Virtual cards: the secret sauce to successful drop shipping

Retail is a tough business, offline and online

Retail faces increasing business headwinds. Store closures regularly headline the financial news, and several major brands have already announced hundreds of planned store closures for the coming year. As sales have continued to move online, e-commerce retailers of all sizes vie for the same consumers and dollars. In the hyper-competitive world of digital commerce, retailers strive to optimize their operations to focus their capital and attention on the core business of reaching consumers and building a long-term relationship with their brand. One trend that has dominated the e-commerce world lately is dropshipping, which can yield substantial benefits for retailers…if done right.

The Case for Dropshipping

Dropshipping is an operational model for e-commerce retailers where retailers don’t carry any of the inventory they sell. Instead, after a sale occurs on their site, a retailer purchases from an inventory source behind the scenes (often another e-commerce retailer!) In this model, the inventory and shipping logistics are handled by that inventory source, also known as the ‘Dropshipper’.

In this model, the retailer can focus on tailoring the right products to sell, and creating a wonderful consumer experience for their shoppers while leaving some operational complexities of the business to others. It has become such a popular form of e-commerce that an estimated 23% of online sales this year will be delivered to customers via dropshipping.

What’s the Catch?

If it sounds too good to be true — it is. Though there are potential operational gains to be had from outsourcing inventory management and shipping logistics, doing so efficiently while maintaining a superior customer experience is difficult to pull off. With a dropshipping model, you typically end up swapping one set of operational complexities for another.

There are several operational challenges with dropshipping that fall into three general groups:

Order management: Most retailers who rely on dropshipping use suppliers who have e-commerce sites. Customers expect prices and inventory to be up-to-date which requires retailers to expediently pull that information from their suppliers through a robust integration.

Fulfillment: The challenges in fulfillment of orders are similar to the challenges of order management; though fulfillment is being handled by a third-party unbeknownst to the consumer, the retailer is expected to manage shipping expectations with their customer. Customers expect a delivery estimate and tracking details for independently tracking those packages in real time.

Payments: Often overlooked, supplier payments have historically been a pain point for back-office teams. There are a variety of payment mechanisms available, and the most common ones have many inherent challenges. Some require tight integrations with merchants, while others create large reconciliation challenges for back office operations. Employing the right payments strategy can actually alleviate many headaches for retailers.

Not All Payments Are Created Equal

It’s easy to underestimate the operational benefits that can come from optimizing the payments piece. Most of that comes from a lack of understanding of the various options available on the market and their respective tradeoffs. However, if done correctly, the right payment strategy can not only simplify your operations, but can even turn your back office into a profit center.

Three of the most common payment types at the moment include ACH (bank-to-bank transfers), check, and corporate cards (or P-Cards). A single card processing large volumes of transactions has a number of disadvantages; not only do they tend to trigger declines more frequently due to merchant fraud monitoring systems, but can also be a security risk for potential fraud and cause a disruption to your business if it requires cancellation and reissue.

Virtual Cards To The Rescue

To combat the challenges of these legacy payment methods, retailers are now turning to virtual cards — payment cards without the plastic that can be created on-demand and leveraged broadly for merchant payments. Like corporate cards, virtual cards enjoy broad merchant acceptance. However, unlike corporate cards, new virtual cards can be generated on-demand, meaning that a different virtual card can be spun up for each transaction. This makes reconciliation much easier as there is a 1-to-1 mapping between your payment card (with its own ID) and purchases you make. This mapping extends to matching returns. When your supplier receives a return from your front-end customer, the supplier will credit back the virtual card you provided which is tied to that specific order, making refunds easy to process and identify. It also avoids the security risks of corporate cards by spreading your purchases across a variety of one-time use cards (each of which can also be locked down with individual spend and merchant controls if desired!)

On top of all the operational advantages they provide, the card issuer will typically provide a rebate on your virtual card purchases based on volume, turning your back office into a profit center.

Marqeta has been providing virtual cards to a variety of businesses, both in e-commerce and beyond. While the e-commerce space still lags in adopting virtual cards for payments compared to other industries, many are quickly realizing the benefits of this type of payment to streamline their operations so they can focus on their core business — providing the products their customers desire and creating a wonderful customer experience while doing it.