virtual accounts

Virtual accounts: real-life benefits in real-time

By embracing virtual accounts, corporations can automate treasury processes and simplify liquidity management at the same time

Ask a treasurer about their business and they will typically cite ‘number of bank accounts’ as a measure of the scale and complexity of a treasury function. But how valid a measure is this?

Every bank account brings complexity: it needs to be reported on and reconciled, balances managed, and authorised signatories maintained. Every account also has a related cost and represents a potential security risk without adequate oversight over signatories and balances.

With virtual accounts and virtual ledger solutions maturing and becoming more interconnected with liquidity management structures, however, this is changing. The sophistication of treasury can increasingly be measured not by how many accounts they have, but by how many virtual accounts they have.

One solution set to fit all sizes

Treasurers’ desire to reduce the number of physical bank accounts is not new. As a way of combatting the complexity of new physical accounts, many larger corporations have set up in-house banks, in which treasury provides banking services such as funding, investment and risk management to group companies. Treasurers are increasingly introducing payments-on-behalf-of (POBO) and/or receivables-on-behalf-of (ROBO) as part of an in-house bank. Under these arrangements, companies make payments or collect incoming flows ‘on behalf of’ group companies, removing the need for these entities to hold their own bank accounts. But the system is not frictionless – for example, suppliers may find it difficult to reconcile payments made by an entity different to the one they invoiced.

The need to simplify and streamline cash and liquidity management is not limited to large multinational businesses. Scalable, accessible solutions are also required by smaller or less mature treasuries that have not yet built sophisticated in-house banking structures.

Consequently, virtual account solutions emerged, initially as a way of supporting automated reconciliation and then as a means of simplifying liquidity management for treasuries of all sizes and levels of sophistication.

Tangible benefits of virtual accounts

Companies can use virtual accounts in a variety of ways to meet their specific needs. Virtual accounts are linked to a single physical account. Treasurers and finance managers can set up as many of these accounts as they need and some banks even provide online account maintenance functions. For example, some companies choose to assign a virtual account to each customer, while others may assign them to their individual subsidiaries or divisions. Customers make payments to the virtual accounts but remittances are automatically routed to a single bank account, typically by currency. The account number is used as a reference field for automatic reconciliation, account posting and reporting purposes.

For both domestic and international companies, virtual accounts offer a range of advantages. The number of physical accounts can be rationalised, reducing cost, risk and administration. Automatic reconciliation rates are higher, and remittances can be posted immediately to customer accounts, freeing up credit lines more quickly.

As companies expand geographically and acquire new entities, their liquidity management needs become more sophisticated, so virtual accounts become part of a broader treasury strategy, potentially also including cash pooling, POBO and ROBO. Treasuries can operate as in-house banks through virtual ledger accounts, combined with automated liquidity management structures that provide intercompany limit tracking and interest settlement. This is a cost-effective way of providing an in-house bank service, with less implementation effort than using physical accounts.

Real-time liquidity management

While reconciliation and reporting are often the reasons companies first choose to implement virtual accounts, there can also be significant liquidity benefits. In particular, by holding a single account rather than multiple accounts, cash is automatically centralised in one location, with balances available for use as soon as remittances are credited to the bank account. With many countries moving to domestic FAST (Fast and Secure Payments) and the SWIFT gpi (global payments innovation) initiative resulting in faster credit of cross-border payments, the ability to reconcile accounts receivables in real time is critical. This capability, allied with solutions like just-in-time cross-border sweeps, allows clients to centralise cash and deploy it for payments exactly when needed.

There are inevitably issues to consider when implementing any new cash or liquidity management solution, including regulatory, tax and currency implications. The need to manage the cost of change, such as communicating new settlement instructions to customers and adapting systems also needs to be factored in.

However, as companies continue to expand internationally and adopt new business models, the value proposition of holistic virtual account solutions, combined with automated and increasingly real-time liquidity solutions, is growing.

Crucially, companies can build in additional services progressively, without disruption, as their needs evolve and new opportunities and demands emerge.