Virtual Bank Accounts – Corporate Banking is Going Virtual
Author: Brian Weakliam, Founder & CEO
Virtual Bank Accounts (VBA) offer a much better way for companies to manage their banking arrangements and their cash. VBAs are also called Virtual Account Management (VAM) or in-house bank accounts. Using virtual bank accounts, companies can generate significant cost savings.
VBA is nothing new but is now entering the mainstream. Banks and treasury technology providers now offer off the shelf virtual bank account solutions. Some companies have even built their own.
So what is VBA, and how are companies using it?
VBA is a single bank account or group of bank accounts that have been virtualized into hundreds or thousands of bank-active virtual accounts. So effectively, a company has its own in-house bank account, which mirrors a real bank account with real funds. The real bank account is divided into lots of ‘sub-bank accounts’. These sit either on a bank system or internally on the companies’ own systems. These virtual bank accounts can be hosted in the cloud.
VBA allows companies to operate a very small number of real bank accounts with the funds allocated via virtual bank accounts across many different operating entities. Companies can dramatically reduce the cost and enhance the efficiency of managing multiple bank accounts.
Bankhawk helps corporates evaluate and devise a strategy to implement Virtual Bank Accounts and generate large savings.
Background
Corporates are seeking greater operational control over their cash, their banking relationships and their banking services. Companies have used Virtual Account Management (VAM) to improve control.
While virtual bank accounts in the past were often technologically static and inflexible, they enabled corporates to operate internal and self-managed banking structures, albeit, in a limited fashion.
VAM platforms now allow corporates to manage their cash management operations more efficiently. These platforms provide a single view of their cash and allow companies to reduce costs and manual processes. They provide liquidity management, payments and receivables management, inhouse banking and client money management.
With a VAM solution, corporates gain a single view of pooled bank accounts that have been virtualized into thousands of bank-active virtual accounts. They provide an automated self-service solution that is made available either on-premise or in the cloud.
Today, VAM is a technology platform which harnesses advances in workflow integration, analytics and real time reporting. Combined with functionally rich virtual accounts VAM provides greater flexibility, self-service and the option of additional integrated applications for example cash management solutions.
What is the difference between virtual and physical accounts?
In a nutshell, virtual accounts have all the capabilities of real bank accounts but with added flexibility and self-service functionality.
Like physical accounts, virtual accounts have unique account numbers providing clients access to all pay, receiving and reporting functions. Account numbers can be assigned by the bank or chosen by the company. Virtual accounts can also participate in a notional pool or cash concentration structure. They can cover a single or multiple entity structure, and track, report, and settle inter-company loan positions.
In practice, a virtual account hierarchy is underpinned by a single physical account header, with as many virtual accounts as needed sitting underneath. Payments and receipts can be processed through each virtual account, while the actual fund movements take place through the physical header account
Why should your organization go virtual?
Generally speaking, if your organization meets any of the 5 criteria below, then you really should be exploring how VAM can transform your business:
On average, more than 5 banking relationships
More than 50 bank accounts total held across different banks
More than one million transactions annually
Reliant on cash pooling products for managing liquidity
Usage of complex treasury management systems
Corporates who operate many bank accounts – in some cases, in the thousands – often experience difficulties in tracking and reconciling their payments and collections. There is also a significant cost in opening, maintaining, and closing these accounts, with firms having limited control over the process, which can take months.
Segregating accounts across different businesses and functions can also be very challenging for an organization. Multiple physical accounts are often needed to keep cash flows distinct and trackable, but this adds to administrative workloads and costs.
Reduce the number of bank accounts
Simplify the cash management structure
Provide better control and individual reporting
Centralize treasury functions
Rationalization also comes with the added benefit of real-time cash concentration and the ability to set up single and multi-entity virtual accounts. This helps companies to centralize their processes.
One challenge many companies’ face is that reported bank data differs from how they want to view and understand that data. Companies find it costly and inefficient to obtain analysis in the form it needs, and may have to process data manually.
VAM provides flexibility in structuring, segregating, and aggregating data. Companies can slice and dice reporting according to their business needs. Intercompany reporting is also available for companies with multi-entity hierarchies.
In Practice/ Use Cases
VAM has been widely adopted by insurance companies, pension funds, and asset managers for the segregation of clients’ funds. It allows them to keep clients' funds separate (subject to regulations) while not having separate bank accounts, which are costly and clumsy to administer.
In virtual banking technology, physical ledger accounts are replaced by virtual bank accounts held in a virtual banking system (VAM). Companies could, theoretically, run their whole operations with just one bank account. Virtual account technology and the approach is now being used in many different ways. It is starting to transform approaches to cash management, and in how payments are made and collected.
It also provides much more self-service control for corporates. Virtual accounts enable easy differentiation of expenses and client accounts and companies can layout the hierarchy any way they wish and no request or intervention by the bank is needed to make any changes. Other benefits of a hierarchy structure like this include automated reconciliation, improved FX management and full knowledge of account balances.
In Payment Collection
VAM is increasingly used in making and collecting payments. For example, virtual cards use a temporary account number to uniquely identify the payment and tie it to a specific bill or invoice. This can support the corporate treasurers dream – straight through reconciliation.
VAM in the Insurance Industry
Insurance providers are increasingly adopting automated systems to streamline their service and provide their policyholders with a more efficient service. But payment solutions have not kept up with this innovation. The inefficiency in their collections systems is an ongoing drain on operational and financial resources and results.
The insurance industry is highly competitive. Improving efficiency and reducing the cost of payment management – reconciliation and pay-outs – will benefit the business and improve customer service and loyalty.
Some of the potential benefits of virtual accounts specifically for Insurance providers include:
Fast account set up for collection of premiums and first-party pay-ins and to fund claims payouts.
Instead of relying on references with payment messages, payments can be sent directly to individually designated accounts, meaning there is no delay in reconciling payments.
Improved payment acceptance, settlement times, and reconciliation because payments are made in the name of the insurance account holder
Reduced risk for Anti Money Laundering (AML) and Know Your Customer (KYC) due to end-to-end transparency and clear segregation of funds through virtual IBAN accounts
Any proposed virtual bank account structure should be reviewed for compliance with local and industry-specific regulations.
