Is 2022 Finally the Year of the Virtual Card?

Virtual cards are one of the hottest topics these days. Card networks, banks, financial companies, and industry analysts talk about virtual cards almost every day, all day long. They monitor the adoption of virtual cards, and anticipate usage and associated revenue growth. Virtual cards are believed to be a great product for businesses of all sizes. However, for all the excitement and appreciation, the adoption rate is disappointing. why is that?

Virtual cards and why they can be cool

A virtual card is a card in which it is you, the user, not the card-issuing organization, who controls how much can be spent, where and how, and you, the user, have the ability to create and destroy these cards whenever you want. You are the master of cards. Ostensibly, virtual cards work like regular cards, but behind the scenes are really digital wallets.

To answer why virtual cards are great, we need to take a closer look at the product itself. When asked to explain virtual cards, banks, financial companies, and card networks will do so in a fairly straightforward but not very helpful way:

  • A famous new bank explains that a virtual card is a payment card that exists only in digital form, which is not entirely true but most importantly not very useful – and we’ll see why later.

  • One unicorn fintech company also resorted to recursion and padding to explain virtual cards, pointing out that they are exactly what they sound like: cards without plastic. scandal!

  • The famous old bank (what is the synonym for “neobank”?) explains virtual cards as virtual card numbers. What makes you wonder if you missed something or search for the wrong answer? Don’t cards and numbers mean different things?

From the end user’s perspective, nothing is clear, everywhere is well written, but specifically, why do we use one over the other and when? Defining a new product as an old one doesn’t quite help but having one thing is unimportant. Personally, I use credit cards to buy things online and via POS machines, and I don’t even remember when was the last time I held a credit card in my hands — I use Apple Pay on my phone and Google Pay in the browser. My card is in these two virtual places at the same time – does that make it virtual? Of course not … or not? Do I need a virtual card?

This is where proponents of virtual cards can’t rely on System 1 thinking and filler definitions, responding instantly with a list of value propositions, unique features, and potential use cases. Suddenly this clarifies a lot of things and makes the previously provided definitions seemingly wrong.

Virtual plastic cards

Virtual cards are virtual not because there are no plastics or other physical materials, but because the cards act as avatars to calculate the funding source that remains securely hidden behind this avatar. So you can create these avatars and even print them out as physical cards and hand them over to real people. Or better yet, send them as special files to their 3D printers, so they can print their plastic virtual cards themselves. I also like this feature because it reminds me of a funny dialogue between Peppa Pig and Suzy Sheep that I had with my daughter:

  • And my shoes are very special because they are made of gold!

  • They are not golden, they are yellow!

  • They are not yellow! It’s real plastic gold!

Low resolution avatars. jpg

To avoid confusion (or, mistakenly, to create more of them) I will continue to use the term “avatar” from time to time because this is what it means on the Internet: “A still, animated, or other graphic representation that acts as a proxy for a person or is associated with an account or identity Certain digital, such as on the Internet.”

I find this to be a very accurate description of virtual cards that are not installed on the medium (digital, physical, plastic or even real plastic gold). This also means that the avatar has a very limited scope compared to the actual account. In the world of virtual cards, this manifests itself through a variety of things:

  • Limited spending: The amount available is less than the maximum funding source.

  • Limited Use: Can only be passed once to a specific dealer.

  • Limited Life: It can be a small part of the actual physical card. They can be revoked and canceled faster than anyone on Twitter can.

While online avatars make it less risky for adults with jobs to post silly memes and trolling each other in forums, card avatars make using card products less risky for payments, so the convenience of card products doesn’t come at the expense of security any more. So.

Virtual cards don’t have to be credit cards

I intentionally use the term “funding source” in contrast to “credit card account,” which is why I’m not discussing the cash flow and working capital implications of virtual credit cards as a payment method. It is important to strip the user experience of a payment product away from its source of funding. If it looks like a card, acts like a card, can be accepted by Stripe, Block (Square) or POS terminal – does it matter to the seller/supplier if the funding source is a credit card account, credit line, debit account or Ethereum wallet if funds are withdrawn from Source account and reached the destination account?

Why is the adoption of virtual cards so disappointing

The two biggest advantages of virtual cards are better financial controls (better than sharing a non-virtual card) and easier settlement (vs using a single non-virtual card for all cardable payments).

In order to become a true Jedi card pro and take full advantage of these benefits, one (business client) still has to do some manual work in the finance department. A company looking to adopt virtual cards will need to change their operations, and most likely adopt new software. The company may need to update its policies to answer previously unanswered questions about payments and expense management processes that were open to private interpretations (and misinterpretations, errors, and fraud).

In an effort to simplify AP settlement, this problem can turn into a different, arguably smaller one, related to managing multiple virtual cards. While managing expenses can become simpler with virtual cards, managing vendors can lead to unexpected results. For example, paying virtual cards as a payment method at some sellers that you have paid differently in the past may cause them to react by increasing prices and changing terms.

With the abundance of payment methods and payment providers, it is important to remember the issues that each of these methods aims to solve. Unfortunately, this does not appear to be the case. It has almost become fashionable to personify virtual credit cards as one of the most profitable payment methods and try to make every account and payment cardable. Yes, I have seen people swallowing knives, but this is not the purpose of using the tool nor normal human behaviour. It is a hoax and dangerous.

What banks can do to improve the adoption of virtual cards

I think the most interesting benefits of virtual cards are improved controls, risk management, and settlement potential. Occupational distortion can, at times, narrow professionals’ worldview, as they tend to see things only through the lenses of their industry and products. Everything becomes a hammer, everything becomes a payment rail and a lending product to the bank, everything is cardable to card networks and around financial cards.

However, for end users, these are tools that are within a broader scope and context. Settlement directly touches ERP and accounting systems. As well as managing expenses. Risk management directly affects a company’s financial controls and policies and requires accurate, real-time updates to the ERP’s recording system or accounting software.

To make virtual cards a truly transformative product, banks and card networks need to be able to exchange information with end-user records systems in real time. Embedded banking and ERP could be the answer to this challenge.

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