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From cryptocurrency to DeFi to digital payments, all that we as consumers have come to expect about money is changing. This, of course, isn’t the first time such a transition has occurred. Though none of us recall, there was a time when moving to paper currency was considered controversial.
“Mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control…”
– Andrew Jackson
In fact, the lameduck poster boy for the twenty-dollar bill, Andrew Jackson, was a staunch opponent of the shift to paper currency. But, as we’ve seen, the shift to paper currency was not the final stop in our long history of abstracting monetary value.
Digital – and the capabilities and risks it brings – enables the next wave of currency.
Digital innovation has already changed the ways we use credit cards, debit cards, and any other card that stores value or enables commerce.
Many of us have been using services like Apple Pay for years, and while there was some initial hesitation about the security of storing such information on the phone, as security of our phones has improved and continues to improve, most are now willing to accept the risk. 82% of Americans already use digital payments, but this is just one phase of the shift to digital cards.
Another emerging aspect of the digitization of cards is the virtual card.
A virtual card, in theory, is much like a normal credit card except there isn’t a physical card to carry around. It exists only in the digital form. In practice, they tend to be different in another, more material way. They are often created for a single use with the borrower/holder of the card requesting a specific amount for the card.
Looking at the quote from Andrew Jackson, you could probably replace “paper currency” with “digital payments” today and the sentiment would still hold true. While mobile payments raised security concerns in their nascency, virtual cards can actually protect against fraud because they do not expose a user’s credit card number, but instead use a randomly-generated number to issue a specific amount of credit.
With over $28 billion in losses to online payment fraud globally in 2021, virtual cards will become an important tool in the arsenal of payment providers to combat this.
What follows is an overview of how virtual cards are most commonly used today, where some of their pain points lie, and what we think the future of virtual cards holds.
A 2021 study from Juniper Research projects that the global value of virtual card transactions will reach $6.8 trillion in 2026, increasing by 370% over the next 4 years. The vast majority of these dollars are B2B payments, accounting for 80% of the total value of virtual card payments.
This makes sense – businesses loaning and paying money to one another are generally dealing in larger transactions than the typical consumer. It’s this divergence between B2B and B2C value that has centered the focus of investment and technology on B2B virtual card transactions.
But the value of the transaction isn’t the whole story – the transaction volume of virtual card B2B payments makes up less than 5% of all transactions, as B2B sales occur markedly less frequently than B2C.
While the value of the transaction may be smaller, at least 95% of virtual cards generated are for consumer use – so this experience should flow seamlessly to meet the high expectations for consumer payments (think the “Buy Now” button on Amazon or an auto-filled Apple Pay purchase). And it should maintain the security that virtual cards can support.
This model of creating a virtual card for a set amount for a consumer purchase has become popular with Buy Now Pay Later (BNPL) services as a way for BNPL providers to expand their reach. Not every store will have a particular BNPL service like Klarna or Affirm integrated into their checkout but they all take credit cards. The BNPL providers, as a part of a strategy for creating loyalty, are enabling consumers to create one-time use cards that can (or, as we’ll see, should be able to) work with any checkout.
On its face, the way the virtual card is offered seems to make a lot of sense. As a consumer, I go through the process of purchasing a product online – let’s say it’s a new pair of Air Jordans. When I get to the checkout, I see that Nike doesn’t offer a BNPL option or the option that is provided isn’t one that I have an account with – in this case, I already have an account with Affirm, but Nike only offers Klarna. Seeing this, I pop into my Affirm account and request a one-time loan of $175. My BNPL provider asks me if I want to add additional funds for shipping and tax and reassures me that I’ll only be on the hook for the actual amount due at checkout.
So far this flow seems just fine. Where it tends to fall apart is in the next step – actually inputting the details of the card into checkout. In talking with consumers, we’ve heard of countless issues. The most troubling being information simply not being included on the virtual card – like a PIN/security code – or a card simply not being accepted, even with all the pertinent information. Some providers offer a button to copy the card number and paste it into the purchase field, but this doesn't include all the fields necessary to complete the transaction.
The most common complaint, however, is simply the manual nature of the process. As consumers, we’ve come to expect seamless digital experiences. The virtual card requires that I flip from one app to another – since both the card creation and shopping are likely to take place in-app or at least on a mobile device – remembering bits of the card number and other details to input them manually.
