibility into payment transactions.”

For all PYMNTS B2B coverage, subscribe to the daily B2B Newsletter.