Virtual Cards

Virtual cards are just that – virtual!  They 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. Virtual cards are ideal for A/P payments because 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. Virtual cards are easily processed by suppliers using their POS terminal or online merchant terminal.  Authorization and settlement occur identically to other card types. 

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.  These features make virtual cards inherently the most secure form of card payment.

Purchasing Cards

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.  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.  However, as an A/P solution for invoice payments, PCards have proven to be sub-optimal because of 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.  Additionally, purchases made with the PCards may need to be allocated across several departments, which then require a detailed and sometimes difficult reconciliation process to determine which purchases are to be charged to each department.  This reconciliation is especially difficult if Level III data is not passed (Level III data is granular and detailed information about each purchase).

Ghost Cards

Ghost cards are similar to virtual cards in that they do not involve plastic.  They are simply account numbers 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. 

A ghost card resolves some of the issues associated with traditional purchasing 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: charge limits, transaction limits, monthly limits, MCC limits and frequency of use limits.  Additional flags may also be generated by ERP systems, such as when a transaction exceeds a predefined threshold.

Leaving the Check Behind

What is the optimal type of card program for an A/P department?  Understanding how various card programs can best serve a corporation is the key to ensuring the best payment methods are utilized. The latest advances in payables technology now enable organizations to easily migrate traditional A/P payments, even those to strategic suppliers, to virtual card.  The use of single use virtual cards as a payment solution for B2B invoice payments has a proven track record of success. Building on that success, the virtual card programs help companies leave the check behind, streamline their processes, continue to move toward hands-off straight-thru-processing, reduce costs, and benefit from new channels of revenue generation.

What types of card program are you using in your A/P department?  If you are using virtual card programs, are you generating revenue?  I’d like to hear from you.

More and more corporations are seeing the benefits of migrating paper checks to electronic and now specifically to virtual card programs.  Virtual card technology generates single-use unique card numbers with set credit limits based on the company’s payment instructions.  This approach safeguards each virtual card against unauthorized use and simplifies reconciliation.  A company can earn rebates from check disbursements that are migrated to card payments based on a defined percentage of their total monthly spend.

For example, a corporation with 5000 checks per month at a cost of $1.50 is spending $90,000 per year just to pay invoices by check. By migrating 25% of those 5000 checks with an average check value of $1100 to a virtual card program that has an average rebate of $13.75, a corporation can earn $206,256 year from the rebates – turning the finance department into a revenue generator.   Additionally, by migrating 50% of those 5000 checks to ACH at $.50 per payment, a corporation could save approximately $30,000 per year.

One of the most significant barriers to migrating to a virtual card program however is vendor enrollment.  Having a vendor enrollment strategy in place is key to the success of a virtual card program whether it is in-house or outsourced.  Companies that I have worked with that have migrated to virtual card programs are often surprised at the adoption rate but often pleased as they begin to negate costs and earn revenue.

I often get asked why would vendors accept card payments?  Vendors are actually willing to accept card payments (not a majority, but enough to generate significant rebate revenue).  Some are already accepting card payments from other customers.  Some highly value the relationship that they have with specific customers and will accept card payments to maintain that business.  Others may have enough margin built into their prices that they can absorb the merchant fees.  Additionally, payers can incent their vendors to accept card payments, perhaps by offering different payment terms or by concentrating more of their spend with a vendor if that vendor will agree to accept card payments.

Stay tuned for Virtual Card Programs Part III where I will describe how virtual card programs differ from other card programs.

Are you currently using virtual card programs or thinking of migrating your vendors?  I’d like to hear from you.

The attractiveness of card program rebates have provided the motivation to use PCard and ghost cards in the A/P arena, albeit with mixed results. Providing a ghost card number to select vendors is one thing – providing it to all of your vendors is another. Concerns over fraud, control, and reconciliation 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.

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.

Stay tuned for Virtual Card Programs Part II where I will discuss how corporations can earn rebates by migrating their vendors to virtual card programs.

Are you currently using virtual card programs or thinking of migrating your vendors? I’d like to hear from you.

