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Virtual card payments

What you need to know about virtual credit card programs when it comes to insurance claims payments

Cash back rewards have been a staple of personal credit cards for decades. Did you know that many businesses also leverage credit card perks when making payments? Although the rewards differ between personal credit cards and commercial credit card, the benefits of paying by card are the same: less reliance on costly paper check payments. Another such benefit is the fact that companies can receive money back for paying their bills on time using a virtual credit card. A virtual credit card is a one-time use credit card number that is loaded with a pre-determined amount of money to pay a specific bill. When it comes time for a business to pay a vendor’s invoice, the vendor receives a credit card number through email or mail. The vendor then enters the number into their credit card terminal to receive their payment.

Why should a business consider paying a vendor with a virtual credit card? Virtual cards are used so that individual employees do not need a physical card on hand to make a payment, helping to reduce the payment fraud risks that come with owning plastic. Another reason to consider is that by using a virtual card, a company can receive “cash back” or revenue share opportunity that is non-existent with ACH and paper check payments. Imagine if your personal credit card program gave you a cash back percentage as a reward for every purchase you made. If your business could leverage the same perks as your personal credit card program, you’d more than likely want to have your business take advantage of the rewards as soon as possible.

If your business is looking to start adopting digital payment options, it’s tough not to look at the benefits of using a virtual card to pay vendors. For example, many insurance companies have started to move away from paying out claims by check due to the benefits that digital payments have for both insurers and claimants. It makes sense that they might also look to make claims payments to their vendors using a virtual credit card as well. Many vendors have modernized their payment processes and have become receptive to digital payment options and credit cards as an alternative to check payments. Insurance companies shouldn’t hesitate to ask vendors if they would be willing to accept a credit card payment. Many vendors are already accepting credit card payments and those who are not can continue to ask for checks.

When used correctly and accepted voluntarily, virtual credit cards can add value to the supplier/buyer relationship. Cash flow businesses that have credit card acceptance costs built into their pricing structures appreciate the (generally) faster turnaround time on payments versus the potential lag times seen in other traditional payment types. This is true for insurance claims as well. However, the story quickly changes when the payment becomes forced on a business that already has challenging profit margins.

Let’s explore the “opt in/opt out” approach that services providers use when getting virtual credit card programs off the ground.

Opt-In: The vendor has the option to opt-in (through a vendor enrollment campaign conducted by the virtual credit card service provider) to the program for accepting virtual credit card as payment. The virtual credit card service provider will ask the vendor if they would be willing to accept a virtual card from your business as a payment option, while also providing traditional payment methods should the vendor choose not to accept a virtual card. The vendor experience should be one that shows desire to partner and allow choice, while encouraging the acceptance of a virtual credit card.

Opt-Out: With an opt-out approach, there is no vendor enrollment campaign for a virtual credit card program. When your company is ready to make a payment, the vendor is either mailed/e-mailed a credit card number as payment along with instructions for completing the payment. If the vendor is unwilling or unable to take a credit card, they must manually contact either the payment company issuing the card number or your company issuing the payment. The vendor then must decline the card payment before they are sent a check for the invoice. Depending on the payment issuer, they may be able to enroll in an ACH payment as an alternative.

Which approach should your company select?

Issues begin to arise quickly with opt-out programs when it comes to the insurance claims industry. Where payments are normally issued monthly to a small set of vendors in traditional accounts payable departments, insurance claim departments have a significant number of vendors that are paid irregularly. Receiving a virtual card payment without warning may delay critically needed repair services that insureds rely on in their time of need. A delayed claim payment may cause property and casualty insurance carriers issues with state regulators due to complaints arising out of the perception that their vendors are being “forced” to take a credit card as payment. Complaints to state regulators from vendors like body shop associations or home repair organizations will also likely cause action. This may all lead to departments of insurance regulating the use of a virtual card as payment and opt-out programs in general.

As you consider virtual credit card services providers for your insurance claims process, evaluate how they approach vendor payments and the use of virtual credit cards. Opt-in programs provide a sense of partnership and freedom of choice to your vendors, your service provider, and your business. Your vendors may appreciate that you considered their needs as you make changes in how you issue payments on your claims. In the end, you will likely have the same amount of derived “cash back” as you would see from an opt-out program, just without all the headaches. If the insurance claims industry started leveraging the opt-in approach, then it may dissuade individual state departments of insurance from deciding which payments are appropriate for use, or even eliminating credit card payments all together.

Lenny Richileau is an insurance industry consultant for Commerce Bank. Having spent 25 years in the insurance industry, he works with carriers to help optimize their claim payment strategies and better the insurer-claimant experience.

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