The end result of this clumsy experience is that some consumers simply won’t try it again. Instead, they’ll opt for having multiple BNPL accounts rather than developing the loyalty the virtual card is designed to support. Business clients that provide virtual cards to dispersed contract workers or traveling employees risk similar dissatisfaction if the issuing bank lacks the infrastructure to support mobile wallet integration for virtual cards.
The problem with the virtual card is that it isn’t yet easy enough to redeem when it’s not associated with a specific merchant. There was a time when credit cards could be processed by handing your card to someone who would take an imprint of the card which would later be verified. Consumer virtual cards feel like they are in a similar stage of maturity. It’s all a little too manual for a digital tool.
The downside of the virtual card process hasn’t yet stopped their usage from expanding. While some of the consumers we have talked to have said they won’t go back to virtual cards, others feel they are worth the hassle. The projected CAGR for the virtual card industry is around 22% in the next three years. What all want to see, however, is innovation in the space to make the cards more user-friendly and accessible in more places.
To keep up with demand from consumers, legacy financial services providers have continued to add innovative payment options to their existing infrastructure, including virtual cards. One well-executed example is Capital One’s Eno virtual assistant, which allows customers to pay with a virtual card directly from their browser extension. At checkout, Eno creates a merchant-specific virtual card for you that is linked to your credit card account – which saves users the hassle of manually translating data between two interfaces.
Today, the experience is typically relegated to ecommerce – but consumers want to have this same type of experience enabled when they are getting ready to make a large purchase at a physical retailer. Certainly there are hardware challenges that need to be addressed for this to work but most of the pieces are there just waiting to be connected.
Beyond rethinking the redemption experience, there will also be a push to rethink the use cases for virtual cards – not only for consumers, but for business payments as well. For consumers, virtual cards are expanding to things like personal loans. Outside of sending credit to buyers and suppliers, businesses have also been using virtual cards for distributed payments like employee expense management as well as various types of disbursements. Mastercard, for example, just launched a partnership with One Inc. to fulfill insurance claims through virtual cards.
Although the example we provided above of the consumer purchasing Air Jordans was wrought with friction, BNPL providers would likely be thrilled by the prospect of a user that is loyal enough to a provider to switch between their shopping experience to request a virtual card in a different application. Research from MacQuarie tells us this is rarely the case – users are far more loyal to the merchant brands than the BNPL brand. In fact, 70% of consumers would rather switch BNPL providers than switch retailers to use the same provider. In a space where there is limited loyalty today, the payment provider that cuts out friction and builds a more integrated virtual card experience will likely make big loyalty gains.
The same will also likely be true in B2B. While business users today likely only have the choice to use virtual cards from the provider their company has selected, as the consumer experience becomes more seamless, churn in B2B is likely if providers can’t keep up.
So far we’ve just scratched the surface of what’s possible. But for virtual cards to reach their potential, the core experience first needs to be refined and made as seamless as users, both businesses and consumers, expect.
From concept design to technical integration, WillowTree has helped some of the world’s leading financial services providers launch frictionless payments solutions. We’ve built end-to-end payment experiences including core infrastructure, merchant and user-facing front ends, and of course, virtual card platforms.
Wherever you are on your journey, we’d love to help.
UX Audit of Virtual Card Experience (2 weeks)
Looking for increased adoption and reduced friction in your current experience? Our expert UX designers can audit the flow and provide recommendations for UI heuristics, visual direction, and the golden path.
Technical Assessment of Payment Integrations (4 weeks)
If you want to integrate new payment options into your digital experience, our solutions architects can assess your technical infrastructure and guide you through options across the spectrum of build, buy, or partner.
Virtual Card Landscape Deep Dive (2 weeks)
Want to know more about the virtual card experiences being offered by competitor banks and payment companies? Our strategists will compile an in-depth competitive analysis.
Concept Design and RITE Testing (8-12 weeks)
Ready to design and iterate on your virtual card experience flow? We offer cross-functional team engagements that include strategy, design, engineering and user research to create a solution that is fully centered on the user and feasible within your current technical architecture.
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