Accounts receivable:

• Encouraging your vendors to pay you electronically will reduce your use of paper and remittance advices that need to be stored and, at the same time, reduce your customers’ use of paper
• Some companies worry about fraud when giving out their account information but it’s actually very safe if you put debit blocks on those accounts (check with your bank for other security features they may offer such as ACH positive pay)
• If you receive checks in your office instead of in a lockbox, consider Remote Deposit Capture which eliminates the auto pollution associated with having an employee drive your deposits to the bank

Other green steps that can be taken:

• Scan your documentation and permanent files, then shred and recycle them.  Be sure to tag your digital files thoroughly so they are easily searchable.  Scanning also provides greater protection to documents in case of a disaster or other unforeseen circumstances
• An electronic bank account management system (eBAM) can reduce account documentation paperwork by utilizing SWIFT messaging instead of paper
• Internal documentation such as support documentation for repetitive payment setups can be made paperless by using a workflow-based system like SharePoint.  The same applies to user authorization forms.  This approach also allows auditors to have view-only access which avoids them having to take up your time pulling documents
• If you have processes that currently result in the generation of multiple pieces of documentation, reengineer the process to eliminate unnecessary portions, consolidate to fewer pieces of paper and use self-inking stamps to add a place for approval or tracking number notations instead of a using a separate sheet of paper
• Use an Internet fax service so your incoming faxes are converted to electronic documents and e-mailed to you.  This leverages your e-mail archiving for short-term retention, makes them easy to save electronically for long-term retention and you only print the faxes you need to.  In a disaster, it also means that you won’t lose your ability to send and receive faxes, just redirect them to a personal e-mail address

In part I and II of my “Going Green with Electronic Payments” articles , I have detailed many of the methods that can be implemented by your organization.  You may find it easiest to start with some of the smaller steps such as an Internet fax service or document scanning.  Steps like this can reinforce the additional benefits to the organization of being environmentally friendly.  Once that idea has taken root, in a short time, it becomes easier to pursue the larger goals such as an electronic payment initiative, which also has significant cost benefits.  Regardless of your path, start with one or two of these steps and keep moving.  Beginning is the most difficult part; the rest will follow easily once the benefits become obvious.

What steps is your company taking to go green?  I’d like to hear from you.

If you are one of those firms, a push toward “green” in your company can open the dialogue that you may have had difficulty with otherwise, particularly in these times of cutbacks.  Regardless of the true reasons that your company has an interest in “going green”, there are real cost savings to be had in making treasury and finance more environmentally friendly.  In the information that follows, I detail some of the ways that you can help the Earth, and do it, partially, by converting to forms of electronic payments.

Paper checks: environmentally unfriendly

Aside from the obvious use of paper and petroleum used to make check stock and envelopes with windows and possibly self-stick, there are other impacts on the environment that are less obvious such as:

• Toner use
• Latent power draw – your printer is probably on 24 hours a day and constantly drawing power
• Heat – laser printers create a lot of heat due to their fusing units
• Window envelopes are often not recycled by the recipient even if they do so with other paper products
• Excess auto pollution if an employee drives your check run to the post office

Electronic payments: environmentally friendlier

• Electronic forms of payment include ACH, Fedwire, Purchasing Card and Virtual Card
• MICR Laser printer only turned on when needed for the occasional emergency or manual check
• No other resources used, such as envelopes other than on an exception basis.  If your remittance data is available in multiple file formats rather than just a text e-mail, you also reduce how many vendors will print the remittance data in their office
• Side benefits: Reduces or eliminates escheatment and fraud on your accounts
• Caveat: You may feel that you do not have the personnel, resources or systems security to achieve these goals.  If so, consider outsourcing the function and the conversion of vendors.  Outsourcing or software-as-a-service offerings reach your “green” and efficiency goals while still reducing your costs by approximately 50% or more over printing your checks in-house.  In the case of Purchasing Cards and, especially, Virtual Card payments, rebate structures translate into income instead of expense

Are you thinking of helping your company go green?  Is your company considering migrating from check payments to electronic?  I’d like to hear from you.

Stay Tuned for Part II….

