Can Virtual Cards Make Dumb Payments, Smart?

Virtual cards are increasing in popularity for a variety of reasons – but one in particular that many both underestimate and overlook. Eric Mettemeyer, CEO of Store Financial, tells MPD CEO Karen Webster that is because they make “dumb payments, smart.” He explains here.

KW: As virtual cards continue to gain traction in a variety of sectors, such as travel, health care, and even some other segments in the B2B space, there are still these pesky paper checks hanging around – what gives?

EM: There are certainly lots of reasons for that, but I will concentrate on a couple of big ones we see consistently out in the marketplace. The first reason is the resource constraint within accounts payable organizations and the second reason has to do with the disincentives provided by banks.

It is rare to see an AP organization with access to additional headcount resources, but additional headcount resources are needed in order for the organization to become better performing or functioning because moving away from paper checks requires incremental manual labor. If an organization is going to move from checks to ACH or wire, it will require going out and obtaining the bank account information of each of their vendors. If moving to virtual cards, an organization will have to go out and obtain the email addresses of vendors. Most organizations’ master vendor files today do not contain this information, resulting in an incremental effort to get there. That is a constraint organizations face that we need to address.

With respect to the disincentives provided by banks, an AP organization is often trapped into using a bank’s treasury services because of the exclusivity clauses that frequently accompany the bank’s lines of credit. Generally, the banks also offer low-value alternatives to checks making their main form of electronic payment an ACH, which we view as a very high cost-to-service payment method. This is due to the efforts involved around managing bank account information and the enormous number of calls that come back to an AP organization from vendors, such as “What is this payment for?,” “Can you track down my invoice? It is not for the right amount,” or “’I don’t have enough information to interpret this payment, I need help.”

Obviously banks offer wires but they are a very high-cost payment method. Banks consistently push a purchasing card on AP organizations but it is simply the wrong product with which to pay suppliers, as it sits outside of the payment approval process and the procurement process, causing more trouble than help.

At Store Financial, we cannot free an AP organization from a poorly negotiated bank line of credit, but outside of that we can solve for the resource constraints. At no cost, we provide the AP organizations a supplier enrollment program, where we enroll the suppliers in the new higher-value method of payment while providing an alternative payment method to checks via our low-cost virtual cards.

Store Financial is addressing as much as we can, but I do see AP organizations attempting to do things themselves without enough resources and the banks being in the way as two very significant constraints to progress in the battle against checks.

KW: The obstacles you describe are obviously very real and tough to overcome, particularly when it is not the AP department’s decision to dump a large banking relationship. Those guys are merely enabling payments because of a decision others have made higher up in the food chain – so do virtual cards go far enough to help solve those problems or overcome those hurdles?

EM: Well not in and of themselves, it is a continuous education process that we are promoting with the other constituents within a finance organization. How are we getting the message out to CFOs, treasurers and controllers? How are we helping and arming the AP organization with information to bubble up? But it is not always just about virtual cards or the payment method; focus should also fall on payment process and all of the hidden costs within those. The more we can educate an organization, the more empowered they will feel to become strategic and do something about it.

KW: Where are you seeing a lot of demand or success stories in enabling virtual card programs to make a difference and act in a more strategic fashion innovating both the process and the method of payment? Are there particular sectors or types of businesses?

EM: There is certainly more activity in health care than anything else. There is just so much attention on that industry right now surrounding process improvement and getting costs down, and there is a lot of money being thrown at it and a lot of mind share being pushed that way. Depending on the vertical, here and there we will find an energized person within the organization who wants to see change and force change. Those individuals are stepping up to the plate, they understand what is going on because they have taught themselves the entire picture. In a lot of cases they are using rebates from virtual card programs to fund additional headcount in their organization, which allows them to go out and really improve processes.

This can mean getting rid of paper invoice processing, putting in digital imaging packages, or getting involved in procure-to-pay programs, this is where they really begin driving value through the entire process chain. However, these types of initiatives require funding and mind share. A great way for an AP organization to achieve this is through pursuing virtual cards, generating a rebate and using that rebate to fund the necessary activities. It can be done, it just requires the right person within an organization who has the drive, and they are off to the races.

KW: What sales pitch do these motivated, empowered players within the organizations use to make their case? Is it about better control, more secure transacting, making suppliers happier by offering a better process, saving money? What seems to be the most compelling case these players use within their organizations to get things moving?

EM: Efficiency is the key word. A CFO or controller is going to look down on the AP process as probably being the most inefficient within the overall finance function. If these players can go in and say the AP process can become much more efficient in terms of the expense line, the ability to process payments and invoices, while also being in a position to take advantage of working capital and early pay discounts, these things will really get the ear of the decision-makers. The CFOs and controllers care about inefficiency and worry if their cost of capital and working capital are not being used as efficiently as possible. Those are precious resources, which is what a person will need to appeal to. These programs deliver real results in that area once they are implemented.

KW: In the hospitality and travel space, virtual cards are increasing in popularity with hotels even taking some steps to begin to distinguish virtual cards from traditional cards. Why is that a big deal?

