Virtual cards are taking over – but will it last?

Virtual cards are taking the payments world by storm. We ask why this is happening, what it means – and how long it’s going to last…

Virtual cards are taking over

As a grizzled hack, one gets used to hype cycles. After AI and Machine Learning, most recent hoopla has focused on the demise of the humble payment card in the face of Open Banking payments and digital wallets.

Yet – according to our most recent annual research – payment cards have come through the pandemic in rude health, boosted by consumer familiarity with the form in strange times and a continued decline in the use of cash.

Another reason for the popularity of plastic cards could be a development that’s breathing new life into the card concept – virtual cards.

These products include the unique sixteen-digit card number from a plastic card, as well as an expiry date and cardholder verification value, or CVV.

Unlike physical cards, however, virtual cards are stored on digital devices and can be used to pay contactless in stores or online.

As a form, they include the option to offer a one-time, single-use card number associated with a card or bank account, making them harder for criminals to harvest for fraudulent purposes.

Wild popularity

To date, the concept has proven wildly popular.

Two years ago, we reported a virtual card market value of around $1.9 billion worldwide; Juniper Research say that could grow to around $6.8 billion by 2026, with two-thirds of usage coming from North America and just under a quarter from Western Europe.

“Juniper Research predict the v-card market could be $6.8 billion by 2026.”

According to GrandView Research, two-thirds of the market for virtuals comes from the corporate sector, while Transparency Research break this down further, splitting the business market roughly in half between B2B spending and consumer cards provided by businesses for in-store use (virtual store cards).

As the world’s economy goes digital and e-commerce grows at around 20 percent a year, it’s not hard to understand the appeal of virtuals, whether for consumers or businesses.

From a consumer perspective, the fact that a one-time virtual card can be issued to enable a single online transaction then linked to a bank account or physical card for settlement means that fraud risk is massively reduced.

Virtual cards are also great when paired with a digital wallet.

For example, a consumer shopping at Target or BestBuy in the US might purchase a card in-store or online to enable fast and simple online shopping – or load a cash value onto a virtual card on their phone for the same purpose.

From a bank point of view, issuing is instantaneous and – compared with the production, distribution and security costs associated with physical cards – rapid and cheap.

For consumers, virtuals offer speed and security, plus the convenience of linking the virtual and physical worlds with an existing physical card or bank account, cutting down on admin, account openings and other hassles.

A corporate phenomenon

The Transparency research cited earlier shows that virtual cards are far more popular with companies than with consumers.

Brian Tomkins, Global Head of Commercial Cards at HSBC, confirms this, noting that virtual cards are HSBC’s fastest-growing card product: “We’re seeing growth in this product line year-on-year, whether that’s for large corporates or SMEs.

Our corporate customers are using virtual cards for online payments – they appreciate the level of security and control virtual cards offer.”

According to Tomkins, many SMEs are using virtual cards to help them manage their working capital.

That’s because the companies can use the cards immediately and benefit from favourable payment terms from their issuer – effectively spreading the cost of their purchase over 30, 60 or 90 days without needing to apply for overdrafts or loans.

This practice explains why GrandView Research say two-thirds of virtual cards in the US are – and will continue to be out to 2030 – credit products.

Another favoured use for virtuals is store cards, where Application Programming Interface (API) connectivity between an issuing bank and the merchant offering the virtual store card to consumers makes it possible to offer these products almost instantly, and at considerable scale.

Why virtual cards work for SMEs

Shelley Havemann, Senior Product Director at Juni, a platform that aggregates finances for online businesses, says they are seeing massive demand for virtuals from digital businesses.

“95% of our customer base are using virtual cards for their media spend. That’s because there is less risk of a card being flagged or blocked for repeat use with virtual cards, and – thanks to one-time use of virtual card numbers linked to a bank account – there are fewer security concerns.”

Moreover, Havemann says virtuals enable real-time spending analytics for SMEs that might otherwise struggle to afford the advanced data analytics packages used by larger corporates.

Because it’s possible to bulk-issue virtual card numbers almost instantly and associate these cards with a single bank account, spending can be tracked, categorised and managed – including setting spending limits, geolocations and merchant types – in real time.

When it comes to month-end reconciliations, SMEs can isolate their spending across the enterprise by currency, account and purchasers, meaning they have better oversight of where their money is being spent.

Sounds good – but can it last?

Runaway growth in usage – especially among those SMEs which have felt somewhat unloved by Payment Service Providers (PSPs) in recent years – plus no brakes on issuance and an inherently lower risk of fraud.

It’s no wonder things look bright for issuers and merchants offering virtual cards.

Despite this, Pat Bermingham, CEO of Adflex, says there have been some problems with virtuals, not least the issue of how to get card numbers into the hands of users rapidly and in a secure fashion.

“The problem is one of delivery”, he says. “Card numbers would be sent to users by email, meaning the number appeared in a user inbox and became susceptible to fraud. Now people are more wary, and there’s more security around the process. A further disadvantage to virtual cards is the fact that numbers are temporary and need to be reissued for each use.”

Looking ahead, it’s not hard to imagine payment systems linked to Open Banking or blockchain which will emerge to trump virtual cards.

“New systems linked to Open Banking or blockchain could emerge that will trump virtual cards.”

Variable Recurring Payments (VRP), set to be launched in the UK later this year, enable a trusted buyer and trusted seller to instantly settle a potentially limitless number of transactions between the two parties, effectively creating an open channel for the exchange of value between two organisations.

This development could reduce the popularity of virtuals with SMEs and larger corporates.

Likewise, tokenization solutions being promoted by Mastercard (MDES) and Visa (VTS) enable any payment – irrespective of form – to be tokenized and exchanged between merchants and banks.

Again, such a solution appears easier to use than a virtual card.

As things stand, though, issuers, merchants and users – especially in the corporate space – should continue to reap the benefits of virtuals while keeping an eye out for alternatives that feel a little less temporary and, well, more real as opposed to virtual.

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