the role of purchasing cards, ghost cards and virtual ... · the role of purchasing cards, ghost...

The Role of Purchasing Cards, Ghost Cards and Virtual Cards in B2B Payments

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Introduction Corporations remain under continuous pressure to reduce costs and improve operational efficiencies. One of the

easiest ways to do this is by migrating payments from check to electronic. Corporations, however, are now

beginning to take the migration to electronic payments a step further by implementing virtual card programs which

can even turn their A/P departments from cost centers to revenue centers. Virtual card programs have been

around for some time but adoption rates are just now beginning to increase. They are also still often confused

with purchasing card (PCard) and ghost card programs. This paper will explore how virtual card programs work,

how corporations can benefit by migrating checks to them, and how they differ from other card programs.

Single-use virtual cards – what are they and how do they work? The attractiveness of card program rebates has provided the motivation to use PCard and ghost cards in the A/P

arena. Concerns over fraud, control, and reconciliation however have led to the development of single use virtual

cards.

Virtual card numbers are just that – virtual! Like ghost cards, there is no plastic involved. However, unlike ghost

cards, virtual cards are unique card numbers that are tied back to a real card number. The real card number

allows the issuer to control overall credit limits and perform billing. What makes virtual cards ideal for A/P

applications is that they can be generated when needed (on a batch or real-time basis) and allow the payer to

specify the maximum credit limit (to the penny) as well as when each card number expires. Most of the time they

are single-use, meaning that once the full value of the virtual card has been charged, the card number is

deactivated. Typically, the cards have a short time to live, often expiring at the end of the month following the one

in which they were issued.

Virtual cards offer tremendous security and reconciliation advantages. As they are issued for a specific dollar

amount, suppliers may not charge more than the limit on the card. For example, supplier A sends an invoice to

their customer for $2,000. A week later, the same supplier sends another invoice for $3,000. When the supplier

receives the card number for the first payment, they might be tempted to process it for the $5,000 total. However,

because the virtual card number was issued for $2,000, the $5,000 transaction would be declined. In addition,

because it is single-use, it may not be used for any more purchases once the $2,000 has been charged.

Additionally, virtual cards may also be configured to allow multiple charges (up to the limit on the card). For

example, a card with a $1,200.57 credit limit can be configured to allow only one charge for exactly $1,200.57 or

for multiple charges totaling $1,200.57. The behavior of many suppliers has shown that they prefer to enter

multiple charges, each associated with a single invoice, when receiving a single payment for multiple invoices.

This improves their A/R reconciliation and improves the relationship between buyer and supplier.

Benefits of virtual card programs

Reconciliation is vastly simplified with virtual cards because each payment is now associated with its own unique

card number. Most virtual cards allow additional data elements to be passed to the issuer when the virtual card

number is generated. Those additional card numbers often include data commonly seen in remittance details,

such as invoice number, purchase order number, reference number, etc. The issuer can provide these additional

data elements back to the payer in their statement, making automated reconciliation a reality. The suppliers and

their associated merchant acquiring banks no longer need to pass this data back to the issuer.

Another benefit of virtual cards is the ability of corporations to earn rebates from check disbursements migrated to

card payments based on a defined percentage of the total monthly transaction value.


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For example, in Example A, a corporation with 5,000 checks per month at a cost of $1.50 per check currently

spends $90,000 per year just to pay its invoices. Assuming an average check value of $1,100, the average rebate

on a virtual card transaction would be $13.75. By migrating 25 percent of its transactions to virtual cards, a

corporation can earn $206,256 a year in rebates – effectively turning the finance department from a cost center

into a revenue generator. Additionally, by migrating 50 percent of those 5,000 checks to ACH at $0.50 per

payment, a corporation could save approximately $30,000 per year.

How do virtual card programs differ from PCard or ghost programs?

