By Ed Sherrington, Head of Product, Banking at Codat

Cash and checks have long dominated B2B payments in the US. Despite high costs and long processing times, the transition to faster & cheaper means of payment has been long and slow.

But the tides are turning. AFP’s 2022 Digital Payments Survey reported that checks and cash make up 33% of all business-to-business (B2B) payments in the U.S. and Canada. That’s a significant drop from 51% in 2016, and an all-time low since AFP began tracking this data in 2004. At the same time, 33% of B2B payments still represent over $9 trillion, and therefore a huge opportunity for those that can capitalize on the continued shift.

What will fill the void? As a follower of industry news, you may point to the launch of the Federal Reserve’s instant payment method FedNow, which promises to revolutionize the payment process by facilitating real-time transactions, not unlike The Clearing House’s real-time payments (RTP). However, FedNow’s success hinges on its widespread adoption by banks, a critical step towards offering a viable alternative to the entrenched practices of checks and Automated Clearing House (ACH) payments.

While early providers of the FedNow service are planning to receive real-time payments, few plan to adopt “send” capabilities, according to Forbes. As such, despite the excitement around FedNow and RTP, widespread adoption of it is unlikely to come any time soon.

Meanwhile, there has been a noticeable uptick in B2B card payments, a trend poised for acceleration. The catalyst? The growing adoption of virtual cards.

Virtual card is the new king – here’s why

There are more than a few reasons businesses are ditching traditional payment methods for this more modern alternative.

Let’s start with one of the most important benefits of virtual cards over cash, checks and plastic cards – the access to credit lines.

Virtual cards provide easy access to credit lines, allowing businesses to improve their working capital position while also paying suppliers sooner. Quicker settlement balances the higher acceptance cost of card payments for suppliers, while access to credit provides paths to growth for businesses that aren’t available with checks and cash.

Businesses have always had physical credit cards linked to a credit line, but it isn’t practical to give credit card details to all of their suppliers. Virtual cards are suitable for B2B payments because, although it’s essentially the same credit line under the hood, each supplier receives unique details, so suppliers can charge only what they are owed, simplifying the process for finance teams.

There’s also the incredibly important issue of security. Check and ACH fraud trends are rising. In fact, checks are the most targeted payment method for fraud within B2B payments, according to NACHA. A 2023 report by AFP shows that organizations reporting incidents of ACH or check payments fraud stood at over 65% at the end of 2022.

The issue of fraud only worsens with RTP, as we’ve seen in other countries like the U.K., which saw a significant jump in fraud cases following its Faster Payments launch.

On the flip side, virtual cards are issued with a unique 16-digit card number that expires when the payment is completed or when the allocated time frame is reached, creating a significantly lower risk of potential fraud and misuse.

Beyond the financial mechanics, virtual cards can enrich the B2B payment experience with added perks, like rewards, rebates, and expense management tools, adding layers of value that extend beyond the transaction itself. This holistic approach underscores the growing appeal of virtual cards in the B2B domain.

So, what’s the catch?

Some will argue that acceptance fees are blocking more widespread adoption of virtual cards. But as awareness of the benefits increase, and with the prospect of lower fees driven by the bipartisan Durbin-Marshall Credit Card Competition Act, it is an argument that is getting weaker.

If the act gets signed into law, it could save merchants and their customers at least $15 billion a year, says Doug Kantor, general counsel of the National Association of Convenience Stores. The Senators leading the bill also sent a letter to Visa and Mastercard last fall calling for a  reversal of plans to increase credit card swipe fees on merchants and consumers, which would cost American businesses and merchants an additional $502 million annually.

The way forward for B2B payments

There’s a phenomenon in commercial banking where new, innovative payment methods are introduced while the ones already in play are not being used to the fullest extent – why?

B2B payments are often intertwined with complicated workflows, and changing processes can be difficult.

But ultimately, we need to drive B2B spending out of the dark ages and onto more convenient and secure methods.

As we stand at the crossroads of payment innovation, it’s tempting to chase the allure of shiny new tech, like FedNow or RTP. But perhaps the answer is closer at hand?

Virtual cards offer a viable, attractive option for businesses & their suppliers. They may just be what brings America’s B2B payments up to par with the rest of the world.