Everyone knows the laborious tasks and processes involved in the administration of bank accounts and payment transactions. Many companies groan under massive administrative effort, inadequate reporting and poor efficiency. Banks, in turn, see themselves exposed to increased KYC costs (Know Your Customer), distribution and documentation processes, and resulting low margins. Relief can be provided by the resurrection of an old idea: the use of virtual bank accounts.
How virtual accounts work
An increasing number of banks offer virtual accounts or account structures. To do this, companies open a "real" account, i.e. an external account with a corresponding IBAN. This requires the standard KYC process. Additional virtual bank accounts are assigned to this account. The company can thus determine the number and structure; whereby it is still a breeze to create even complex interlocking accounts. The bank, as provider of the product, knows the mapping rules determined and communicated by the company.
Payments received by the company are deposited in the individual virtual accounts which are then recorded on the operating account. The bank provides the account numbers of virtual accounts in the statement, enabling allocation and evaluation for reporting purposes.
Many possible applications for companies
Virtual Account Management (VAM) gives a company the possibility to close numerous (external) bank accounts and replace these with corresponding virtual accounts. The idea is simple but it still has great potential. Concepts such as Payments On Behalf Of (POBO), i.e. the central treasury performs outgoing payments on behalf of its entities, or Collection On Behalf Of (COBO), may also be implemented without any problems using virtual accounts.
Above all the second construct, COBO, was until now nothing more than a concept on the drawing board. Through COBO, which is also referred to as Collection Factory, central treasury takes responsibility for group-wide incoming payments. Virtual accounts can overcome the challenge of allocating payments received to subsidiaries' accounts. The customers of each group entity will not recognize that a virtual account is in use: Characteristics such as IBAN are not distinguishable from a "real" external bank account.
Companies, supported by the introduction of SEPA, now have the possibility to centralize and optimize their European-wide (i.e. within the SEPA area) payment receipts (A/R), while simultaneously improving reporting and limiting administration.
Companies and banks profit
There is thus a great potential for companies to optimize the areas of A/R and working capital management. Applying virtual accounts simplifies laborious reconciliation processes while optimizing liquidity on the external account. Additionally the costs for virtual accounts are lower than for standard bank accounts – not only in terms of administrating the introduction of virtual accounts, but also in terms of the financial aspects. There is a real cost savings.
Banks equally profit from virtual accounts: On the one hand, they can generate additional revenue through sales of platforms for VAM (to the extent that a multi-bank solution is offered). On the other, business customers can be acquired and bound more tightly through the expansion of payment transaction offerings. Additionally banks profit when business customers maintain their liquidity in-house as short-term deposits can be called upon to determine key ratios. This is an aspect which may be of primary use in view of Basel III regulations, which will come into force shortly. Furthermore, additional available funds may be used for other segments (for example to issue credit or trade). VAM can also be used as an incentive model for business customers to maintain or increase liquidity across the group.
Leading banks have offered solutions for VAM for some time. Company demand for VAM, however, is only just getting off the ground as cost and efficiency pressures continue to rise while the necessary framework has only recently been created. Companies recognize the great potential provided by new regulations, which up to now have only been processed and implemented in projects to satisfy minimum regulatory requirements. Thus SEPA not only covers the introduction of IBAN and BIC. Now with VAM and COBO, companies have an additional instrument to manage group-wide liquidity and achieve cost advantages.
Author: Sven Korschinowski, Senior Manager, firstname.lastname@example.org
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