Businesses and organizations who operate a large number of 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 this process, which can take months.
Virtual accounts, which are provided to a company by its banking partner, are linked to that company’s physical bank account. They enable a company to segregate cash within its physical account, eliminating the administrative workload, complexity and costs associated with holding additional physical accounts for different functions or lines of business.
Virtual accounts can be termed as sub-accounts linked to an actual physical current account, which can be used by treasurers to manage working capital processes. From a user’s perspective, these dummy accounts offer the same capabilities as a bank account, but without the associated administrative workload and costs so therefore drastically reduce the need for real physical accounts.
Virtual accounts enable companies to:
- reduce the number of bank accounts
- simplifying the cash management structure
- provide the same level of control and individual reporting
While as a concept, virtual accounts sound new, they have been prevalent in world over, namely Asian and European bankers have been using a similar liquidity management offering. The re-emergence of virtual accounts in European markets is largely due to the sophistication the product offers today and the variety of business propositions it can support. They have been used to improve the accurate identification of receivables, with payees being allocated their own individual virtual account number to pay into. The same virtual technique has since been re-used to allow those managing funds on behalf of multiple clients to segregate client money effectively, whilst still holding funds in a single bank account.
Virtual accounts provide the flexibility to structure, segregate and aggregate data. Companies can slice and dice reporting according to their business needs. Intercompany reporting is also available for companies with multi-entity hierarchies.
Virtual Accounts solutions offer a clear opportunity to broaden the range of businesses, from the global multinational to professional service companies. The intriguing point about them is that they are not just a solution that functions in isolation, but also a valuable catalyst that creates or improves capabilities across the whole cash and liquidity management spectrum.