For this reason, A/P departments are increasingly outsourcing payments execution to third-party service providers who not only execute on check, ACH, wire or card payments, but also manage vendor enrollment to help sign vendors up to receive electronic payments.  These third-party service providers will manage an end-to-end enrollment campaign which involves reaching out to vendors, explaining the benefits, answering questions and assisting with enrollment.

Outreach to vendors nearly always includes a combination of emails, letters and phone calls.  The most successful campaigns develop messaging that addresses frequently asked questions and describe how accepting electronic payments will benefit the vendor.

These benefits might include earlier payment, more frequent payment, reduced risk of lost or stolen checks, prompt settlement, receipt of electronic remittance, or status as a preferred vendor enjoying a greater concentration of spend.  Messaging can be further tailored with wording or presentation geared toward specific vendor segments.  This might include mandates for vendors of commodity items, or a mention of typical industry practices.

The tone of a campaign will vary by payer.  Some payers are comfortable issuing a mandate, some have a specific dollar amount or percent enrollment goal that that they wish to achieve, and some adopt a light touch approach in order to maintain carefully nurtured relationships with their vendors.  Most payers will review the sample messaging provided to them and customize it to their satisfaction as needed.  A key component of the enrollment campaign is the analysis of the vendor master file and A/P spend.  The goal of the analysis is to identify and prioritize the vendors to be targeted during the campaign.  This analysis yields critical information that can answer questions including:

• What type of product or service is being purchased?
• Is the product or service unique or a commodity?
• Is the vendor one of many or the sole vendor?
• What are the types, sizes and frequencies of payments?
• Can this vendor accept a card payment today?
• Can vendors be segmented by size or industry?
• Have special terms been negotiated with the vendor?
• Is the vendor new or established?

Experience has shown that vendor enrollment campaigns must be continual.  Vendors who say “no” to accepting electronic payments today may very well say “yes” in 6 months.  Chances are they have other customers who are also migrating to electronic payments and hearing the message from multiple customers will influence their decision.  Changing business conditions may entice them to consider new payment options.  A good rule of thumb is to automatically enroll your new vendors to receive electronic payments as part of the new vendor setup process.

What have your experiences been with vendor enrollment campaigns?  I’d like to hear from you!

The latest issue of Financial Operations Matters, published by the Institute of Financial Operations contained the article, ”Are you ready for lean A/P? 4 Trends to watch in 2012.” As the article highlights, lean A/P is the outcome of analyzing existing business processes, uncovering inefficiencies, redefining processes and applying technology where appropriate to support automated processing. Best practices at companies with the lowest A/P costs typically include: a high degree of automation, end-to-end integration of A/P with purchasing, movement to electronic payments, embracing a self-service model for suppliers, and maximizing revenue from card rebate programs.

I concur with the points outlined in this article.  As today’s business culture evolves and companies seek to emulate the success of best practice organizations, 2012 will see a continued push toward leaner operations and the following trends emerging.

1. Automation will continue to grow.  Regardless of the many advantages of automation such as shortened processing cycles, reduced lost spend, elimination of duplicate payments, and reduced time spent on rectifying issues, the rocky economy has made it increasingly more difficult for senior management to justify the capital expenditures historically required for an automation project. However, given the growing availability of Software-as-a-Service (SaaS) based solutions, automation will not only continue to grow, but it should be easier for organizations to justify the move to automation.
2. SaaS Solutions will become ever more attractive. SaaS solutions eliminate the initial license fees and ongoing IT costs associated with installing and running software on-site.  These low entry costs will helpjustify the business case for automation at a time when there is a reduced appetite for projects requiring large capital expenditures.
3. Shrinking A/P departments. The relentless shift towards automated processing and touchless A/P processes continue to reduce the need for traditional A/P professionals for whom a large part of their job is entering data, cross-checking purchase orders, and processing payments.  The focus is shifting to analysis and exception handling which require higher level problem solving skills.   This will create opportunities for those with analytical and processing skills.  These higher skilled A/P professionals will continue to be in high demand.
4. Push toward self-service solutions.  According to the article, at Home Depot, “80% of supplier inquiries can be handled via the [vendor] portal with payment inquiries as the number one call driver to [their A/P] help desk.”  Full featured vendor portals allow suppliers to perform their own queries, obtain payment details, and deliver remittance information in electronic format for input to accounts receivables systems.  Expect to see more automated feeds of payment and remittance information as the push continues to achieve straight-through-processing.
5. From cost center to revenue center.  As companies struggle with increased competition, lower margins, and restricted revenues, card rebate programs will be readily embraced.  A/P professionals will distinguish themselves by implementing A/P card programs that generate revenue, and will use this revenue to fund additional automation projects.

