Virtual bank accounts (VBAs), or rather the idea of virtual bank accounts, has been trending for many years now, with major global banks heavily investing and preaching to convert their customers. But are virtual bank accounts really the miracle solution that treasurers across the world have been waiting for? And if so, why is the current adoption rate still so low?

What are virtual bank accounts?

In many ways, a virtual bank account is identical to a physical account. It has a unique account number and can perform the same types of payments, and — from a bank’s perspective — virtual accounts are not treated any differently from a physical account in their books. The only true difference is that a virtual account doesn’t hold a balance because it doesn’t settle any transactions.

Virtual accounts are merely vessels carrying transactions to and from the physical account that sits in the background. Only this physical master account will settle transactions and carry the consolidated balance from all the virtual accounts linked to it. And, as you can guess, just like that, you are a step closer to achieving not only a true zero balance account (ZBA) but also payments-on-behalf-of (POBO) and receivables-on-behalf-of (ROBO). Too good to be true? Let’s have a closer look and separate fantasy from reality.

What can you achieve by converting to virtual accounts?

Virtual accounts have many benefits that are low-hanging fruit, making the solution extremely appealing for corporate treasurers. For those operating in the retail, insurance, or healthcare industry, you are probably juggling thousands of accounts on a daily basis while constantly opening and closing accounts. By converting to virtual accounts, you can obtain better visibility and control over incoming and outgoing payments, balances, and reconciliation through a simplified and streamlined account structure.

Virtual accounts can also be a huge source of savings on your bank fees and internal resources. They don’t have nearly as many maintenance charges as physical accounts do and can be opened and closed without going through the hassle of know your customer (KYC) procedures every single time.

For companies operating a much smaller number of bank accounts, virtual accounts still make sense. The true physical account number is never communicated to any of your business partners, thus reducing the risk of fraud. You could also consider opening single-use or dedicated virtual accounts that will facilitate your reconciliation process.

If we are taking things to the next level, virtual accounts are an ideal replacement for ZBAs. They can cover single or multiple entity structures and track, report, and settle inter-company loan positions.

What are the limitations and pitfalls of virtual accounts?

With the list of benefits going on and on, why is the adoption rate still so low for virtual accounts? In our daily interaction with banks and our various RFPs, we asked them about the product’s actual adoption rate. You would be surprised to know that even the largest banks in the U.S. have merely succeeded in converting a handful of clients in the low double digits.

One factor contributing to the slow adoption rate is simply the power of inertia. Most treasury departments are still reluctant to become early adopters.

Another contributing factor could be regulation. If you are operating in a highly regulated industry such as insurance, you might face the same challenges you face with co-mingling of funds.

If you have a significant international footprint, be aware that local regulators might not allow virtual accounts. In China, for example, the People’s Bank of China (PBOC) doesn’t accept POBO/ROBO and consequently any form of payment to and from a virtual account.

Not all virtual accounts are created equal

By far, the biggest challenge about adopting virtual accounts is knowing who to bank with. Unlike more mature products such as checks, ACH and wires, or information reporting, there are currently enormous gaps in capabilities across banks and, shockingly, even across the Big Four.

My personal biggest concern with virtual accounts is the ease of conversion and reversibility. Some banks will require you to close all the physical accounts that you want to convert and then reopen them as virtual accounts, which means making a significant initial investment in time and resources even to set up the solution. If you are a highly acquisitive company, you would be repeating this painful process for every new acquisition. What would happen if you were to sell off an entity after investing all this time and effort converting to virtual accounts? How easily and quickly could your bank revert all these virtual accounts to physical accounts? Some banks will allow you to do so by flipping a switch, while others might retake you through the painful process of account closing and opening.

Beware: this is only the beginning of a very long list of differentiators for virtual accounts in the banking industry. If you are seriously considering this solution, do your homework and research to compare the offers, or reach out to an expert, like Redbridge, to discuss your needs.

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