User Experiences with Virtual Bank Accounts

Commentary

All your cash in one place – but with each transaction tagged so it can be identified and allocated automatically. This is the promise of virtual bank accounts: the first offering was a unique IBAN for each customer to pay into, although all the cash really goes into the main account. This makes it easier to reconcile the receipts to invoices – the customer is already identified.

The second step is to keep one bank account, but give each subsidiary or division its own IBAN: no need for cash sweeping or pooling – all the cash is in one place. But you can then use the tags on the records to constitute and account for each entity. This structure is used by many in-house banks.

Banks have been marketing virtual accounts for more than a decade. In a recent CXC poll (results here) , 30% of respondees said they use them: of these, 84% found the product met or exceeded expectations, while 16% were disappointed.

So – what is happening? Why hasn’t the product taken the world by storm? 

Overall:

Some peers have effective solutions, which vary from complete in-house banks to receivables and payables solutions with varying degrees of sophistication.

Others have found that they are able to achieve many of the objectives of virtual accounts by using the enhanced data recognition and machine learning capabilities of more recent ERPs. These peers generally found virtual accounts added limited value.

During our call, we learned of unexpected uses of virtual accounts. These included managing payroll confidentiality, enforcing limits on employee credit cards, and segregating customer cash.

Positive cases:

• One peer achieves significant benefits, not only from cash pooling, but from eliminating the need to do intercompany settlements. Several peers have implemented their own internal virtual accounts: there is only one external bank account by currency, but all cash transactions are tagged to different entities or business units, which means central treasury (or the in-house bank) can track receipts, payments and balances by entity or business unit as if they were with external bank accounts. This is how most in-house banks work. An internal IT capability is required: including SAP and various TMSs.
• One peer uses virtual accounts to provide cash and cash flow reporting for their five business units, which all share the same external bank account. They use BlackLine  - machine learning - which effectively uses the remitter’s bank account information to identify the payer.
• Virtual accounts involve a significant reduction in external bank accounts and relationships – with the usual challenges which accompany closing banking relationships.
• This should lead to a significant reduction in bank charges. Some peers – but not all – found this to be the case – but there is a reduction in bank reconciliations.
• One uses virtual accounts for payments: this makes it easier to distinguish when an incoming receipt is due, for example, to a rejected payment or a supplier returning cash.
• Virtual accounts are often used as part of POBO and ROBO solutions (Payment and Receipt on Behalf Of). In Europe, some companies receive all euro settlements into an account, usually in the Netherlands, and use virtual account functionality to credit the national operating entities. 
• Virtual accounts are also being used for payroll. To maintain confidentiality, it is essential to have a single, bulk, debit to the bank account: if each payment is a separate line item, the salary of each employee becomes visible to all the accounting staff. Some banks are only able to switch bulk debits on or off at the account level, not by payment type; in this case, a virtual account provides a solution. Some of the technical details here were still being resolved.
• Another unexpected use was in managing employee credit cards: virtual accounts provide the ability to settle the cards automatically, while imposing strict limits on the amount which can be paid. This use was in Indonesia, with Bank Central Asia.
• A couple of peers have businesses where they need to hold client cash. Virtual accounts are an effective means of tracking this: one uses Barclays’ VAM system, which also provides the ability to pay different interest rates by customer. This system also allows them to provide their own dynamic IBANs for virtual accounts.
• One peer found virtual accounts in Japan (with JPMorgan) to be an effective way of avoiding confusion when many customers have similar names. 
• One peer can allocate their own virtual IBANs from a range provided by their bank (HSBC).

Negatives:

• Banks were found to be inconsistent in their offerings, both between banks and across the same bank in different countries. HSBC received the most positive comments: other banks which were appreciated include JPMorgan and BNP Paribas - though they do not offer them everywhere. Citi, Wells Fargo (in the US), Deutsche Bank and Barclays (in the UK) were also mentioned, with product development ongoing.
• As mentioned above, the benefit of virtual accounts is that they provide a tag which identifies transactions to a customer or a business unit. Increasingly, ERPs and other software are able to achieve this by other means. In all cases, the virtual account numbers need to be mapped to the internal systems.
• A corollary to this is that virtual accounts work best when coupled with a good internal IT system. Apart from anything else, this is required to meet tax and audit requirements.
• Peers look for reduced administration, KYC and bank fees. Peers’ experience on this varied. Some were positive; others less so. 
• Cash pooling via virtual accounts works where there are no regulatory or exchange control issues. So it is effective in Europe, but less so in Asia. 
• No peer on the call reported having virtual accounts with multi currency capabilities.
• Using virtual accounts for customer receipts requires getting all customers to change the bank account number they remit to. This is a challenge – and can result in a large number of bank account numbers to manage. 

Bottom line: the idea of virtual accounts is seductive: have all cash in one bank account, with all transactions properly labelled so they can be correctly reconciled and allocated to the relevant legal entities and business units. That way, a treasurer receives all the benefits of concentrating cash, while at the same time being efficient in matching collections and tracking cash and cash generation by business. If the entire banking and corporate infrastructure was being built from zero today, this would doubtless be a very attractive solution.

Listening to the peers on our call, some impressive results have been achieved. But the fact remains that we all have to deal with legacy infrastructures – especially the banks. So, as other means of achieving a similar result become available, it should not be surprising to see these being adopted. Going forward, as treasurers issue RFPs to change existing structures, we will doubtless see more virtual account solutions.

But, despite the clear benefits and the creativity on show, we should not be surprised to see treasurers go with other solutions.