Virtual accounts for cash management

Amongst our ecosystem of experts, François Masquelier (CEO of SimplyTREASURYdeciphered virtual accounts in his article "How virtual could the bank accounts be?" in the #107 "Interconnectivity" issue of ATEL's "Treasurer" magazine. Here is a look at this concept that helps financiers manage their cash flow.

Virtual bank accounts have been widely developed over the last few years, offering companies the opportunity to create and manage their cash flow more easily. It seems important to clarify this concept, which is still evolving today.

Virtual bank accounts function as sub-accounts attached to a physical account. A physical account that settles transactions and carries the consolidated balance of all related virtual accounts.
Virtual IBANs are also associated with a physical account that centralises all incoming payments. The difference is that an IBAN is assigned to each transaction, so that the issuer and beneficiary of the payment are automatically identified. It is then possible to allocate an IBAN data range to a specific department or subsidiary of the company.

What are the benefits for companies?

The main advantage for treasuries is the ease of creating and managing accounts online. While banks retain control of the physical account. This reduces the number of bank accounts, while allowing businesses to open as many virtual accounts as they need.

A virtual account has many other advantages and benefits:

• Can be an alternative to traditional cash management solutions,
• Helps centralise treasury functions,
• Can be a substitute for cash management tools,
• Reduces costs while increasing efficiency,
• Improves the Straight-Through Processing reconciliation process,
• Simplifies banking relationships by reducing the number of accounts,
• Harmonises the virtualisation of all its accounts.

They provide better visibility and control of incoming and outgoing payments. This is achieved through a simplified and streamlined account structure.

However, the concept of virtual accounts is not new. In fact, services similar to virtual accounts have existed before, addressing specific needs of corporate treasurers.

In an ever-changing world, with increasingly stringent regulations and a focus on cost reduction, interest in virtual accounts has intensified.
Indeed, the costs associated with bank accounts continue to rise. In addition, KYC ("Know Your Customer") controls are demanding more and more effort. But also transparency and disclosure of customer information.

Efficient In-House Banking

Although the concept is not new, only a few multinationals have successfully built and run in-house banking services.
However, the implementation of In-House Banking (IHB) requires time and significant investment. Before the Payment Services Directive* came into force, some companies even tried to get a banking licence to do IHB.

It is possible that virtual bank accounts will become the basis for internal corporate banking systems. With this, companies can streamline and control the management of their bank accounts. That is, open, close, modify, or manage bank accounts in seconds. This, without having to fill out a ton of administrative forms.

This is done by first streamlining accounts by closing all accounts opened for accounting purposes within a legal entity. Then, at a higher level within a group of companies, virtualise and use Payment On Behalf Of/Collection On Behalf Of.
This is not only useful for managing and sorting debts and receivables. It is useful for building a new type of liquidity management called cash pooling. C’est une technique de gestion de trésorerie centralisée, utilisée par les entreprises ayant plusieurs filiales. L’avantage à cette action est d’optimiser les soldes de trésorerie de l’ensemble des entités légales. Les liquidités sont détenues nativement sur le compte principal et les comptes virtuels représentent les différentes balances liées aux filiales.

With In-House Banking, the payment is directly transferred by the head office on behalf of its subsidiary and generates transactions within the group. With virtual accounts, treasurers could even imagine a single bank account per currency to manage 100% of their cash in an IHB..

*regulates payment services and their suppliers within the European Union

Bank account virtualisation for more efficient cash management

One of the issues in processing incoming payments from virtual accounts is the differentiation made between the beneficiary* and the legal entity**. As far as compliance is concerned, this is fairly well handled by EU regulations and practices, but this is not the case worldwide.

Even then, bank account virtualisation at the legal entity level brings many benefits, alongside the traditional tools already in use. Obviously, the power and size of the system, as well as good integration with your ERP play an important role. This requires organisation, discipline and new support processes. If you no longer use a local bank, then the treasury becomes the only point of contact. It risks being inundated with questions from the local entities. That is, bank account virtualisation is not only a question of computer technology, but also of organisation and the budgetary implementation.

*who holds the virtual account
**who holds the bank account

Ce qu’il faut retenir

In conclusion, it is possible to use virtual bank accounts to set up an internal banking service. In particular with payments and collections on behalf of:

• native cash pooling ,
• internal short-term loans,
• centralized international trade management,
• and netting (clearing of currency inflows and outflows).

So far, the concept of virtual accounts has been misrepresented or misnamed by banks. Virtual accounts offer benefits to corporate treasuries: improved cash management and a better overview of corporate accounts. This gives the treasurer a more influential and strategic role in the organisation. Now that Virtual Account Management (platforms) offer a simple, out-of-the-box solution, interest in virtual bank accounts will increase significantly. They really have the ability to reinvent cash management by supporting treasurers.

Written by Eléonore Berne, on 30/03/2022.