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VIRTUAL ACCOUNT: A FURTHER OPERATING MODEL FOR CASH MANAGEMENT

On their side, corporate treasurers need to improve efficiencies through automation of accounting, reconciliation and cash management processes, as they are always expected to do more with less budget, less resource and so on.

In particular two are the central challenges corporate treasurers face today:

  • Obtaining real-time consolidated information of group multi-currency cash position in order to optimize the financing mix and duration of funding against expected and actual cash flows.

  • Optimizing the automation of order-to-cash and purchase-to-pay cycles, reducing the administrative workload through a straight-through-reconciliation of cash to accounting around 100%

Traditional global cash management solutions are based on pooling structures and sweeping techniques to physically consolidate cash in a layer of concentration accounts. At a basic level, such services are not available in all markets due to national currency control: regulation is driving the need for smart, innovative solutions, yet 80% of bank IT budget on average is tied up with legacy system changes, which make no obvious contribution towards customer value Instead of using sophisticated pooling techniques that physically move money end-of-day in order to adapt to a corporate’s fractured account landscape, under the Virtual Account Management (VAM) model corporate cash remains naturally concentrated in a small set of corporate current accounts but without sacrificing transactional operating functions of the subsidiaries. Virtual account is not a new concept, since virtual accounts have been in the market for around 20 years serving specific purposes for corporate and SME customers, although many of the ways in which it is being used are new. It is under continual development, and as such its uses will extend and expand. End-users are more self-sufficient as they can design and structure their virtual accounts in real-time outside the traditional banking environment and processes.

"Traditional global cash management solutions are based on pooling structures and sweeping techniques to physically consolidate cash in a layer of concentration accounts."

DEFINITION

Virtual accounts are a series of off balance transaction accounts which can be incorporated into various forms of hierarchical structures. A group of shadow account in the top of the virtual account structure is linked to and mirrors the physical accounts per currency. Using shadows accounting techniques, VAM maintains synchronization of transaction allocation and balance control between header and virtual accounts, as well as between the header and mirrored demand deposit accounting. In other words, virtual accounts are a series of accounts linked to a physical account and incorporated into various forms of hierarchical structures enabling aggregation and segregation of transactional data. Virtual accounts are mechanism to improve straight through reconciliation of receivables for corporate clients. Under such an offering a bank would open a series of dummy IBANs for its client. Underlying each of these virtual ibans is a real physical account to which the payments made to these virtual accounts are routed. With this arrangement in place, the client than has the flexibility to assign these ibans to its individual suppliers, so that when a supplier makes an electronic payment it would automatically go into the relevant virtual account.

APPLICATIONS OF VIRTUAL ACCOUNTS

Virtual accounts can have a wide range of application, such as:

  • Payment and collections can be executed on-behalf of in a virtual account set up. In particular corporates could open a virtual account per entity managed centrally for which collections are booked by

  • Virtual Account Management can be used to set up virtual accounts on payer level (or even invoice level), enabling a fully automated reconciliation process, with enhanced reporting to ERP solutions (e.g. telecommunication or energy companies assign 1 virtual account to every customer in order to better and easier the reconciliation process. As a result, the company could have millions of virtual account depending on the number of direct customers).

  • Multi-entity liquidity management avoiding cash pooling structures.

  • Optimization of multi-entity funds

  • Inter-company lending

  • Interest apportionment

  • Assignment of one virtual account per supplier, geography, using the receivables information from the account statements to help them achieve improved working capital efficiencies.

PLUS/BENEFITS

Many are the advantages that a virtual account can help to achieve:

  • Increase revenue - Deploy working capital effectively, manage risk better and improve organizational resilience

  • Cost cut - by reducing banking and account management fees and staff time spent on payment related admin. Virtual accounts eliminate the cost of opening and closing physical accounts by theoretically reducing the number of accounts to few centralized ones. This helps corporates in the reconciliation management and improved credit control due to availability of timely and accurate reconciliation of collection information.

  • Improve business - Improve reporting, decision-making, productivity/efficiency and automate repetitive tasks

  • Rationalization of accounts and banking relationship – VA simplify overall cash management in the customer’s organization by reducing number of bank relationship and help centralize multi-entity cash

  • Substitute for cash management offering - Virtual account offer a great value proposition for large corporates which do not have an in-house bank/treasury center, as virtual accounts offer a far cheaper alternative option. In particular VA are a viable alternative to notional pooling products as no balance set-off by the bank is needed as cash is only located on the current account

  • Centralization of treasury functions – Virtual accounts eliminates the need to maintain an extensive network of physical accounts, while at the same time providing transparency to the working capital positions.

To improve reconciliation even further, accounts can be created at a payer or even invoice level within a virtual account structure. The payer will then use this account number when the invoice is paid. The account number itself will function as a reference in such set-up, improving the reconciliation to new levels of accuracy. If the system is self-learning, it can match payments automatically to outstanding invoices. It can also propose allocations based on previous payments and recurring actions, if the payer does not provide full remittance information. This helps automate repetitive tasks

"To improve reconciliation even further, accounts can be created at a payer or even invoice level within a virtual account structure."

VIRTUAL ACCOUNT STRUCTURE: AN IMPORTANT DECISION

Virtual accounts are one of the hot topic in the current cash management bank offer. The structure of accounts can vary significantly between banks, countries and the choice depends on the needs of the corporate subscribing the service. Some bank can open the master account in one country and virtual accounts in other countries and this virtual account could be in the name of a third company. This model fits the needs of corporates wishing a centralized management of customer collections through a collection factory, without impacting the “customer experience” (the customer would pay in one account of the supplier and in the same country, but the cash would be directly managed by the collection factory, with big advantages in term of real-time management of information). Some other bank can open a master account and virtual accounts in the same country, but the virtual account can be open in name a third company, like a subsidiary of the group. Same as above, the advantage is an unchanged “customer experience” in term of supplier name, but the account could be located in a different country to that of the customer. Finally, banks propose a certain customization in the account number definition, allowing the allocation and the opening of millions of accounts for one corporate, very useful especially when the virtual account is intended to manage collections for public utility corporations: in this case a virtual account is allocated to one specific customer and this improve the straight-through-reconciliation process.