virtual account, digital wallet based solution provider

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 accounts 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 payments 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.

virtual account, digital wallet based solution provider

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.