By Allan Halcrow
Accenture reported that virtual cards accounted for about $169 billion in purchases in 2018 (about one-third of all card spending by large businesses), and that this number will grow to $355 billion (46.5 percent of the total) by 2022.1 Accenture also reports that more than 25 percent of Fortune 100 companies are now using the virtual cards.2 So, again, what is a virtual credit card and what are the benefits driving that growth?
A virtual credit card is a digital payment device that can have strictly limited usage parameters and is created through the random generation of a 16-digit number. This process, known as “tokenization," is a variation of how chip-bearing standard credit cards work. The chip generates a single-use number, or token, each time it is inserted into a reader. Chip cards are more secure than previous generations of cards because transactions can be made without the merchant ever having the user’s card number.
Similarly, virtual cards exist only in relation to actual credit card accounts. The random token is also assigned a card verification value (CVV) code and an expiration date (often determined by the user), so that the virtual card can be used to make purchases online or over the phone.
When the card is used, the merchant only has the virtual number, but the charges post to the owner’s actual credit card account. Greater security is one clear advantage to virtual cards. And because most virtual cards also allow for built-in financial controls, improved tracking and accounting can be another advantage.
Because virtual credit cards are totally digital, they can’t be lost or stolen, making them more secure than standard cards. Their use can also protect a business if a merchant’s site is hacked, because there is nothing more to steal than a random, virtual number. Such theft is a greater risk than ever because hackers, now thwarted by chips in standard cards, have redirected their energy to Web hacking. Since January of last year, quite a few major brands have been compromised. Jupiter Research projects that online fraud will grow beyond $26.5 billion by 2020.3
Virtual cards can help. The financial controls afforded by many virtual cards add a further layer of protection. By setting credit limits to the penny and defining expiration dates or setting cards to expire after a single use, these cards can be set up for a single purchase. That helps prevent misuse by untrained or careless employees and can thwart bad actors, as well.
Those same financial controls can also improve approval and tracking. Suppose an employee needs to purchase office supplies. The employee can shop for the necessary products online, then, at checkout—when the exact, final cost is known—he or she can submit the total amount for approval. This way, a manager can issue the virtual card with a spending limit that matches the cost, while also setting immediate expiration. The employee then completes the purchase. The virtual card number is tied only to that specific transaction, so spending is approved and tracked in real time. Many virtual card programs allow users to generate unlimited numbers, so controls can be as tight as users want.
To help businesses take additional advantage of such controls, startups are emerging to help businesses customize, or “up-level,” their virtual cards. These companies use application programming interfaces (APIs) that enable sharing data from virtual cards with other financial management tools. This process is very different from having a single credit card used across the organization, which is common at many small businesses and in corporate departments. The single card approach is less than ideal because, for one thing, all expenses must be identified and reconciled—usually manually—after the fact.
Despite these advantages, there are some issues to consider before adopting virtual credit cards. First, returning merchandise might be difficult because merchants can’t simply reverse charges since the virtual card no longer exists. In such cases, retailer credit may be the only option. Nor might virtual cards be ideal for reserving a hotel room or rental car, because the actual card used must often be presented at check-in or pick up.
What’s more, as is the case with traditional credit cards, not all virtual card options are created equal. Experts suggest that choosing the functions available on the card is more important than what institution is providing it.4 They say the best virtual cards offer several specific advantages:
For businesses that use credit cards for purchases, virtual credit cards offer some unique advantages by being more secure, easier to control, and easier to track than are traditional cards. But they aren’t ideal for all business situations, and to enjoy all the advantages users may want to compare virtual credit cards to find the best option for their company.
Allan Halcrow is a freelance writer concentrating in business, human resources, and diversity and inclusion. His is also the author of four books on management.
1. “A Slice of $700+B in US Commercial Card Spend Up for Grabs,” Accenture; https://bankingblog.accenture.com/slice-700b-us-commercial-card-spend-up-for-grabs?lang=en_US
2. “Benefits of Virtual Credit Cards and How to Generate Them,” Fundera; https://www.fundera.com/blog/virtual-credit-cards
3. “Online Transaction Fraud to More Than Double to $25BN by 2020,” Jupiter Research; https://www.juniperresearch.com/press/press-releases/online-transaction-fraud-to-more-than-double-to-$2
4. “How to choose a virtual credit card for your business,” Spendesk; https://blog.spendesk.com/en/virtual-credit-card