Global Treasurers are continually striving to streamline account structures and centralize transaction processing. Increasingly, they are turning to virtual accounts as a key tool to provide this comprehensive view of their cash position and improve their decision-making process. However, in spite of certain advantages, virtual accounts have some difficulties when being integrated into the landscape of companies.
What can virtual accounts offer?
Virtual Accounts have evolved through technological innovation, offering businesses the advantage of streamlining account structures and enabling true end-to-end solutions that are fluid, accessible, and integrated. Virtual Accounts provide broad functionality and facilitate interconnectivity between debt, receivables, and liquidity solutions through a better view and control of the activity. They also support localization strategies and global treasury operations. The primary benefit of virtual accounts is the concentration of all activity into a single physical account, while maintaining the ability to reconcile transactions at a more granular level (e.g. by entity or customer).
Advantages of virtual accounts
For many international businesses, global banking is time-consuming, frustrating, and costly. Without a resident bank account in Europe, international payments can take nearly a week to post. In addition, because of the sprawling systems and thousands of employees of traditional banks, the costs are high.
With virtual accounts, you do not need to be a resident to open an account. This is not the case with opening traditional bank accounts where you have to be a permanent resident. Virtual bank accounts are a solution for global entrepreneurs who do not have European residency, for example. This avoids the complexity and costs associated with traditional international cash pooling.
Virtual bank accounts can also facilitate the centralization of cash activities and daily cash management. They add agility in the structure of payments and receipts with the ability to open, close, or modify as many virtual accounts as needed and organize account hierarchies at your convenience without the need for heavy KYC documentation.
In addition, virtual accounts maintain the traditional bank reporting functionality with Swift, Camt, and other methods available. Undertaking digitization as part of the virtual accounts project allows for centralizing of the cash flow and achieving economies of scale. For professionals, it guarantees better visibility and control of transaction volumes.
Drawbacks of virtual accounts
Despite all of the benefits and years on the market, companies have been slow to adopt virtual accounts. There are a few reasons as to why this slow implementation into the market persists:
- The first issue is that not all banks are at the same level of development due to different banks having different capabilities across geographical regions. Not all banks offer virtual accounts, at least not in the optimal capacity. In some cases, banks do not develop this offer as a priority due to lack of demand. For example, regional banking in countries where legal restrictions are important and where physical accounts are mandatory negate the benefits of virtual accounts. In other cases, it is a question of technical capacity. The issuance of virtual accounts adds a new layer of reconciliation complexity from the provider’s perspective.
- The second issue is companies’ fear, uncertainty, and doubt surrounding significant changes in their treasury model. Indeed, banks need to address customers’ risk appetites in this new transition. For example, coding between physical and virtual accounts may not be the same, which can generate problems for companies if the bank has not made the link.
- The third issue is the unwillingness or inability to accept significant change in the treasury structure required by implementing virtual accounts. Projects can be spread out over a few months to more than a year depending on the company and the internal resources available. Moreover, teams within a company require thorough training to be able to take full control and realize all of the benefits the virtual structure has.
In addition, certain tools are required, such as TMS, for maximum use of the solution. It is therefore understandable that the move to virtual accounts requires a great deal of effort on the part of companies in terms of time and cost associated with this change. Virtual accounts also suffer from their current lack of recognition as an innovative payment architecture. Plus, the interest of the banks is not necessarily to push the solution if the companies do not have many accounts in other banks.
Is there an ideal virtual account customer?
At first sight, virtual accounts are a product for all companies that want to be innovative.
The product can be implemented by a young start-up that can initiate a flexible and innovative architecture from its inception before making it more complex as it grows over the years.
They can also be used by large, mature firms to simplify the treasury structure, optimize cash management efficiency, and facilitate post-acquisition integrations. A large number of companies can be interested in this, from educational institutions, loan companies, electronic distributors and generally all companies acting in B2B, to retailers and others! Virtual accounts allow companies to customize the transfer and collection chain, so revisiting a traditional architecture will make sense.
Companies that are in the process of rationalizing the number of bank partners and accounts should be very interested in virtual accounts, as they offer a quality service and their implementation fits perfectly with this transition.
Virtual accounts are not an isolated solution. What makes VAM structures powerful is their connectivity with other capabilities related to cash, payments, collections, channels and currencies. A complete VAM solution has the power to transform a reporting layer service into an effective and powerful business tool. A company that is looking to revamp its payment chain would be well advised to take an interest in the subject.
When to transition into virtual accounts
Virtual Accounts have evolved with technological innovation and virtual reference numbers have paved the way for more holistic virtual account offerings that streamline account structures. These offerings enable true end-to-end solutions that are seamless, accessible and integrated. They offer broad functionality and facilitate interconnectivity between debt, receivables, and liquidity solutions. They support localization strategies as well as global treasury operations and
Virtual accounts are part of a futuristic vision of treasury and the digital transformation that is and will continue to be required to centralize flows while retaining visibility and control.
The rather “slow” implementation can be explained by the human factor and the magnitude of a project affecting the entire treasury function. The transition between the traditional to the virtual model requires technical skills and support in the implementation and thus human resources for IT integration. The ideal moment to make the transition ultimately depends on each company’s specific situation, but the benefits of virtual accounts await those who are willing to take the plunge.
Thomas Finkelsztejn & Chris Gibson
A special report on the cash management & payment trends that will transform your treasury department in 2022
The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.
Our new publication analyzes the most prevalent trends and innovations in the treasury world today.
Included in this publication:
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- PCI Compliance in an E-Commerce World
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- The Future & Alternatives to SWIFT GPI
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Download the full publication