IBM Payments On The Future Of Virtual Cards

Businesses that once relied on paper-based payment methods and in-person transactions have marked seismic shifts to digital processes during the pandemic.

Businesses of all shapes and stripes are embracing online and mobile tools — willingly or not — to meet their B2B payment needs, according to Mike Cook, senior partner and head at IBM Payments Center. Transactions such as business expenses and product procurements that were once paid for using plastic cards can now be easily made online, leading more firms to use digital methods to settle vendor invoices.

“We have [billions of] digitally organized individuals on the planet who have learned how to transact life for the last eight months in the virtual world,” Cook said.

Cook and Sridhar Narayanan, IBM Payments Center’s chief architect, spoke with PYMNTS about how this digital shift is affecting the B2B payments space. The world is witnessing a large-scale push toward virtualization, they said, and companies charting these waters must therefore find ways to securely digitize their payments. Virtual cards are emerging as a key consideration for numerous firms as they look to better protect themselves from cybercrime.

“The premise of virtual cards is that they’re a lot more secure to use in the context of B2B payments,” Narayanan said.

Narayanan and Cook discussed the factors that are drawing businesses to virtual cards as well as those that could determine whether companies continue to use these payment tools or shift to other methods.

Virtual Security

Narayanan said digital cards can protect B2B payments by giving buyers temporary, one-time-use codes for individual payments, thus preventing them from transmitting sensitive card details. These tools also offer buyers various control measures, such as the ability to limit transactions to certain sizes or merchants.

Providing fully secured experiences requires more than simply shielding payment details, however. Card providers must safeguard other aspects of businesses’ virtual card journeys. Cook noted that financial institutions (FIs), FinTechs and other payment providers must carefully consider how they translate previously manual processes like onboarding to digital environments, lest they introduce weaknesses upon which cybercriminals can quickly capitalize.

Issuers that are launching digital cards also need new ways to confirm applicants’ identities. Small business owners seeking commercial cards may once have visited branches to present identification, but now they are likelier to submit applications online to avoid crowded public spaces and accommodate banks’ more limited hours. Simply asking applicants to submit photos of the front of their driver’s licenses is often not enough to prevent fraudsters from using counterfeit IDs to slip past security measures, Cook warned.

Players in the space are taking heed, and efforts to modernize fraud-fighting techniques could ultimately lead to stronger security. Cook predicted that digital IDs will eventually become commonplace and could provide issuers with troves of metadata that enable them to more robustly evaluate applicants than would be possible when examining physical ID cards.

“Now as we go into virtual cards, you’re having to think, ‘I’m going to have to assume that, in my lifetime, I will have a digital lD,’ and the integrity of that ID is, frankly, going to be way stronger than a piece of plastic with a smeared signature,” Cook noted.

Future Of Virtual Cards

Digital cards can also offer firms benefits beyond security as long as buyers and sellers have the right integrations to unlock these advantages, Narayanan said. Businesses that integrate their accounts payable (AP) and accounts receivable (AR) systems with cloud-based virtual card platforms to initiate, process and settle transactions can gain greater visibility into these payments, he said, which allows them to better manage cash flows. These integrations also set up sellers with straight-through processing for swift reconciliation.

Firms are taking note of virtual cards, but the future of these tools could depend on whether they offer benefits that distinguish them from other emerging digital payment options. Virtual commercial cards stand out because they enable deeper security, provide useful remittance data and make funds more quickly available to recipients than do traditional methods, Narayanan noted. Real-time payment systems that deliver near-instant account-to-account (A2A) transfers are now drawing attention — especially from small- to medium-sized businesses (SMBs) — because they offer similar advantages. These rails use the ISO 20022 messaging standard to transfer detailed information alongside payments, making reconciliation easier.

The new rails also avoid interchange fees, Narayanan said, which remain a key friction to greater supplier acceptance of virtual cards. This sets up potential competition between the methods, and only time will tell whether the companies that are currently using virtual cards will transition to real-time payments or deem both tools useful.

“We may see some coexistence in the large organizations space, where cards are already used for purchasing,” Narayanan said. “But in the [SMB] space, it’ll be interesting to see where the shoe will fall, especially as real-time payments gain traction around the globe.”

The pandemic is causing dramatic shifts in B2B payments as companies respond to new digital realities. Virtual cards can deliver significant advantages to companies eager to evade the frictions of paper checks, but card providers will need to enhance their offerings to deliver payments experiences that support their customers’ needs.