Cash & Liquidity ManagementCash ManagementThe value of virtual accounts

The value of virtual accounts

Virtual bank accounts (VBAs) are a trending topic among corporate treasurers, but what are they and how have they evolved to improve reconciliation, cash liquidity and payments?

Virtual bank accounts (VBAs), also commonly referred to as ‘shadow accounts’, are, as the name suggests, non-physical bank accounts. Corporate treasurers use VBAs to increase the efficiency of their working capital processes and take cash management to the next level.

According to Dick Oskam, Global Head of Sales for Transactions Services at ING, VBAs have the potential to deliver benefits across organisations of varying types and sizes. “While it’s clear how non-bank financial institutions may use VBAs to help allocate client monies, or how large collections businesses such as utilities or telecom companies can use VBAs to improve their complex reconciliation processes, VBAs are just as suitable for multinational companies (MNCs) in other sectors too.

“For corporates with purely domestic cash flows and those with cash flows coming in from different legal entities, in disparate locations and denominated in various currencies, VBAs can help streamline cash management processes – potentially reducing the drain on experienced staff and minimising future investment in sophisticated ERP/TMS systems.”

Virtual account types

There are in fact two types of shadow account products offered by banks for corporate treasurers to choose from:

  • Virtual IBANs
  • Virtual account solutions

Despite each product having their own strengths, the latter offers a far more holistic solution, giving corporate treasurers and their clients the most cost-effective method for centralising their accounts payables and receivables.

Put in the simplest terms possible, VBAs are dummy current accounts that effectively replace physical accounts, with payments and collections routed instantaneously via these virtual counterparts to a linked ‘master’ account. But what is the exact benefit of this arrangement?

With virtual accounts, a major advantage is that banks can remain in control of the physical account, while corporate treasurers have free rein of as many shadow accounts that they wish to create off the main account, increasing efficiency by reducing complexity.

“Every bank account adds complexity: it needs to be reported on and reconciled, balances managed, and authorised signatories maintained,” explained David Rego, Head of Liquidity Management and Escrow Solutions at Standard Chartered in article for Euromoney.

“With virtual accounts and virtual ledger solutions maturing and becoming more interconnected with liquidity management structures, however, we could be seeing a reversal – in which the sophistication and effectiveness of treasury is measured not by how few accounts they have, but by how many virtual accounts they have.”

The real value of virtual accounts

Despite the clear advantages of virtual accounts, implementing them is a challenge, and one that demands significant investment and time from corporate treasurers. But if approached correctly, operating a virtual account environment offers an abundance of benefits including:

  • Alternative to traditional cash management solutions
  • Centralising of treasury functions
  • Substitute to liquidity management tools
  • Increased cost efficiencies
  • Improved straight-through processing (STP) reconciliation
  • Simplification of account and banking relationships

It is worth mentioning that virtual accounts are not a new phenomenon. In fact, products that bear a striking resemblance to modern virtual accounts have been around for the last two decades, providing corporate treasurers and SMEs solutions for specific purposes. However, as the regulatory landscape becomes stricter and customer demands become greater, combined with businesses focusing on reducing costs of doing business in a world where margins are increasingly under pressure, appetite for VBAs has intensified.

Early adopters of VBAs include insurance companies, pension funds and asset managers, who have used them to segregate clients’ funds from their own accounts. As it stands, bank’s offering VBA solutions in Western Europe are not as advanced as those available in Asia Pacific, but there are several major large-scale lenders that offer virtual accounts as part of their suite or products including:

  • Deutsche Bank
  • UniCredit
  • BNP Paribas
  • Barclays

Virtual account management platforms

The increased interest for virtual bank accounts has coincided with a rise in virtual account management (VAM) platforms, which offer corporate treasurers a simple out-the-box solution that empowers them with the ability to create, manage and monitor multiple VBAs.

Furthermore, these platforms work in tandem with VBA solutions offered by bulge bracket banks like Deutsche Bank, with VAM solutions designed to help corporates setup, define and manage virtual accounts via an online channel, allowing treasurers to make payments and receive collections to and from shadow accounts.

They also boast the ability to integrate seamlessly with a bank’s core banking platforms, offering a information in real-time between the physical accounts holding actual capital and the virtual accounts in the virtual environment.

VAM market solutions

  • Montran’s virtual account management system
  • Cashfac – Virtual Accounts Solution
  • Tieto’s virtual account solution
  • D+H Global CASHPlus Receivables Management

Adoption of virtual accounts

Virtual accounts promise corporate treasurers many benefits in terms of enhanced cash management as well as providing a much clearer picture of a company’s accounts, allowing treasuries to have a more influential role within organisations. However, the bank’s that offer these products have been criticised for not adequately communicating these benefits to corporate treasurers.

“[The virtual account] has the potential to be a good idea but it is being poorly communicated,” Associate Policy and Technical Director at the Association of Corproate Treasurers (ACT) Stephen Baseby said in an interview with Euromoney.

“The cost of operating bank accounts has become a huge issue for treasurers and they are certainly keen to cut the number of accounts they use, but in most of the literature banks have put out it is not clear whether each virtual IBAN has an additional cost.”

“Banks want to offer a new product, to draw attention to themselves in the age of fintech to remind people they do develop useful products, too,” he added.

For more corporate treasurers to seize the opportunities afforded by adopting virtual accounts, bank’s must do better at conveying these advantages to them. But this is no sales pitch, with treasurers, dependent on the size and the sector in which they operate, requiring bespoke solutions to meet their own specific needs. But the more that banks continue to liaise with their corporate clients and better understand how to put this technology to best use, virtual accounts will continue to proliferate across the corporate landscape.

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