EM: We are not experts in the hotel vertical but I can see two immediate and significant benefits that are definitely a big deal. The first is that many businesses are increasing the value of a virtual card payment within their vertical, specifically within their hotel payment vertical because the specification is adding more information to payments. We always talk about dumb payments, because there are a lot of dumb payments out where the payment itself goes but it has very little information with it. In contrast, these businesses are making the payment smarter by attaching certain information to it, which allows the hotel to be more efficient, reduce duplicate payments, cut down on the number of errors, and increase the level of automation, all due to the information tied on with the payment. It just makes the payment itself that much more valuable, which is a great thing for that payment vertical.

The second benefit is that anytime there is a standard in an area where processes are trying to be improved, it is good thing because it keeps the IP trolls at bay. Patent trolling just clogs up the system and impedes progress with payment process improvements. You cannot patent a standard, which makes it great to have standards and it also allows the vertical to make progress faster.

KW: There are a lot of options in the market for AP departments and CFOs to contemplate when it comes to virtual card programs. What makes Store Financial different? What kind of special sauce do you provide? Is the characterization of smart payments versus dumb payments part of the mix you deliver when you talk about virtual cards to the businesses you serve?

EM: Yes, it is. Certainly we have pages of differentiators and value propositions against the other programs in the market. But in the end it only really comes down to one thing, and that is how much of an organization’s spend is being converted from a low-value payment method to a higher-value payment method, in this case the virtual card. The more spend that is converted mean more cost is taken out, which allows a higher rebate to be provided back to the customer therefore creating the highest overall value.

We designed our program to convert the most spend. We make a living out of going in and cleaning up after failed bank programs, in which they offer the payment method but they do not provide any meaningful way to truly convert spend. If at least 30 percent of an organization’s spend has not been converted to virtual cards, they need to call Store Financial because we can get them there. It is our ultimate value proposition in the marketplace.

KW: Explain what you mean by “convert spend.” 

EM: For example, an AP organization has a $100 million in spend to suppliers and they are paying half of that spend via check, 40 percent via ACH and the last 10 percent in various other ways, such as wires or purchasing cards. Converting at least 30 percent of that $100 million to a virtual card method would be Store Financial’s goal.

It is a benchmark discussed internally, as well as throughout our industry, which is achievable but rarely happens through the programs an organization may have gone through in the past — usually due to the fact that these programs were not designed well and lacked the ability to produce lower cost cards for more supplier acceptance.

In some cases it may not be an AP organization’s spend but it could be an insurance company’s client payments, which may go well beyond the 30 percent. In other cases, reaching the 30 percent is a challenge. It is an average benchmark for organizations to look at themselves as a measure of how well they are doing versus where they could be. If an organization does not have 30 percent of its spend on a virtual card program, there is a potential for underperformance.

KW: Based on that example, how do you begin to attack that? Are you looking at the existing payment method or are you looking at types of suppliers? How are you going in and actually starting to examine low value and converting it to high value?

EM: Well that is part of the special sauce, because it is custom every time. There is no one size fits all program. If we look at a particular buyer, which in this case has $100 million in spend, we look at a multitude of factors, including: types of suppliers, concentration of spend, size and number of suppliers, suppliers’ current payment methods, payment terms, type of excess working capital and the ability to offload some of that capital to work through offering early payment incentives for certain types of suppliers.

All of these factors must be taken into consideration to build out a custom program that will deliver the best results. For example, if a supplier has very thin margins an organization may not be able to convince them to pay with a card that may cost up to their margin percentage. A situation like this may have to be attacked differently or it may not be a part of the converted 30 percent at all.

It is important to segment suppliers into different groups in order to deliver the appropriate messaging and offers that will make it compelling enough for them to proceed with the virtual card. The segmentation and custom campaign used is a lot of the secret sauce banks do not have. Many do not have the expertise or the desire to perform that service, and a lot of times they will outsource some of that function to Visa, MasterCard or another third party. The companies may go after the low-hanging fruit but they will never reach that 30 percent because their program is not designed for it. Instead, it may move over just 5 to 10 percent before moving on to the next deal.

KW: Do you worry at all about the efforts around same-day ACH, which will begin rolling out in some way next fall, having the potential to thwart some of the advantages of virtual cards? Especially since, as designed, it will create an ubiquitous network where banks can move transfer, authorize and settle funds in a way they were not able to do before.

EM: If they are able to do it, it will still not be a concern. Certainly our only solution is not just virtual cards, we understand in certain situations the alternative payment methods have more value than others. It is about fitting the right one into the right box, but it is more about a smart payment versus a dumb payment. Just because it may be faster does not make it smarter, which is where the value really gets added.

Looking back over my 15 years of being in the payment space, it has always been about making both the sender and the receiver smarter. If you are, then you are adding value. There is a certainly a benefit to real-time ACH and certain payment flows will receive a lot of value out of that, but that does not take away from a very significant play for smart payments and for virtual card payments.

Eric Mettemeyer
CEO, Store Financial

Eric is the CEO of Store Financial, bringing eleven years of experience in the payments industry. His initial experience in the industry was the management of more than ten acquisitions of prepaid, card processing and money transfer companies in Europe and the Americas for Euronet Worldwide. He then subsequently served as Managing Director of epay Americas and Asia, a division of Euronet Worldwide. His previous job experience also includes International Tax, Financial Planning and Treasurer roles for companies including Arthur Andersen, Sprint and Euronet. He received his undergraduate degree in Accounting from the University of Iowa and his MBA from Thunderbird School of Global Management.