How lean is your A/P department?  Are you doing more with less?  Are your automation efforts proactive or reactive? Are your A/P plans for 2012 in line with trends mentioned here? I’d like to hear from you.

1. Market demand and customer expectations
2. Competition from alternative settlement networks 
3. Offerings from geographic markets outside of North America
4. Regulatory influences to reduce counterparty, systemic and liquidity risk

The current “Rules” allow an Originator to specify an Effective Entry Date, which is the date the transaction is to settle.  For ACH credits, the Effective Entry Date must be one or two banking days in the future.  For ACH debits, the Effective Entry Date must be one banking day in the future.   The EPS amendment would allow Originators to specify the same day as the Effective Entry Date for both ACH credits and debits.  This amendment could pave the way for banks to create new premium service offerings or enhance existing premium service offerings such as emergency payroll deposits, just-in-time tax payments, or expedited bill payments.

How would Expedited Processing and Settlement work?  It would essentially enable same-day settlement by modifying the existing afternoon clearing and settlement window so that ACH Operators would be open for all types of ACH entries – credits and debits; consumer and corporate entries; forward and return entries; non-monetary and administrative entries.   The afternoon window would have a file submission deadline for Originating Depository Financial Institutions (ODFI) of 2:00 p.m. Eastern Time, with output files available to Receiving Depository Financial Institutions (RDFI) no later than 4:00 p.m. Eastern Time. Settlement would take place at 5:00 p.m. Eastern Time. Because the EPS amendment would become part of the Rules, all RDFIs would have to be able to receive or pickup ACH files from their ACH Operator for this window. With this timeline, it is important to note that while some ACH transactions could be processed “same day,” ACH processing would not take place in “real time”.  Settlement in “real time” means payment transactions are not subjected to any waiting period. The transactions are settled as soon as they are processed. 

The results of a recent survey by the Association of Financial Professionals shows that there is corporate interest in same-day ACH capabilities and that corporate users recognize same-day ACH as a premium service. The EPS amendment could potentially enhance a number of ACH products offered by banks to their customers including expedited processing of late or failed payroll originations, allowing billers to collect consumer payments faster, and faster delivery of consumer payments made via a mobile device or online.

Other potential beneficiaries of the EPS amendment include recipients of disaster assistance payments;  government agencies could offer a premium service permitting expedited tax payments to be made on the due date; corporate treasurers could concentrate cash from multiple accounts more quickly;  reversals of erroneous entries could occur more quickly;  administrative transactions such as pre-notes could complete more quickly.  The amendment also offers the opportunity to reduce overall settlement risk, including counterparty risk, by accelerating settlement and thus reducing the duration of exposure.

In 2010, the Federal Reserve rolled out a same-day service limited to consumer ACH debits.  Adoption has been slow, in part because participation is voluntary.  Due to the nature of the “Rules”, the EPS amendment, if adopted, will impose additional costs on financial institutions as they modify and enhance their applications. 

The ever increasing adoption of technology by consumers has raised and will continue to raise expectations for the B2B world.  Near instantaneous settlement of mobile P2P payments will inevitably lead to a demand for quicker settlement of B2B payments.  Users will ask, “If banks can do it for my personal checking account, why can’t they do it for my business checking account?”  Same-day ACH is a step in the direction of meeting those expectations. 

Ultimately success of same-day ACH will depend upon adoption by banks.  Will same-day credit cannibalize bank’s more lucrative wire business and even exert downward pressure on the price of wires?  Will ACH prices increase?  Will same-day be enough to satisfy market needs?  Let us know your thoughts.

