VAM may be virtual, but the benefits are real

The penny is rapidly dropping about the benefits of virtual account management (VAM), one of the most valuable tools for treasurers in rationalising physical accounts.

Similar in principle to virtual simulation models that are transforming the industry, VAM greatly simplifies the daunting burden of running multiple physical accounts, freeing treasurers to manage risk and cashflow. Little wonder that corporate treasuries are buying into VAM.

“We’ve seen significant interest in our virtual integrated account (VIA) solution across all applications, including receivables reconciliation, bank account rationalisation, real time liquidity management, in-house banking and banking-as-a-service,” says Mark Smith, global head of liquidity products, transaction banking at Goldman Sachs. Initially seen as just another method for streamlining inbound transactions, VAM has come into its own.

“Against the transformational backdrop of real-time payments and open banking, VAM is emerging as a platform for comprehensive, enhanced real-time liquidity management services,” according to Tietoevry, a Finnish IT software and service provider.

Currently, Goldman Sachs is working with 13 clients across the US and UK, with dozens more in the pipeline. “VIA comes up in almost every client conversation,” Smith adds.

Banking-as-a-service platforms are also jumping aboard the VAM bandwagon. Goldman Sachs, for instance, partners with Stripe Treasury to leverage virtual accounts onto the latter’s platform.

 “We present VIAs as a holistic banking solution and have seen a range of uses as a result,” says Goldman Sachs’ Smith. “For example, we’ve worked with two supply-chain finance companies that use VIAs to help organise an originate-to-distribute model for trade receivables. We’ve also worked with a fintech who used VIAs to reconcile the two legs on FX transactions.”

VAM acceptance accelerates

VAM is not entirely new, but the pandemic has certainly accelerated its acceptance.

“Quarantine and other restrictions on movement forced most businesses to go online, which accelerated the shift to e-commerce, encouraged companies to adopt electronic payment channels, and forced them to reimagine supply chains – including their financial supply chain,” says Smith.

“In-house banks (IHBs) are one of the most sophisticated ways of reimagining the financial supply chain. They do so by centralising treasury operations and bringing banking services in-house.”

Here virtual accounts act as catalysts, powering IHBs because they serve as intercompany ledgers that are critical to on-behalf-of-structures. For instance, Goldman Sachs’ VIAs carry clearing-recognised account numbers that facilitate straight-through processing of payments.

Essentially, VAM is about cash and payments. Until now, most corporates managed the former through multiple-demand, segregated deposit accounts that show what’s happening for a specific operating area of the group. As consultants point out, practically all the techniques developed so far for cash management rely on pooling and sweeping that consolidate cash through numerous bank account transactions.

As corporates grow, cash deposits end up being spread right across the business in what is often a confusion of group and subsidiary bank accounts, consultants say. Making things more complicated, each part of the business develops its own operating, regulatory and liquidity requirements.

Thus treasurers have been making life unnecessarily hard for themselves.

“Cash concentration in this environment can be expensive and time-consuming due to complex information-gathering workflows, manual reconciliation processes, different reporting standards, and batch processing methods,” Smith says. “All of this mitigates against agile funding and does nothing for efficient use of capital.”

Before they introduce VAM though, treasurers need to do their homework to avoid any disruption. And typically, they would start by analysing in detail the virtual account structure that is best suited to the organisation.