How payments companies apply virtual cards to real-world challenges

Virtual cards gained favor during the pandemic as a way to speed up payments to suppliers, but there's a lot more that the technology can do for industries that are still responding to rapid economic changes. 

The product frees B2B payments from the constraints of a physical card or check — there's no need to wait for an item or sliver of plastic to arrive by mail, no need to reorder or reissue them, and no static account number that would limit the number of users. 

"Virtual cards are a versatile tool," said Andrew Jamison, CEO and co-founder of Extend, which has signed a deal to power virtual payment cards for Bank of the West. "There's better reconciliation, better insights into spending and you can have them up and running in five minutes." 

While Extend leans into virtual cards as a way to help corporations manage costs, Mastercard has invested in Conferma Pay in an effort to sell a similar product to travel companies. In both cases, the companies are responding to 2022's turbulent mix of economic opportunity and headwinds.  

"Any product or service that improves a small business' financial workflow is a powerful differentiator," said Alenka Grealish, lead researcher on emerging technology at Celent, adding that virtual cards provide controls and tracking features to improve spending management and fraud mitigation. 

The San Francisco-based Bank of the West will make virtual cards available to thousands of small businesses, which can set spending limits, expiration dates and tags. Executives can also send virtual cards directly to themselves, employees, vendors and contractors, as well as set budgets. 

"Most digital card payment solutions have been created for larger companies with sophisticated IT teams that can easily adapt and tailor solutions for their organization's particular needs," Dominique Fracchia, a managing director at Bank of the West, said in an email. "But small businesses require a plug-and-play option that does not require time-intensive implementation customization." 

The $104 billion-asset Bank of the West has more than 600 branches and commercial banking offices, mostly in the Midwest and Western U.S. BMO Financial Group, which has agreed to acquire Bank of the West for $40 billion5, has said it would increase investments in small-business banking and would retain Bank of the West's branch network. 

Extend, which was founded in 2017, has grown through white-label partnerships with traditional card issuers, offering a way to use digital cards to improve visibility into transactions and add spending controls to better manage expenses and supply chains. 

"Our model is to work with established banks, rather than burn down Rome to rebuild it," Jamison said. 

As companies look to cut costs during a potential economic downturn, Jamison contends the digital adjustments and personalized setting that virtual cards offer can be applied to a business's spending policy and budgeting. 

A series of shocks has hit supply chains over the past few years ahead of a potential recession — including the pandemic, Suez Canal blockage, the 2021 freeze in Texas and Russia's invasion of Ukraine. These shocks have created unexpected expenses for companies and have reduced visibility into available supplies and markets for those supplies, according to Gartner.

The uncertainty that has resulted has led financial institutions to upgrade supply-chain finance and payment technology, a trend that Jamison hopes will create demand for more flexible payment cards. 

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"Spending control is now at the top of the agenda during what looks like a period of uncertainty for small businesses," Jamison said. 

The overall virtual card market should reach $1.8 billion in payments in 2022, with a compound annual growth rate of 10.5%, according to Valuates Reports, placing the market on pace to reach $3.3 billion by 2028. The report attributes the growth partly to the need of businesses to streamline supply-chain payments. 

"The crux is selling small businesses on the value proposition, making onboarding easy and training in the tools smart and fast," Grealish said. "Given the inroads by fintechs like Stripe, banks need to seize opportunities like issuing virtual cards."

Virtual card use started to expand quickly in the early days of the pandemic, and made inroads into business payments. U.S. Bank, for example, launched an app that combines virtual payments and expense reporting. 

Mastercard in 2021 introduced a virtual card that allows borrowers to apply for buy now/pay later loans through mobile banking apps, then use the virtual cards to make the installment payments. 

This week, Mastercard partnered with Conferma Pay to expand the use of virtual cards for B2C travel payments. Conferma, which was recently acquired by software developer Sabre, will support single-use card numbers that have a link between the booking and payment system for flights and other travel purchases that involve a third party. Mastercard, which has gotten an earnings boost from the recovery in travel payments, did not provide comment for this story by deadline. 

More fintechs that sell expense management software are embedding virtual cards, which can be distributed directly to businesses or to issuing banks, said Steve Murphy, director of Mercator's commercial and enterprise payment advisory service, adding new entrants and expanded offerings could face challenges. 

"There is already competition out there," Murphy said, noting there are also challenges, as the business credit card firm Brexmoved away from small-business payments earlier in 2022 to focus on larger clients.