Struggles with reconciliation issues, forecasting, compliance, fraud risk and reduced working capital have necessitated B2B payment technologies’ evolution

In the digital payments scene, while the market for consumer credit cards is healthy, business-to-business (B2B) usage of cards is relatively low.

Some explanations for this trend are that, Consumer-to-Business (C2B) payment cards were designed for in-person retail payments rather than invoice-based B2B payments, which represent the bulk of commercial payments. Subsequently C2B cards were useful for e-commerce too, although B2B cards still had their value for commercial payments of generally higher value involving many stakeholders across “accounts payable” and “accounts receivable” departments.

As B2B spending went digital (especially over the COVID pandemic years and beyond), the volume of commercial payments had been increasing unevenly around the world due to each country’s technology and economic policies and trends. For example, China’s cardable domestic B2B spending grew by almost three fifths between 2017 and 2023. Meanwhile, China’s inbound and outbound cardable cross-border B2B spending grew by nearly a third.

For this reason, B2B payment cards and related payment modes for invoice-based payments have been evolving. Virtual B2B payment cards are a growing payment option in B2B payments. They are temporary card numbers randomly generated and then linked to a funding account that has an established line of credit. They are typically used for a specific transaction or for a specific period of time, often integrated into accounting, enterprise resource planning and expense management systems to streamline back-office processes, including automating reconciliation.

Common B2B payment problems

The ability of an electronic funds transfer (EFT) to meet B2B buyer and supplier needs can vary considerably based on its type. Common problems include:

  • Inefficient manual reconciliation if transaction data is not supported by sufficiently detailed information in financial messaging.
  • Limitations around forecasting and compliance, if real-time visibility into total transactions is lacking.
  • No payment reversals for irrevocable real-time payments (RTPs), which pose an increased fraud risk if fraud prevention is not equally real-time.
  • No payment guarantees for automatic clearing house (ACH) transfers, coupled with delayed failure notifications for issues such as non-sufficient funds.
  • Reduced working capital when funds are taken directly from bank accounts.
  • Unavailable or cumbersome international payments, which may involve unclear and unexpected intermediary-bank fees.

According to Tancho Fingarov, Senior Principal, Mastercard, the evolution of B2B payments first started with the familiar P-card, and is now into the second and third phases that include virtual cards and straight-through processing (STP), respectively. These developments address common B2B payment challenges, and will continue to evolve as market trends and needs shift. In a recent blog post, he explained the various benefits of the three forms of B2B payment technologies.

Tancho Fingarov, Senior Principal, Mastercard

P-cards, virtual cards and STP

What are the different benefits and target audiences of the three forms of digital B2B payment options? According to Fingarov:

Payment Type Benefits Uptake Trends
P-cards
  • Buyers can keep money in their accounts for longer (payment deferment), and benefit from card-issuer rebates associated with spending volume.
  • Offers detailed transaction data with one-to-one matches for efficient payment reconciliation.
  • Cross-border payments are processed on trusted international networks.
  • Offers payment guarantees without the need for buyers to validate and update supplier bank account information.
  • Fraud protection and security via adherence to payment card industry data security standards.
  • Card issuers and their corporate customers may increasingly appreciate the benefits of card payments for commercial payments. Between 2017 and 2023, domestic B2B card spending more than doubled on average across Australia, China, India, Indonesia, the Philippines, and Singapore, according to Fingarov’s data.
  • Nestled within that growth has been a near-tripling of virtual card spending over the same period.
Virtual Cards

On top of the same benefits as P-cards, virtual cards also offer the following:

  • Inherent security in single-use virtual card numbers, which relieve the burden of handling or storing sensitive payment credentials.
  • Custom spending controls for single vs. multi-use, frequency of use, transaction amounts, purchase types, locations, and times of day.
  • Fraud protection through automatic account opening/closing tied to valid start and end dates with custom controls.
  • Instant worldwide card issuance that eliminates the need for physical card distribution.
  • Push provisioning of cards to digital wallets for instant use on mobile devices anywhere.
  • Enhanced transaction data, including non-financial information such as invoice numbers and billing codes, for real-time tracking and reporting.

In 2021/2022, the growth of virtual card adoption was driven by the sentiment that virtual cards improve organizational processes and enhance cybersecurity.

Virtual cards can also dovetail into STP modes, where available, for additional benefits.
STP

STP for virtual cards is an emerging solution in some markets, bypassing traditional hassles for suppliers when inputting received credit card information into the accounts receivable module. Additionally:

  • No need to manually input payment information.
  • Reduced need for manual exception handling when a payment fails.
  • Fewer compliance challenges as the payment network, not the supplier, handles the virtual card number.

STP trends are similar to those of virtual cards. However, these industries may benefit more from the evolution of digital B2B payments:

  1. Wholesale and retail – due to high volume, low-value transactions with tight margins.
  2. Freight and logistics – due to dispersed stakeholders.
  3. Healthcare – due to complex public/private stakeholders, fragmented suppliers, lack of price transparency, and lengthy debt collection cycles.
  4. Digital and “as-a-Service” sectors – due to longtail spending on non-strategic items.

While a virtual card number is quicker and easier to issue than a physical P-card, it still needs to be generated and transferred. That role traditionally falls to a commercial card issuer. After the buyer puts an invoice into its ERP system to submit as a payment instruction to the issuer, the issuer requests a virtual card number from the payment network and then sends the virtual card number to the supplier’s ERP system and the payment authorization status to the buyer’s ERP system.

Fingarov noted: “Embedded finance offers an alternative by allowing the issuer to embed its issuing capabilities into a buyer’s ERP system. The buyer can then interface directly with the payment network to issue the virtual card number itself. In addition to improving efficiency, embedded finance also accords more control to buyers by giving them full insight into all the virtual card data in real time. It is still novel — even anomalous — for buyers to act as issuers of commercial cards themselves, but that status is now changing; along with the status of the commercial payments they enable.”