The credit card has come a long way since Forrest and Dorothea Parry invented in 1960. Forrest was an IBM engineer working on bar code systems and optical character readers when he came up with the idea of a plastic card with data stored on magnetic stripe. He tried to stick the tape to the card, but the glue destroyed the data. His wife Dorothea suggested ironing it. His idea worked, and the data storage, reading, transmission and authentication system that IBM developed around the magnetic stripe card revolutionized payments.
The days of that simple plastic card are behind us. Most plastic cards today use chips, which can store and transmit more data, and also provide the ability to program custom features into the card. In the world of B2B payments, virtual cards now transmit money and data without any plastic.
Evolution of virtual cards
With the Rise of third-party APIs and microservices, companies building digital businesses can embed custom virtual card functionality directly into their business processes. Think of it as a virtual card as a service. I spent 15 years contributing to the development of this technology, starting in the mid-2000s.
At the time, what we were building was to help Online Travel Agencies (OTAs) and Travel Management Companies (TMCs) better serve hotels. During the Great Recession, business or leisure travel collapsed. With business plummeting, OTAs and TMCs were looking for ways to increase efficiency and reduce costs, both for themselves and for the hotels they served.
Their business model, which was relatively new at the time, was to collect and aggregate room inventory and price data from global distribution systems (GDS) such as Saber, Amadeus and Travelport. They would then publish the listings to a user-friendly platform where travelers could book rooms directly through an API integration with GDS, instead of having to call a group of hotels on the phone and book directly.
In return for acting as the marketing and sales arms for hotels, OTAs would earn a commission or assess fees on room nights. For example, suppose you book a hotel room through an OTA for $225. The OTA charges your card $225 through its acquirer. They are the merchant in this scenario, so on your credit card statement you will see a charge from the OTA or TMC for $225.
You have completed the transaction, but the OTA still has to pay the hotel the agreed amount. At the time, most OTAs did this part offline. Hotels could send them an itemized bill weekly or monthly, and they would manually reconcile it with the inventory sold and send a check. It was costly and inefficient for all parties.
Then as now, most travelers paid for their hotel stays with credit cards, so hotel accounts receivable processes were and still are designed around credit cards. When you give them a credit card for a specific hotel room, their AR system associates that card with a hotel stay. And when the transaction is complete, it automatically reconciles these nights. The final accounting is very clean.
OTAs were looking to find a credit card issuer and credit card processor that could use then-nascent virtual card technology to digitize the process and transmit funds and credentials to hotel accounts receivable departments in near real time, without the hotel having to charge the OTA separately.
We have built a technology stack to be able to issue unique virtual card numbers one at a time, at the time the traveler has booked the room. The sale of $225 hotel rooms triggers the OTA to call a virtual card API and request a virtual card.
The issuer sends the OTA a unique 16-digit MasterCard number, complete with expiration date, CVC, and built-in controls that allow it to be used only for an agreed amount at merchant category code hotels. The OTA then transmits this unique card number to the GDS, which contains all the data associated with your reservation, and transmits the card number and data to the hotel.
The hotel’s payment system charges this card the same way it would if the 16 digits were engraved on plastic, and the hotel’s authorization request is sent back to the payment processing platform. credit cards for authorization.
The validity of the card number, available credit and merchant category code are confirmed. The transaction is cleared through the MasterCard network overnight. The hotel receives the funds immediately in its account. The transaction is published on the processing platform and the OTA associated with the booking sees the expected charges on their invoice.
The advantage of the virtual card
This is all computer-to-computer, and it happens in seconds – much faster than you can read this explanation about it.
It didn’t take long for other industries to realize the benefits of this system: immediate and secure payment with customizable controls to prevent fraud; ease of reconciliation and ability to charge back in the event of a dispute. Claims management software vendors were among the first to integrate virtual cards into their processes.
Once an auto insurance claim is approved, for example, you need a mechanism to pay the auto repair shop that has contracted with the insurance company and match it to the right customer and in the correct order of work. Auto repair businesses also receive a lot of credit card payments, so virtual cards fit right into their AR workflow.
In fact, any digital business that needs to integrate unbilled point-of-sale payment capabilities into their business process can leverage virtual card as a service. Examples include delivery apps, expense management, and reimbursements for air passengers in distress.
That’s the beauty of APIs and microservices. Developers and product managers can focus on core business functionality and connect to service offerings for features like website search, location data, and payment connectivity. It makes no sense to build these things themselves when they can integrate them as a service from a vendor who has already perfected it.
In the area of payments, working with a complete virtual card as a service provider, which is also an issuer, can even enhance its own offers with additional features such as conditions and financing.
The humble plastic credit card with the magnetic stripe changed the way we pay. Although people still have plastic in their wallets, it’s been a long time since plastic was a practical way to pay for something. Today’s credit cards are sophisticated payment tools that carry richer data and offer a wider range of functionality. In a data-driven world, the ability to integrate all of this into a wide variety of business processes is essential to helping digital businesses scale and thrive.
About the Author
Keith Axelsen is Vice President of Commercial Product Management at corpay, a FLEETCOR company. He has 20 years of experience in the corporate payments and commercial card industry.