A Virtual Solution To Corporates’ Prepaid Card Woes

The desire for greater visibility and ease in employee spend drove the use of prepaid cards in the corporate world. Recent innovations in corporate FinTech have enabled these card solutions to come integrated with expense analysis and management tools, mobile capabilities, online dashboards and sophisticated analytics.

In a report sponsored by Mastercard for Mercator Advisory Group’s 2016 Small Business Payments and Banking Survey, SMBs told researchers that they’re using a wide variety of payment rails, including business credit cards (69 percent), checks (46 percent) and business debit cards (44 percent).

Prepaid cards, said Mercator in a recent whitepaper on the topic, can address the pain point of requiring employees to file expense reports retroactively, the friction linked to paper checks and the risk faced by businesses – particularly SMBs – of taking out commercial cards and racking up debt.

Today, however, prepaid cards cannot address every issue for employers. Andrew Jamison, CEO of Extend, says one of the biggest reasons is linked to the rise of the gig economy and freelance population.

“The freelance population cannot get a corporate card,” he told PYMNTS in a recent discussion, adding that this forces contractors and gig workers to use their own funds while on a job, and file an expense report later – a process that might take months.

There are a few potential resolutions for this issue, Jamison explained: A company may take a screen shot of card details and upload it to Dropbox in order for employees to gain access to a company credit card.

“There’s a lot of fraud and misuse here, and then a card has to be reissued,” he said. “It’s a very real problem out there today.”

An alternative has been the prepaid debit card, which sees managers loading value onto a card and giving it to an employee. But in this scenario, noted Jamison, “there is a disconnect between businesses that don’t want to hand out a card permanently to people, versus the individuals working inside a company, be they employees or freelancers, who spend on behalf of the business.

“No business likes to hand over money,” he continued. “Companies have to physically move a bunch of money onto a prepaid card, which typically involves opening a new account, and they have to manage that capital there.”

This could come with fees, Jamison said, or could create a lack of transparency into overall cash positions and employee or freelancer spend.

The freelancing population is quickly growing, and corporates will have to address these challenges as they more heavily rely on a population of talent that cannot be given a company card. According to the Freelancing in America survey published last October, more than half of the U.S. population will be freelancing within 10 years.

According to Upwork CEO Stephane Kasriel, who spoke with Forbes when the report was released, the U.S. freelance workforce is growing three times the speed as the traditional workforce.

Extend’s solution to the challenge is to deploy the credit already allocated to employers, and branch it out to employees and freelancers in the form of a virtual card. This way, Jamison explained, employers gain the benefit of card rewards without having to open new accounts, while workers gain access to credit that will be paid by their employers, without having to front personal cash.

“The average business today may use between 30 and 35 percent of the line of credit that is already afforded to them,” he said. “What we’re hoping these companies do is unlock the potential of the credit that’s already been given to them by their banks by redefining how cards get issued, redistributed and accessed.”

Investors at Point72 Ventures, Plug and Play, Reciprocal Ventures, WorldQuant Ventures and others recently backed Extend’s solution to the tune of $3 million in seed funding announced earlier this month.

The use of the virtual card in corporate payments is not new, but has typically been a device to permeate accounts payable. Jamison said Extend’s solution introduces virtual cards as a peer-to-peer financing model connecting freelancers to companies’ lines of credit.

The concept certainly solves some of the issues that arise from pre-loaded debit cards and expense reports, but there are challenges ahead for the business model, too.

Among the largest is a lack of understanding around virtual card technology and how it works for employers and their talent.

“Businesses historically look to use virtual cards in the context of accounts payable automation,” said Jamison, “and they may struggle to get their head around the technological integrations they need to make that work.”

But the rise of virtual cards in the consumer payments world – as top banks like Bank of America and Capital One introduce v-card solutions – is helping to increase awareness and understanding of the technology, he said. This, in turn, is driving adoption, and is likely to lead to the resolution of another key hurdle for this kind of tool: a lack of virtual card compatibility with mobile wallets.

At present, virtual cards used by employees and freelancers can be loaded into apps like Uber for Business or Starbucks’ mobile app to make payments while on the go, but card issuers have lagged in integrating virtual card acceptance for POS purchases in general.

“This is something we’re working on with the issuers, which get to control which cards can be added to wallets,” said Jamison. “Up until now, there have been no real use cases for them to be able to do this at scale with virtual cards – this has been more about the accounts payable space. But because we launched a peer-to-peer model, suddenly issuers see the need for it, and it’s on their roadmap.”

Increasingly, banks are enabling commercial cards for use in mobile wallets; it may only be a matter of time before they support the same for virtual cards issued by FIs working with Extend, too.