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Small is virtual - why virtual cards should matter to the SME market

Unlocking value
By Nick Campbell, Head of Product Strategy & Innovation

Our latest report into the transformation and growth of regional banks shines a bright light on an increasingly growing opportunity in the commercial card market: virtual cards.  

Even though virtual cards are a relatively new category compared to standard commercial cards, interest in this digital payment method is skyrocketing.

Despite rapid growth, some banks remain sceptical of the value of virtual cards within the small business sector (i.e. companies with sales below US$20million per year). However, our research found the mid-market sector (with revenues US$20million and upward) to be currently underserviced by virtual cards and e-payables, providing a sizable market opportunity.  

Virtual cards are an opportunity to reduce some of the payment burdens which put SMEs at a disadvantage compared to their larger counterparts. The cost of manual and paper payments processing is disproportionately high in smaller businesses, making up a larger proportion of their cost base relative to sales. Working capital can also be an issue, as smaller companies are less able to bear tying up cash in stored inventory.

From an administrative point of view, virtual cards allow for a digitization of the payments process. This reduces workloads while increasing visibility of spend for a wider range of employees. Maintaining control over spend is one of the key challenges for SMEs, which virtual cards and e-payables can easily resolve.

In terms of managing working capital, virtual cards benefit companies in the same way as standard commercial cards do. They can extend the critical payment terms from 30 to 60 days, for example, giving business owners double the time to turn inventory into sales and release cash.

Improved payment reconciliation 

One immediate advantage of virtual cards compared to traditional plastic is that they can be a one-off payment mechanism where spend is pre-authorized, making tracking and reconciling payments much easier. This means smaller companies can benefit from favorable terms for larger expenditure, not just expenses and smaller consumables. There is little to no chance for unauthorized spend, for example, as card numbers can be issued for single purpose and will correlate exactly to a single spend on any statement or bank account.

Another benefit of virtual cards over paper payments is from the point of view of a secure supply chain. Smaller businesses are at higher risk from supply chain interruption or collapse than their larger counterparts. If a supplier goes bust or becomes unreliable, the knock-on effect can put an otherwise perfectly viable business out of action, potentially permanently.

Virtual cards put suppliers under the same checks and balances as those who accept traditional card payments. The supplier is checked and registered by the acquirer and companies validated by virtual card issuers and so have an extra layer of legitimacy.

As our research discovered, further education about the benefits of virtual cards is still needed. It’s also important to communicate the benefits of this technology, not just to the potential card users, but to those suppliers who might choose to accept them. Not everyone, particularly in the SME sector, is readily set up to adopt digital payments processes. Advice and guidance from banking providers will prove essential if uptake is to match interest.