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“The report of my death was an exaggeration.” So wrote novelist Samuel Clemens—aka Mark Twain—on May 31, 1897, after a reporter for the New York Journal inquired as to the state of his ostensibly failing health. If you believed the rumors that Twain was dying, you’d have been wrong. In fact, the author of The Adventures of Tom Sawyer and The Adventures of Huckleberry Finn didn’t pass away until 1910, at the (then) ripe, old age of 74.
Similarly, if you believed—or believe—that paper checks are on their proverbial deathbed, you’d be wrong about that too. Though it’s commonly assumed that today’s senior citizens are the only people still writing checks, fact is that small and medium-sized businesses (SMBs) still frequently use checks to make B2B payments.
Don’t get us wrong, the number of commercial checks being collected through the Federal Reserve has been declining for the past two decades (with the steepest percentage drop between 2009-2011), but there are still billions of checks being written each year. One reason that SMBs may still be paying each other by check is a perceived lack of cost-effective alternatives.
Never mind that if you’re an SMB there are a slew of disadvantages to paying—or getting paid—by paper check. For example, checks cost money to print and mail, they have to be manually recorded and deposited, they can get lost in the mail, and they are environmentally unfriendly, especially as compared to paperless alternatives. Being paid by business check is also a decidedly slow way to receive compensation (though some payers may see that as an advantage, if they want to hold onto their working capital as long as possible). And because processing paper checks is time consuming, there’s a significant cost in terms of the human resources one needs to devote to accounts payable and accounts receivables.
Yet in 2019 there are less expensive, more efficient ways to handle B2B payments than issuing and receiving paper checks. At the top of the list are virtual credit cards, which allow buyers to pay with a single-use credit card number and suppliers to convert invoice receivables from paper checks to electronic payments.
So why haven’t virtual credit cards caught on? Well, buyers seem to have no problem using them, especially since buyers are often offered rebates on goods and services purchased when they use a virtual credit card. Historically, the problem has been on the supplier side. Other than inertia, suppliers have been skittish about paying the associated interchange and transaction fees.
But as is turns out, the benefits of virtual credit cards act as a counterweight to the fees. Moreover, offerings like buyer initiated payments (BIPs) and dynamic discounting may tip the scales to the point where suppliers can no longer afford to ignore the opportunity that virtual credit cards provide.
As for the aforementioned benefits of virtual cards: from a supplier’s perspective, you get paid sooner than with a check; payments are guaranteed (no bounced checks); and each payment comes with valuable remittance data, which helps with reconciling accounts. For example, the data typically includes the merchant’s name and address, the invoice number, and line items like quantity and description, as well as product codes.
Meanwhile, buyer initiated payments are exactly what they sound like; all a supplier needs to do is send an invoice and then receive payment as a direct deposit, along with electronic notification of the deposit. By automating accounts payable, the number of man hours required to administer accounts payable is dramatically reduced, reducing processing costs and improving employee productivity.
But the real difference-maker for many suppliers is the availability of dynamic discounting, which “levels the playing field” between buyers and suppliers by allowing the parties to negotiate trade terms. In other words, transaction rates and fees can be determined based on factors like the number of days that have passed since the invoice was delivered or transaction volume and transaction size.
So, for example, if a supplier wants to be paid sooner rather than later, they might agree to pay a higher processing fee. Or if they are comfortable waiting for payment, they might pay a lower fee. In that way, costs can be reduced on the supplier’s side, making B2B card payments more economical than ever before. Better yet, the ability to tweak terms to maximize each party’s benefit has the potential to greatly increase goodwill and improve business relationships.
All of this explains why “the annual commercial card growth rate is roughly nine percent, according to a report by Mercator Advisory Group1, [with] virtual card payments driving the current growth trends.” And why “by 2021, virtual card spending is expected to surpass that of traditional purchasing cards and checks.”2
1 The U.S. Commercial Card Market: A Growing Virtual Reality, Mercator Advisory Group, September 2016,https://www.researchandmarkets.com/research/kjndnd/the_u_s
2 Virtual Credit Cards are Faster and Guaranteed and More Data Rich So Why Haven’t They Exploded Yet, nGenuity Payments Journal, https://www.tsys.com/news-innovation/whats-new/Articles-and-Blogs/nGenuity-Journal/virtual-credit-cards-are-faster-guaranteed-and-more-data-rich-so-why-havent-they-exploded-yet.html
Read the original TSYS article here.
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