BID® Daily Newsletter
Jun 14, 2021

BID® Daily Newsletter

Jun 14, 2021

Virtual Cards Are Here – What Should You Know?

Summary: Big banks such as Citibank, Bank of America, and Capital One have started offering virtual payment cards. Community financial institutions also have started dipping their toes in the water. We explore how virtual payment cards work, and the benefits of fraud protection and reduced costs. We delve into an example of a community bank offering virtual payment cards too.

It is no surprise to anyone that e-commerce grew last year. Still, to see that it increased by 44% in 2020 YoY is pretty amazing, with online sales representing over 21% of total retail sales.

As online commerce continues, several financial institutions are taking the opportunity to make their payment cards “virtual.” Since community financial institutions (CFIs) are finding ways to leverage new technologies for the benefit of their customers, we wanted to provide you with an update on virtual payment cards.
What are virtual payment cards? Virtual cards are computer-generated digital credit or debit cards issued by financial institutions, as opposed to more traditional tangible debit or credit cards. These virtual payment cards have one-time use numbers, yet are linked to a credit card account, and enable the cardholder to make purchases online without inputting their actual credit card number. Customers can apply for a virtual payments card directly from their bank, or through a third party.
Benefits
Fraud protection. Since virtual cards are randomly generated 16-digit card numbers and only exist online, it is more difficult to commit fraud on these cards, even though they are accepted where traditional plastic payment cards are accepted. Even if a virtual card is breached, since it is only valid for one transaction, the damage will be smaller and the credit card account won’t need to be closed, and another one opened. Since card fraud losses are on track to top $35.67B by 2023, this is a big deal.
Tailored usage. Financial institutions have also been flexing their ability to tailor these virtual cards. Users may have a digital payments card that is disabled after only one use. In addition, by storing these digital cards in a mobile wallet, virtual payment cards can be used in brick-and-mortar storefronts. They also provide the customer with a way to manage and limit spending.
Reduced cost. Since virtual cards don’t need to be issued, financial institutions save on card production and shipping costs. Mail fraud costs are nonexistent as they are not shipped by mail. Big banks have been excited about virtual card issuance for several years. Citigroup, Bank of America, and Capital One have all been offering virtual payment cards for a while. With online shopping getting an even bigger boost this past year and continuing concerns about the hygiene of plastic cards, more CFIs may want to consider partnering with fintech vendors to issue virtual credit and debit cards too.
 
SMB customers want them. These virtual cards are not only appealing to consumers either. They are considered particularly appealing to small and mid-sized business customers (SMBs). One example is the recent announcement by a CO-based CFI that it offers business customers a virtual payment card option. In addition, they offer SMBsthe ability to offer virtual cards to their employees too, for one-time purchases or to keep budgets under control.
Potential customer disadvantages. Not everything is rosy. There are some potential disadvantages for customers. Some virtual cardholders claim that this form of payment can create a certain level of difficulty when they attempt to make returns since the card number is disposable. Also, virtual cards are not a good candidate for any ongoing payments or subscriptions due to the temporary nature. 
Virtual cards may be worth exploring by CFIs for their customers. They are still quite new, but their adoption could be expanding, as with all digital payments. Keep an eye on their development and talk to your customers, as you determine if this is an option you want to pursue. 
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