Virtual Accounts: How They Actually Work

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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:

  1. Reduce the number of bank accounts
  2. Simplifying the cash management structure
  3. 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.

Virtual Accounts: Enhancing Collections and Payments

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Today, an increasing number of organizations have begun to recognize the benefits of using a single account for channeling payments and / or collections using Virtual Accounts (VA). Virtual account add value by streamlining, rationalizing and simplifying cash management structures and the accounts receivables reconciliation process.

Here are a few insights into the benefits of virtual accounts by Mindgate, a payment gateway, digital payment and collections solutions, payments platforms like RTP & UPI and digital wallet based solution provider.

Earlier, Virtual accounts have largely been used for receivables reconciliation – to resolve reconciliation issues on the collections side. But today, as corporates have begun to set up in-house banks (IHBs) and other centralized structures, however, they have encountered new challenges.

Corporates have usually addressed these challenges by opening different physical accounts for different business units, factories, or product lines. Having so many physical accounts adds significantly to corporates’ administrative overheads and creates unnecessary additional challenges with control, visibility and cash concentration.

Virtual Accounts enable corporates to replace their physical accounts with virtual accounts while still allowing them to retain key characteristics of a physical account: For example, being able to restrict user entitlements, allow clients to have customized payments, authorization matrices and provide end-of-day utilization reports at the account level.

VA’s have the potential to significantly improve cash collections through accelerated cash management and more efficient accounts receivable reconciliation. For incoming payments, customers use a Virtual Payment Address (VPA) when making payments which appears on the collections information as received by the company while for outgoing payments the VA is used to indicate the payees on whose behalf are the payments being made. This process greatly helps in removing the complexities inherent in the payments and collection process making it simple and easy to reconcile.

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Capitalizing on POBO & COBO

In order for the organizations to centralize treasury functions and reduce the number of bank accounts held, firms are looking to adopt payment-on-behalf-of (POBO) and collection-on-behalf-of (COBO) structures using a central account. Virtual accounts offers a solution to this problem by enabling corporates to sub-divide a single bank account into almost any number of notional ‘virtual’ accounts. Previously, treasurers had deemed it shady and unethical to ask clients to make out payments to an account that doesn’t belong directly to the owner. Virtual accounts overcome this issue by allocating a unique a/c number to each virtual accounts (known as IBAN in many countries), to which payments can be addressed. All these payments will actually be collected and diverted into the one main physical account. Online portals enable firms to manage their accounts independently of the bank thus giving full control and streamlining the process.

Benefits of Virtual Accounts

  • Improved Fund Management.
  • Guaranteed availability of payer’s information.
  • Ease of reconciliation of Account Receivables.
  • Cost Saving for both customers as well as payer’s/distributors.

What Does The Future Hold

The ability to cut down the number of physical accounts used by a business via a Virtual Account solution also provides for natural liquidity aggregation across the resulting smaller number of physical accounts. In future we shall be seeing more and more use of VA’s by businesses for streamlining their fund management.

For a company operating with multiple currency requirements, the option exists in many markets to deploy a multi-currency, single entity notional pool across the highly rationalized account structure. Such a solution would enable a corporate to not only enjoy the benefits of natural cash concentration that virtual accounts provide, but also the additional benefit of minimizing Forex conversion costs via the ability to offset debit balances in one currency using surplus cash balances in another.

Request to Pay: The New Innovation in Collections

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Request to Pay (RtP) is a concept designed to give greater flexibility to consumers and businesses while making payments. It has also been quoted as being one of the key services that will be enabled through open banking. Request to Pay is intended to improve the control and transparency of bill payments. RtP is not a disruptive technology but is rather an addition to Direct Debit and other existing bill payment methods to give consumers and businesses an additional choice.

Using RtP, businesses & organizations will be able to ‘request’ payment for a bill, rather than sending an invoice. For each ‘request’, customers will have an option to pay in full, pay in part, ask for some more time, communicate with the biller, or decline the payment. The service could benefit a wide range of sectors – from utilities to financial services, government, NGOs and many more. RtP has potential benefits such as reduced frauds, chargebacks, and better information.

A Typical RtP System Follows the Below Steps:

request to pay

Checkout: When a consumer makes a purchase online, they can choose to pay through their bank at the checkout.

RtP initiation: The merchant then sends the purchase details to the buyer’s bank and initiates a ‘request to pay’.

Authentication: The bank confirms with the buyer using an email or SMS.

Approval: The consumer then approves the payment once the details are verified and found correct.

Confirmation: The bank sends a message to the merchant informing them of the successful payment by the buyer. The money in this stage is still on the way.

Payment: The buyer’s bank transfers money to the merchant’s bank. All this happens real-time in a matter of a few seconds.

RtP benefits

In the payments & collections space there is a constant competition between physical and digital instruments. While the digital payment & collections methods such as credit card, debit card, e-wallets or other schemes compete, RtP is another addition to the illustrious list that has several benefits for mass adoption.

Wider reach:

RtP enables direct real-time access to bank accounts thereby, encompassing a larger audience to transact than the limited users of e-wallets and cards. This is great for a country like India where around 1.2 billion people have bank accounts but no credit cards.

Lower cost:

Unlike the percentage commission that comes with other digital modes of payments, RtP may require to charge only a meager amount for the transaction. This is mainly because RtP is seen as a data business rather than a source of direct revenue.

Minimized Risk

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The use of RtP minimizes the opportunity for fraud and chargebacks as the consumer approves every transaction only after verifying the invoice while the bank verifies the transaction.

Real time settlement:

The request to pay design developed using real time payment framework ensures that the merchants receive their payment instantly in real time.

Tokenization:

One of the solid features that stand out with RtP is the initiation of payment using social media channels, email or SMS. The banking details need not be shared. This eases the registration process and reduces merchant overheads, consequently also reducing the risk of data breach.

RtP is a significant step towards transforming payments ecosystems in countries like India, China, Asia Pacific, Europe and Americas into a cashless economy. With the advent of cashless economy, more and more merchants are acknowledging and shifting towards the digital modes of payment. Even though cash and checks are far from becoming obsolete, their usage is surely set to become limited.