Virtual cards can rescue small businesses from paper checks

In the past year, many large businesses have reaped the cost savings, efficiency and security benefits of faster-payment initiatives led by the Federal Reserve, NACHA and fintechs.

In contrast, few small to midsize businesses (SMBs) have had access to e-payment solutions that meet their unique needs, forcing many to accept the slow nature of paper checks and the associated negative impacts.

As we head into 2018, many barriers to e-payments for SMBs will be removed as fintechs extend the benefits of virtual card (also known as v-card) solutions to this underserved market. Research from First Annapolis predicts that virtual card payments will double from $83 billion in 2015 to $160 billion in 2018, and explode to over half a trillion dollars by 2024.

SMBs are choosing v-cards as their preferred form of electronic payments because they solve many of their payment challenges, while also helping them avoid the costs associated with custom software solutions designed for larger businesses or the burdens of joining multiple disparate e-payment networks in order to reach the wide variety of suppliers they pay.

As businesses continuously seek new ways to gain a competitive edge, many companies see the advantage of streamlining non-revenue-generating processes like A/R and other financial reconciliation processes to improve efficiency or reduce costs.

For companies looking to modernize and streamline accounting processes in 2018, eliminating costly paper checks is an easy place to start. Seventy-nine percent of organizations that participated in the most recent AFP Payments Cost Benchmarking Survey are seeking to convert paper checks to electronic payments.

The median cost of receiving a paper check for organizations with annual revenues below $1 billion is between $2.01 and $4.00, according to AFP. In the same survey, 88% of AFP respondents cited increased efficiency as the primary reason for transitioning from paper checks to electronic payments, 82% to reduce costs, 60% to prevent fraud and 38% to facilitate straight through processing (STP).

One-time-use virtual cards provide the cure to many accounts receivable pains experienced by small businesses. The benefits of moving away from checks in favor of v-cards include:

Lower fraud risk. According to an AFP 2017 Payments Fraud and Control Survey, checks are the most common payment rail for fraud. Research indicates that up to 75% of all businesses experience check fraud. In contrast, virtual cards make it almost impossible for fraudsters to steal and reuse the card number since v-cards can be issued in the exact amount of the bill and payment can be restricted to a specific industry.

Faster access to funds. It is no longer practical for businesses to wait up to 7 days for check funds to be available for use. Virtual card payments often clear within 24 hours, which equates to better cash flow and improved revenue cycle performance for SMBs.

Save time and money. Based on estimates from AFP, receiving a paper check is 5X more expensive than receiving an electronic payment. Although businesses incur credit card fees when v-cards are used as payment, they also gain rich remittance details in return. Many businesses accept this trade-off because the remittance information improves accounting efficiency by supporting automatic reconciliation of payments and transparency into payment activity.

As we look ahead to 2018, we expect v-card adoption rates and participation in networks to continue accelerating as more SMBs look to capitalize on the benefits of e-payments and as more B-to-B processors recognize the value of extending their electronic payment reach to small businesses.