Will RTP and FedNow Make Virtual Cards Obsolete in AP?

Whenever new payment methods come to market, the ecosphere comes alive with predictions of the demise of open network card products. During the past couple of decades, everything from same-day ACH to crypto has been heralded as the downfall of card. Now with two real-time payment mechanisms, RTP and FedNOW, hitting the market, those calls are coming out again – this time, it’s specifically the multimillion-dollar accounts payable industry in the crosshairs.

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The AP segment has been growing by leaps and bounds, with the growth being propelled by the emergence of virtual cards for B2B payments. Estimates vary on exactly where the industry will sit by the end of the decade, but everyone is consistent on the growth: ~12% CAGR through 2030. This should come as no surprise. The value prop is a strong one: eliminate the cost of sending paper checks and maybe even get a little share of the card interchange in cash back.

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The big knock on card has always been the expense of processing the payment. In AP, whether it’s insurance payments to doctors or vendor payments for business, many providers bemoan the 2.95%+ they have to eat to get paid. Now, many are looking at these new payment methods as a possible way to bring down the cost of receiving B2B payments, and that is what’s driving the question of the future of card.

The Cost of Payment

When you look at the cost of payments, it’s easy to see how card takes a hit when you compare the nickels and dimes of ACH, RTP, and FedNOW (when it launches in earnest) to the higher cost of card. But if you look at the baseline cost of card, it’s in the same ballpark as the others. The networks charge pennies plus a very small fraction of a percent of the cost of a purchase to acquire and settle each transaction. That’s a far cry from 3%!

What Makes Up the Difference

The delta between the minuscule amount the networks make and what the merchants get charged is taken up by a number of players in the value chain:

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Card Acquirers – Essentially, merchant acquirers are technology providers that enable merchants to seamlessly connect payer to payee.

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‍Banks – All cards are issued by a bank, and the banks need to make some revenue for providing access to the card networks and for settling funds.

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Card Issuers/Program Managers – in many cases, banks issue their own cards, but in others, a Card Issuer/Program Manager is responsible for marketing, compliance, risk management, customer service and other functions. In both cases, there is a cost to doing this that has to be made up with revenue. The entity that performs this function is also typically the one responsible for fraud losses.

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Card Issuing Processor – a technology company needs to perform the nuts-and-bolts transaction processing, for card that is the Issuing Processor.

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Each of these provides services necessary for commerce, and each gets compensated, as they should, for them. One of the fallacies in the belief that modern, faster payments will lower the cost of payment vs. card is that these same value providers won’t need to be there.

Cards are Easy, Safe, and Ubiquitous

Payment cards have been around for more than half a century, and as of 2022, according to a report by the Federal Reserve, more than 94% of the adult population in the US has either a credit or debit card. Consumers are comfortable using cards, and that habit has translated to business as well. People and businesses are used to giving and taking cards for payment.

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By contrast, people and businesses are far less comfortable providing and taking bank account information. This is a major inhibitor to rolling out payment methods that rely on bank account numbers being shared. And, while there are providers like Plaid that provide access to account numbers without the need for the recipient capturing the data, those providers represent yet another player in the value chain. Additionally, this doesn’t solve for use cases where a payer calls a payee and provides a card number over the phone.

Are Cards Going Away Any Time Soon?

The short answer is no. There will be startups that will try to take advantage of features of more modern, real-time payments, but it will take quite a while for the necessary infrastructure to get built and put in place to supplant use cases where card dominates today. And when the primary driver for change is cost, it’s hard to see an ecosystem 50 years in the making cede much ground solely based on this factor—especially when any of these newer payment mechanisms needs an ecosystem of their own.

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At Qolo, we’re strong believers in the future of card—we’ve made massive investments in it—but we enable our clients to future-proof their payments by providing both card and other payment methods at the infrastructure level.

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