Purchasing cards (PCards) PCards are a form of company credit card issued to authorized employees who can then purchase goods and services within certain restrictive limits. Employees can make purchases that bypass a traditional purchasing procedure involving purchasing requisitions and purchase orders. By streamlining the procurement process for low-value items, they result in lower administrative costs and a reduction in purchasing processing time. Organizations that use PCards are known as “end-users” and span all sectors of industry, education and government. Individuals issued a PCard to make purchases on behalf of their employer are known as “cardholders”. Organizations have long understood the benefits of using commercial cards to streamline their procurement processes. PCards provide convenience to employees, cost savings through lower administrative costs, revenue generation through rebates, and enhanced management information and control. PCards include more controls than a typical corporate credit card. Nearly all issuers provide companies with tools

to implement controls for PCards including frequency limits (transactions per day and per month), transaction

count restrictions (single purchase), merchant category code (MCC) blocks, as well as restrictions tied to specific

suppliers and types of purchases. Advanced reporting permits the identification of duplicate expenses and

payments, unusual spending patterns by employee, department or expense category, visibility into spend with

non-preferred vendors, split transactions to circumvent individual payment thresholds and more.

Some merchants may allow the purchaser to provide an additional data element along with their credit card information at the point of sale. This additional data might be a cost center, billing code or PO number. However, this offers little benefit unless this information can be passed back to the purchase through the acquirer-network-issuer chain. Traditionally, PCards have been used for high volume, low value purchases of goods and services. These include off-contract, ad hoc, non-traditional, non-purchase order, and incidental purchasing transactions. However, PCard programs have made some inroads into A/P. The idea is to use the PCard to pay for purchases made via the traditional purchase order process. The payer avoids the work and expense associated with a check payment while capturing the rebate associated with PCard transactions. As an A/P solution, this program has proven to be sub-optimal. The use of PCards as an A/P solution often brings challenges with integration, automatic reconciliation, spend reporting, compliance and more. Without the proper restrictions, PCards provide a means for employees to circumvent established purchasing rules, making it difficult for the company to take advantage of bulk pricing deals with a small number of preferred suppliers. Cards are also typically issued to a small minority of employees, making it difficult to achieve consistent and comprehensive use for small-dollar purchases. Additionally, purchases made with the PCards may need to be allocated across several departments, which then requires a detailed and sometimes difficult reconciliation process to determine which purchases are to be charged to each department.


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Ghost cards The term “card” is typically used within the industry when describing any type of commercial card product, regardless of whether or not a physical plastic card is issued. A ghost card resolves some of the issues associated with traditional purchasing cards. It does not involve an

actual plastic card – it is simply an account number linked to a high-limit charge account which an organization

uses to conduct a high number of transactions. Sometimes these card numbers are provided to employees or

departments so that purchases can be easily charged back to that department. Other times, the end-user

organization will issue the number to a specific supplier or to all suppliers of a specific supplier type (e.g., office

suppliers) for ongoing use. The supplier knows to process all the organization’s purchases to that account. Some

suppliers can provide a data feed of charge information to corporate ERP systems so that reconciliation and

chargebacks can be automated.

What are the factors that drive the adoption of ghost cards? When spend analysis identifies that a large number of

transactions are made with a particular vendor, a ghost card account number may be created to reduce invoices

and improve purchasing efficiency. This ghost card may only be used for purchases from the specific vendor. This

is often referred to as a “vertical” approach.

Alternately, A/P departments may find that they are getting bogged down processing one category of expense

such as travel, event planning, or office supplies. In these situations, a ghost card account number may be

created with a restriction limiting its use to pre-determined merchant code categories. This is somewhat similar to

a traditional PCard but there is not a physical card and the account may be accessed by many employees. This is

often referred to as a “horizontal” approach.

Misuse of ghost cards can be further limited by the same controls available for PCards by charge limits,

transaction limits, monthly limits, MCC limits and frequency of use. Additional flags may also be generated by

ERP systems, such as when a transaction exceeds a predefined threshold.


