The traditional plastic corporate credit card is getting a digital makeover.
Several fintech startups and Mastercard are marketing virtual cards for businesses that they believe are more secure and take pain and paperwork out of handling employees’ expenses and purchases. Essentially, traditional plastic is rigid and time-consuming. Virtual cards are flexible and streamlining.
Companies are embracing this trend. Spending with virtual cards – temporary prepaid, credit or debit card numbers that can be controlled and tracked -- is expected to surpass plastic corporate travel cards in 2017, according to First Annapolis Consulting, a firm focused on electronic payments.
“While physical plastic still stays relevant and is seeing decent growth, the part of the industry that is growing faster is the virtual card space,” said Sachin Mehra, group executive, global commercial products at Mastercard.
Startups like Emburse, Bento and Pleo are adding features to their virtual procurement and travel and expense cards. Mastercard is pushing its version, called InControl. They’re all making their virtual cards work seamlessly with other software programs that businesses use, and thus offer value beyond the payments themselves: automation of expense reports and account reconciliation; better insight into possible fraud; and real-time monitoring of company spending.
“We see much more value in what happens before and after that payment is done,” said Jeppe Rindom, CEO of Pleo. “This starts with a great user experience on the employees’ side, like automatically categorizing and fetching receipts for them, and simplifying processes for businesses on the other side, like syncing everything with their current accounting system and providing real-time insight into all company spending.”
The shift from plastic to digital company cards is due partly to innovations like these, and partly to the limitations of old-fashioned cards.
Drawbacks of Plastic
Plastic corporate cards have worked well for small-dollar purchases like a catered lunch, argued Frank Martien, partner, commercial payments at First Annapolis in San Francisco. For large purchases that require approvals, companies typically write checks.
Such a system is not always easy for employees to use. And it comes with the dreaded expense report and the dozens of sometimes vague receipts that have to be found, remembered and categorized.
“Financial products are too often built to fit only the financial people’s needs and subsequently, become too complicated for the employees, who find themselves stuck in senseless paperwork,” Rindom said. “From our own experience as employees, managers and even CFOs, we found that out-of-pocket purchasing and expense reports are just broken concepts.”
Another issue for plastic corporate cards, Martien said, is that card issuers have been engaged in a price war on rebates.
“The industry is saying, ‘How do we get around that?’” he said. “One way is to elevate the discussion, so instead of talking to somebody who is focused on a price-based decision, you’re trying to get to the CFO’s office and urging executives to think about a broader business process automation plan.”
Once the CFO’s office is hooked on an invoicing software program, the thinking goes, the business will be likely to use whatever virtual cards that software works with, rather than bid out for cheaper alternatives.
Travelers may still need physical cards for things like hotels that insist on keeping a plastic card on file for incidentals and liability. Coffee shops and restaurants typically need to see a physical card, but virtual cards may eventually become part of mobile wallets like Apple Pay to handle these scenarios.
Virtues of Virtual Cards
Virtual cards give small businesses spend management tools that were formally only accessible by large companies, noted Ben Brown, manager at First Annapolis.
“Democratizing access is the Silicon Valley way to say it,” Brown said. “Startups like Emburse, Bento and their peers are trying to bring some of that capability down to the small-business segment, so it’s cheaper to deliver and more accessible to smaller companies.”
Virtual cards can be sent with appended data that explains what the payment is being received for, so reconcilement can be streamlined.
Virtual cards are more secure than plastic cards, according to Roger Gu, founder of one-and-a-half-year-old San Francisco virtual card startup Emburse, because they can be limited to one-time use or to a daily or transaction budget, so anyone who stole the card number would be restricted in what he could do with it.
“We can set our card to have a budget of $1,000 per month, with a daily limit of $100,” Gu said. “If someone were to use that card, even if they had the full card number, they wouldn’t be able to process a transaction for $101.” (To the vendor, the virtual card looks like any standard Visa or Mastercard. Emburse issues cards through Community Federal Savings Bank in New York.)
The appended data can also be used to identify possible fraud. “We are putting a lot of focus in understanding what ordinary spend behavior looks like and what may be out of the ordinary spend behavior or even fraud using machine learning,” Rindom said.
Also, with virtual cards, the supplier doesn’t have to share account details with the buyer.
In a typical ACH transaction, a supplier has to share its bank account credentials. “A supplier is generally loath to share their bank account information with the AP department,” Mehra explained. “You have to do it, but that’s a concern point that exists. At the buying company, typically the biggest fear of the treasurer is when a supplier’s payment instructions change, and new instructions are sent by fax or email. The buying company has to validate and verify that the account details are indeed right and there is no fraud taking place.”
In the case of virtual cards, all of that is circumvented. All that needs to be shared is the virtual card number.
Employers with distributed workforces, part-time employees or contractors, where the employer-employee bond may not be strong, don’t have to provide those employees a full line of credit. The virtual card can be limited by type of merchant, dollar amount or time.
And in companies where employees prefer to make their own software, equipment and travel purchases, virtual cards can make travel and procurement purchases easier to manage.
Emburse has a built in expense platform that captures receipts and prompts users to take pictures of their receipts immediately after the transaction. It can also scan an inbox for receipts and pair them with transactions; Pleo does this, too. Emburse plans to add optical character recognition so the receipt can be translated to machine-readable information.
Emburse and Pleo automatically categorize expenses like flights, hotels and restaurants, saving users that effort.
Virtual card providers are integrating their offerings with the software companies commonly use. Emburse is working with Slack to get new cards and expenses approved through Slack’s workflow. If an engineer doesn’t have a corporate card but needs to buy a software subscription, Emburse’s Slackbot would let the engineer create a new card request that would go to a manager for approval. If the manager hits “yes,” a new virtual card for just the subscription amount and limited to that one merchant would be generated.
Mastercard has integrated InControl with accounts payable software from Coupa and Bottomline Technologies; Silicon Valley Bank offers the virtual cards to Coupa customers. Coupa also connects to enterprise resource planning systems including SAP, Oracle, NetSuite, Workday and Great Plains.
Emburse is also building integrations to recruiting platforms like Greenhouse. If a company wants to bring a candidate in for an interview, especially a college student who may not have a credit card, it can issue a virtual card with the interview package for travel expenses.
In some cases, virtual cards can be shared: if three employees are preparing for a holiday party, they can share a $1,000 budget. Everyone knows in real time how much money is left, and no one will go over budget.
What companies appreciate the most about virtual cards, Gu said, is having transparency into transactions. Instead of requiring employees to submit receipts and reconcile transactions, the software does that automatically and provides all the data around each transaction in real-time, so the company doesn’t have to wait until the end of the month.
The additional data can provide insight into company spending that can be filtered and searched through to help with budgeting and decision making in the future.
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