Cash & Liquidity ManagementCash ManagementVirtual accounts: Capitalising on POBO and COBO

Virtual accounts: Capitalising on POBO and COBO

With regulation and harmonisation offering fertile conditions for improving efficiency, refining cash management operations is among the most effective moves for corporates to take advantage. Virtual accounts offer a particularly compelling option.

As firms seek greater efficiency in their treasury operations, refining cash management processes is becoming a priority for corporate treasurers. For many, the obvious move is to centralise treasury functions and reduce the number of bank accounts held. With this goal in mind, firms are looking to adopt payment-on-behalf-of (POBO) and collection-on-behalf-of (COBO) structures, which see a central account issue and receive payments for a number of subsidiary accounts.

Yet despite the availability of such solutions, some firms have shied away from investing due to concerns over the difficulty of implementing them. Virtual accounts offer one solution to this problem, combining simple implementation with huge benefits to efficiency and control.

Virtual accounts explained

So what are virtual accounts? Put simply, a virtual account service enables corporates to sub-divide a single bank account into almost any number of notional ‘virtual’ accounts. This means firms can potentially rationalise their existing account structure into a single ‘real’ bank account.

Despite their nature as sub-divisions of the master account, virtual accounts function much like any normal account, possessing their own account numbers, statements and balances – with the exception that the funds they govern are actually held in the master account. In this way, firms using virtual accounts are effectively running POBO and COBO systems, but with a highly streamlined infrastructure.

Easy implementation

Indeed, structuring accounts in this way solves one of the principal difficulties associated with POBO and COBO: implementation. Previously, treasurers have voiced concerns over the practicalities of asking clients to make out payments to an account that doesn’t belong directly to the entity owed the money. Yet with virtual accounts this is no longer a problem. Since each virtual account is allocated its own unique account number (known as a virtual international bank account number [IBAN]), payments can be addressed to a specific department or subsidiary and yet collected in the master account.

Furthermore, this structure also minimises disruption during implementation. Virtual accounts can be mapped out to exactly reproduce a company’s existing account structure, so treasurers need not concern themselves with structural upheaval, even as processes are adjusted and refined.

With that said, should a more advantageous structure be available it could not be simpler for firms to put it into practice. New accounts can be opened or closed within seconds and without recourse to the bank; a drastic improvement that removes huge amounts of administration from the process and gives firms free rein to shape their account structures as they see fit.

Take control

Indeed, this control is one of the most appealing features of virtual accounts. Digital innovation has made a significant contribution in this respect, with online portals enabling firms to manage their accounts independently of the bank. In addition to opening and closing accounts, these portals give companies the power to determine their own account number scheme – useful for replicating existing account structures – manage permissions, and, of course, execute and monitor transactions.

In addition, virtual accounts give treasurers further control through greater perspective on their accounts. Since all funds are held in a central location, treasurers have a real-time view of cash flows across the company. This makes it easy to map out counterparty exposures and determine areas where action is required to mitigate risk. Yet despite this perspective, virtual accounts are a source of highly granular information.

This combination of transparency and granularity can be highly advantageous. Not only does it give treasurers a comprehensive overview of account activity but also enables customer queries to be met quickly and efficiently; helping firms garner the trust and respect of their clients.

Efficient processes

These are all considerable advantages for corporates. Yet at the core of virtual accounts is the concept of efficiency, which is perhaps where they have the most to offer.

Automation is the source of much of this efficiency, with automated matching and reconciliation software drastically improving the speed and accuracy with which firms can carry out routine processes. Not only does automation eliminate the risk of human errors, it also frees workers’ time to focus on other, more important, tasks.

Of course, even without automation, centralisation is inherently efficient. For instance, with all cash held in a central account, firms need no longer devote time and resources to the laborious process of cash pooling. Indeed, with virtual accounts cash is always already pooled, thus greatly simplifying execution for major transactions and enabling firms to maximise interest returns on their accounts.
Perhaps most significant of all in terms of efficiency, however, virtual accounts remove the need for multiple treasuries to cater for different regions. Local branches and subsidiaries, for example, are no longer required to distribute salaries to workers in their particular region. Instead, all salaries can be distributed centrally, in one go, by the human resources department. This kind of saving can be replicated across the spectrum of treasury activities, saving firms huge sums of money on previously duplicated workloads.

It is these advantages in particular that have been driving corporate interest in centralised treasury functions. With virtual accounts there is no need to hold back. The benefits of POBO, COBO, automation and digitalization are within corporates’ grasp, with no implementation problems to bar the way. In these circumstances, it is difficult to see past virtual accounts as the future of cash management.

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