In June of 2011, the ASC X9 and Federal Reserve Bank of Minneapolis hosted the first Remittance Workshop. It was agreed by all that there is a need for more standardized processes to originate and deliver payment and electronic remittance information to all sizes of businesses to better enable straight through processing and accelerate electronic payment adoption.  The candid comments during the first workshop offered by a panel of corporate practitioners were illuminating and I thought I’d pass along:

• There are too many standards – a single remittance standard would be optimal
• Flexibility and interoperability are needed, yet exception processing is costly
• The needs of small businesses and smaller financial institutions are not well met
• Not all banks can or will forward remittance data in an ACH payment
• EDI is problematic for both corporates and banks, however XML is used by even small vendors and companies
• Software vendors must do a better job of supporting remittance standards
• Whether remittance travels in-band or out-of-band, it’s the financial institution’s job to combine the payment and remittance information prior to delivering to the customer
• Only the very largest companies have the influence to mandate that their customers and suppliers use electronic payments and electronic remittance information

It was also recognized during the first workshop that matching receivables data and posting that data to A/R platforms is a complex process that is not easily solved. Limited IT resources within corporations restrict the ability to focus on addressing payments and remittance processing problems while competing priorities at corporations make it difficult to make the business case necessary to gain management support for investing in remittance related solutions. Additionally, both A/P and A/R organizations have limited resources available to sustain electronic adoption strategies and execute the initiatives to promote trading partner adoption.

During the second workshop it was decided that in the near term the coalition will focus on the development of a Glossary of Terms, a catalog of industry initiatives and an inventory of current standards. The group will also provide some coordination between the evolving NACHA B2B Directory initiative, SWIFT, X9 Corporate Standards and the ISO 20022 Standalone Remittance Standard.

The Remittance Coalition will reconvene over a conference call in January 2012 and the next workshop will take place in the first half of 2012. As always, I am interested in your thoughts and comments.

Earlier this summer, I attended a remittance standards conference hosted by the Federal Reserve Bank of Minneapolis and the Accredited Standards Committee X9. Participants represented the Federal Reserve, ASC X9, ASC X12, SWIFT, ANSI, ISO, IFX, OAGi, GS/1, vendors and payments industry analysts. I was reminded of the old adage, “The beauty of standards is that there are so many to choose from!” While the market need for a remittance format standard was understood by all, it was acknowledged that the format and transport mechanisms will take considerable time and effort to define.

Last week at Sibos in Toronto, remittance delivery was again discussed in the context of supporting the extended remittance information in the new Customer Transfer Plus (CTP) message defined by the Federal Reserve Banks and scheduled to be implemented on November 19, 2011. Financial institutions using the FedLine Direct® Fedwire Funds Service are required to be able to receive CTP messages, but support for sending the new CTP message is optional.

But, what are the implications? As was pointed out during the discussion, the fact that a bank can receive the extended remittance does not mean that it can be delivered downstream. And while some banks will be ready on November 19th to offer a full suite of tools capable of delivering this extended remittance data, many (arguably a majority) will not.

In addition to the many available (and competing) remittance data formats, the actual delivery of remittance data falls into two camps: in-band and out-of-band. With in-band remittance delivery, the remittance data travels with the payment information. With out-of-band remittance delivery, the remittance data is stored in a repository separate from the payment information and is reunited with the payment details prior to delivery to the customer.

One of the reasons that checks still prevail in North America is because the remittance data travels in-band, located in the top two-thirds of the paper above the perforation. When discussing the out-of-band solution, corporate customers are adamant that they do not want the responsibility and burden of reuniting data. They clearly see that as a responsibility of the financial institution providing the service. North American solutions appear to favor in-band transport of remittance data while European solutions appear to favor the out-of-band approach.

Ultimately, corporates want payment and remittance data delivered together and the burden appears to be on the banking industry to enable straight-through processing and make the receipt of electronic remittance straightforward and simple. This will help drive the continuing migration towards electronic payments.

I welcome your thoughts on this topic.