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Advantages vs. Disadvantages

Advantages Disadvantages Virtual card

• Payers earn rebates on A/P payments made via Virtual Cards, allowing them to turn an A/P cost center into a revenue center.

• Virtual cards maintain flexibility but have been built as an A/P solution.

• Virtual cards have enhanced security via single use, exact dollar amount and short expiration periods.

• They are an effective alternative to check payments. • They help improve reconciliation via additional

data elements

• Virtual cards are transaction specific, enabling strict controls.

• Participating suppliers can be paid earlier, improving Days Payable Outstanding.

• There is very low risk of employee misuse. • They can effectively replace ghost card solutions.

• Not all suppliers will accept virtual card payments.

• Suppliers can be slow to adopt virtual cards without a properly executed vendor enablement campaign.

PCard • Payers earn rebates on payments made via PCards. • Payers can buy more efficiently online, saving money

and streamlining processes. • PCards can be limited to specific suppliers. • They reduce the costs associated with small

dollar purchases. • They reduce the cycle time of purchasing transactions. • PCards improve supplier relations by providing

payment within 24-28 hours. • Payers can track spending better with

comprehensive reports. • Spending data can be aggregated and be used to

negotiate better terms with key suppliers. • Controls can help restrict rogue purchasing of non-

authorized products or services.

• PCard usage has the potential for credit card fraud and identity theft.

• It is laborious and time-intensive to reconcile PCard statements with purchasing receipts and assign charges to the proper GL accounts.

• Purchases made outside typical purchase order processes do not provide the same level of visibility.

• Employees may experience confusion over the proper purchase method to use for each type of purchase.

• Spend analysis may be inaccurate if PCard data is not integrated with other purchase data.

Ghost card

• Payers earn rebates on payments made via ghost cards.

• Ghost cards extend the power and benefit of a PCard program to a wider group of employees without the potential control issue of having a card in everyone’s pocket.

• They lower costs by reducing the number of processed invoices.

• Reconciliation can be helped by linking buyer-supplied data, such as a PO, to the card transaction.

• They offer enhanced security. • Ghost cards can be limited to specific vendors or

Merchant Category Code (MCC). • The ghost card account number may be stored by the

supplier and not revealed to the buyer’s employees. • The supplier may verify purchasers by requesting

additional information, such as a valid accounting code.

• The burden of verifying if a buyer’s employee is authorized to use the account typically falls on the supplier.

• The logistics of establishing the use of a ghost card with a supplier can be daunting and communication is critical.

• Unless purchase volume is high enough, buyers may fail to see any significant cost savings.

• Reconciliation is very difficult unless the supplier can send and receive buyer-supplied data elements such as cost center, billing code, PO number or GL codes.


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Summary Understanding how various card programs can best serve a corporation is key to ensuring the best payment

methods are utilized. The use of single-use virtual cards as a procurement solution for low-value, high-volume

purchases has a proven track record of success. Building on that success, the latest advances in payables

technology now enable organizations to easily migrate traditional A/P payments to virtual card as well. Virtual card

programs help companies leave the check behind, streamline their processes, continue to move toward hands-off

straight-through processing (STP), reduce costs, and benefit from new channels of revenue generation.

About the FIS™ Integrated Payables Solution FIS™ Integrated Payables solution is a web-based integrated payments platform that can take a payment feed

from an AP group and process it as checks, ACH, Wires or virtual cards through a single online portal.

Corporations outsource their payments execution to FIS to help them reduce costs, improve operational

efficiencies, mitigate risk, migrate to electronic payments and earn rebates on virtual card payments. Historically,

vendor enrollment is a key hurdle in the migration to electronic payments. FIS provides a vendor enrollment

center in the US, focused on creating custom tailored campaigns to migrate vendors to accept electronic

payments. Acting as an extension of our customers’ AP department, FIS will support vendors out of our call

center; managing inquiries, card processing issues, and more.

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