What are virtual cards and how it works?

 Virtual cards, also known as disposable or temporary credit cards, are gaining popularity as a payment method. They provide an extra layer of security and control over spending. But how exactly do they work? 

This article will explain what virtual cards are, their key features and benefits, how they differ from physical cards, and how various providers are using them.

What are Virtual Cards?

A virtual card is a digital, temporary credit card number that can be used for online purchases. Unlike regular credit cards, virtual card numbers are generated on-demand and tied to specific transactions. Once a transaction goes through, the card number expires and cannot be used again. 

Virtual prepaid cards are linked to your real credit card and pull funds from your available balance. But the temporary card number shields your actual card information. This prevents the virtual card data from being stored or reused by merchants.

Some key features of virtual cards:

• Digitally generated card number, expiration date, and security code

• Single-use or short-term validity 

• Linked to your real credit or debit card

• Provides an alias for online transactions

• Transactions appear on your normal card statement

Benefits of Virtual Cards

Virtual prepaid card solutions provide several benefits that make them appealing for online shopping:

Improved Security

The biggest benefit is enhanced security. Since merchants don't get your real card details, your information stays protected. Even if a merchant's site gets hacked, your actual card remains safe. Virtual cards reduce the risk of data breaches and phishing attempts.

Better Control 

Virtual prepaid cards let you set spending limits and define usage rules. You can create a virtual card with limits for a single transaction or merchant. This control helps reduce overspending and unauthorized use.

Convenient

Getting a virtual card is fast and convenient through issuers' mobile apps. Once created, the card can be used instantly for online purchases without having to wait for a plastic card.

Flexible

You can generate multiple virtual cards for different purposes - one for recurring bills, another for a short-term purchase. Creating task-specific cards provides segmentation and control over spending.

How Do Virtual Cards Work? 

When you need to make an online purchase, here is the typical process:

1. Request virtual card: Using your card issuer's website or app, request a virtual card. Define your preferences like spending limit and validity time frame.

2. Receive virtual card: A temporary virtual card number is instantly generated along with other card details including CVV and expiration date. This info can be auto-filled at checkout.

3. Make a purchase: Enter the virtual card details at the merchant site to complete your purchase. The transaction goes through just like a regular card.

4. Virtual card expires: Once the transaction is approved, the virtual card expires immediately or within the allotted time frame. It cannot be reused.

5. Transaction billed: The purchase amount gets billed to your real account like any other transaction.

Once you are done using the virtual card, you don't have to proactively cancel it. The card provider voids the number so it cannot be used again.

Some providers even automate virtual card generation for recurring transactions like subscriptions. A new disposable card is created each billing cycle without any action needed on your part.

Differences from Physical Cards

While virtual prepaid cards act like credit or debit cards, there are some key differences:

• Digital only - no physical plastic card issued

• Temporary, dynamically generated numbers 

• Limited validity and spending power 

• Virtual card number cannot be reused

• Provides an alias protecting your actual card information

• Offers more control over spending and security

Use Cases and Providers

Virtual cards are used in a few key scenarios:  

• Online shopping at unfamiliar sites

• Subscription services to limit potential exposure 

• Corporate expenses for controlled employee spending  

• Teen or family member card with predefined limits

• Verifying accounts on sharing economy platforms like Airbnb

Many credit card companies now offer virtual card capabilities including Capital One, Citi, Bank of America, and American Express. Specialized fintechs like Privacy.com and Swipe also provide virtual prepaid card solutions. Even technology firms like Apple offer virtual numbers through their digital wallets.

Prepaid debit card providers are embracing virtual card functionality too. Companies like Green Dot, Netspend, and Bluebird allow cardholders to generate disposable numbers for online transactions. This brings virtual card benefits like security and control to prepaid products.

Future Outlook  

Virtual cards solve key pain points around security and overspending for online transactions. By issuing digital cards on-demand, providers reduce friction, increase confidence, and give consumers more control. This aligns neatly with the broader industry shift toward instant, embedded finance, and smarter digital payments.

We expect massive growth as virtual cards get integrated directly into our favorite apps and services. Consumers will be able to generate temporary, tailored cards right where they are shopping without switching between apps and sites. Smaller transaction limits will further constrain overspending.    

With concerns around data privacy rising, virtual cards avoid giving out actual card numbers and offer peace of mind. For merchants, disposable cards mean fewer credentials to secure, reducing liability from breaches. By enhancing security and control on both sides, innovative virtual card solutions will play a key role in the future of digital payments and commerce.