The past few years have seen large corporates around the globe actively seek out more efficient and cost-effective payment solutions. For US-based companies, purchasing cards (P-cards) have fit the bill and have proved an extremely popular way of improving the procurement process. The benefits of these P-cards are well documented and include a reduction in payment costs, the elimination of paper processing, the ability to make payments easily to both frequently or seldom-used suppliers, and the availability to use detailed transaction-level data in supplier negotiations.
However, while P-cards have proved popular in a number of key markets – including the US, Mexico and Australia – they have gained little traction in Europe. Many US-based multinational corporations that have practical experience trying to implement a purchasing card programme in Europe cite several reasons why they believe their success in the US market has not been replicated. The most common from a buyer perspective are:
- Insufficient understanding around the benefits of card acceptance outside retail.
- A lack of enhanced (P-card) data flowing from merchants to help manage transactions, or to support electronic reclaim of VAT.
- Apprehension associated with the traditional plastic P-card, which gives purchasing authority to an individual without the traditional dual control in place.
- The fact that much of Europe has highly effective domestic payment systems, as well as markets in which cheques are not widely used, or are in steep decline.
- As a result, the opportunity to leverage card-based payments is not as compelling.
In addition to the purchaser-focused factors, there are also factors on the supplier side in Europe which have hindered P-cards from gaining widespread use. Most notably, the cash flow benefit created by faster, guaranteed settlement through the card merchant systems are less compelling in the current environment where borrowing costs are low.
Data from ‘Visa’s Commercial Consumption Expenditure Index 2010: Economist Intelligence Unit (EIU)’ study shows a lack of traction for cards in the European region to date. Visa research shows that while Europe accounts for 31% or €27.9 trillion of the global Commercial Consumption Expenditure (CCE), less than 8% of CCE is covered by card payment solutions.
A Card-based Alternative to P-cards for Europe
Purchasing cards – as used in the US and simply transferred ‘as is’ to a different part of the world – do not appear to be the optimal purchasing solution for Europe. But there is a new card-based solution which incorporates some of the most compelling features of P-cards but which is better suited to the particular aspects of the European payments landscape. Virtual credit cards or single-use accounts may be a possible answer to the on-going dilemma.
Virtual cards are a form of electronic payment that eliminates the need for a physical plastic card and are an ideal alternative to paper cheques. Virtual cards represent an opportunity to make B2B card payments with tighter internal controls, with better general ledger posting and payment reconciliation, and with the potential for better buy-side and supply-side integration. While the traditional P-card can be difficult to integrate into an automated buy-side process and a cost allocation and reconciliation process, virtual cards lend themselves to deeper integration into supply chains.
To understand virtual card systems, the first thing to bear in mind is that the underlying payment process is essentially the same as with traditional P-card purchasing. The main difference is that the buyer initiates the process by requesting a single-use account number on demand from the bank. The request includes parameters that will drive a decline or acceptance (payment amount, payment date, merchant details, single or multiple transactions). The bank sets these parameters and provides the number securely to the buyer, either through secure email or interfacing into an online buying application, which is then included on the purchase order request. When a number is requested from the bank, there are several free format fields that can be added and used for general ledger codes or any other information needed for reconciliation. In addition, information on which numbers have been used by merchants each day can be accessed by the buyer through an online card account management tool for reconciliation and/or postings.
The flow chart below shows how virtual cards work in practice.
Figure 1: How Virtual Cards Work.
Single-use account number is requested from the bank and received by company/organisation.
The single-use number is used in a transaction.
The supplier submits the transaction for payment.
Card association verifies against pre-purchase controls.
Virtual card transaction is approved and submitted for processing.
Bank provides company/organisation with enhanced data elements for easy reconciliation.
Source: Bank of America.
Rather than adding a plastic card or static ‘ghost’ card number, virtual cards become part of an online purchasing process. When integrated into an existing accounts payable (A/P) system, they do not create the need for additional or manual reconciliation processes that have often been layered on top of traditional P-cards, often times delivering inadequate results. Virtual cards support as many currencies as the commercial card issuer can support, greatly contributing to a reduction in foreign exchange (FX) fees. Finally, they do not require as much administration and management like a traditional plastic-based card programme does.
It is worth noting that single-use accounts also offer benefits to suppliers. They can provide a great opportunity for suppliers to tighten their own processes and move away from traditional ‘ghost’ cards, which have their own control and reconciliation risks. A supplier receives a unique number for every transaction, with a tighter audit control from the buyer side – meaning that each supplier needing a new ‘approval’ layer to complete a transaction has already been properly authorised by the buyer.
One relatively underutilised use for virtual cards is as a solution for low-value cross border and cross currency payments. A European company needing to make payment from Germany to a supplier in Sweden, for example, at present only has SWIFT as a payment option, which is more a high-value payment. The card networks, by contrast, can provide a lower cost payment with more certainty of payment timing for the merchant, a real time authentication process, and potentially lower transaction costs.
Card Associations’ Role in Furthering Development of One-time Numbers
The card associations’ have a critical role in the development of a business-to-business (B2B) payment market in Europe. They support this through technology development, as well as by leveraging their issuer bank and merchant acquirer networks to provide a universality of service. Rene Stynen, senior business leader, global products and solutions at MasterCard, recently commented: “Our approach is to leverage our Virtual Card Number solution and integrate this within existing buyer and supplier ecosystems; this can be e-MarketPlace or the corporates own enterprise resource planning (ERP) or A/P solutions. What we have learnt over the years is that we cannot ignore the needs of the suppliers in our approach. This is where MasterCard will bring together our direct industry partners, issuers, acquirers as well as our indirect providers such as payment service providers and payment facilitators.”
David Harrison, head of Visa commercial large market and multinationals at Visa Europe, explains their approach: “Our strategy is to deliver end-to-end purchase-to-pay automation by engaging different industry segments to understand how Visa can help to address existing process inefficiencies. We are bringing to market solutions like Visa Payables automation, which allows companies to send A/P files directly to Visa from their finance systems for payment. This makes the process of paying suppliers more efficient and eliminates processing steps. eSolutions Map, also allows companies to automatically reconcile orders against suppliers invoice data before creating instruction files for payment through Visa. This can be complemented by straight-through processing (STP) which processes Visa payments on behalf of suppliers providing even more control over payment timing.”
Virtual cards: A New Solution for an Old Challenge
Virtual cards, or single-use accounts, are perhaps the best innovation in B2B card payments to be seen in Europe in many years.
This innovation can be a great payment option for trading partners that exchange high volumes of low-value, cross currency payments, which require supporting reconciliation information. The technology is a major step forward and is worth treasurers’ exploring.
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