Digital innovations have changed the banking experience for consumers over the past few years. Now, many banks are turning their focus towards offering a similar level of innovation to their corporate customers.
Large businesses often have complex banking requirements. They are likely to have outlets or clients across different regions or countries. This means that payments may be received in different currencies. Banks typically maintain more than 350 accounts per corporate client, according to data from Goldman Sachs.
Companies need good oversight of multiple accounts covering different parts of the business. And they will expect banks to meet their growing needs. Physical accounts can be expensive and time intensive to open. Virtual Account Management (VAM) can be a powerful solution to the operational and compliance challenges that come with managing multiple accounts.
Virtual accounts can help banks win new business and enhance their service offerings with current clients, leading to greater customer retention.
Below we explain the benefits of virtual accounts and how they are shaking up the traditional banking landscape.
The complexity of corporate banking and cash management
Corporate banking has traditionally involved managing cash deposits and transactions across several bank accounts. For larger firms with subsidiaries worldwide, there may even be thousands of accounts covering different parts of the company.
Many firms will rely on multiple demand deposit accounts (DDAs) to cover different business divisions or separate subsidiaries. And to help with cash management, they may look at all these accounts to see where money could be moved to be used more efficiently.
For example, one account may be utilizing an overdraft and is paying an interest rate of 10% while another account has a cash surplus earning 5% interest. In this case, it might make sense for the entity with the cash surplus to have loaned or given money to the other division, ultimately saving the parent company interest payment costs. This cash management technique may be described as pooling or sweeping.
The problem with having multiple bank accounts is that it is difficult to have full visibility over them all, so it is easy to miss opportunities to streamline processes and reduce costs.
More than a fifth (22%) of treasury and risk management professionals recently said that getting better visibility of their cash position and cash forecasting is a main priority.
Rise of Virtual Account Management
In the face of a volatile economic environment and stringent regulatory requirements, corporates are seeking more efficient and cost-effective ways to manage their cash and transactions.
Virtual Account Management (VAM) addresses these needs head-on, providing businesses and corporate treasurers with a streamlined and unified approach to cash management.
VAM may also be called Virtual Accounts, Virtual Solutions or Virtual Cash Management. There are multiple terms but ultimately it is one powerful concept for managing cash that has advanced in line with technological innovation.
Virtual accounts give business owners and financial controllers a way of organizing and reporting data through a single bank account. VAM enables them to have a comprehensive view on their cash position. This helps them to focus on strategic decisions such as where to invest or where to save money by not taking an expensive credit.
Virtual accounts are a set of administrative ‘sub-accounts’ underlying one physical bank account, usually known as the master or real account. Both the real account and the sum of all virtual accounts underneath stay synchronized through a range of accounting techniques. Payment postings to the real account are replicated into the virtual account hierarchy using either virtual account numbers or reference IDs which allows automating the reconciliation process.
Via self-service features, treasury teams can organize account hierarchies and align them to their legal, operational or business function structure. Some providers allow companies to combine VAM with traditional processes such as pooling and sweeping to enhance money management across the business.
Given that the money is centralized inside one real account, treasurers are also able to reduce or move away from complex liquidity arrangements such as notional pooling, which require strict regulatory oversight and are often costly to run.
Advantages of Virtual Account Management for corporates
Customers are demanding increased levels of self-service and greater digitalization. They want a flexible banking solution that is tailored to their own business needs, which Virtual Account Management provides as it removes the need for multiple physical accounts.
Here are some of the other benefits of VAM for corporates:
Visibility and control
Corporate clients have real-time visibility and control over their transactions and balances, which is particularly beneficial for those dealing with high volumes of transactions or with multinational operations.
Operational efficiency
Managing transactional operations efficiently can be challenging through multiple bank accounts. VAM means everything can be handled through one main account, making it easier for companies to monitor cash flow, track payments and make the accounts receivable process more efficient. They are designed to simplify the reconciliation of payables and receivables. Payments can be routed automatically to the desired virtual accounts, meaning reduced manual reconciliation.
Risk management
By consolidating multiple physical bank accounts into a streamlined structure of virtual accounts, treasurers gain a more accurate, real-time overview of the organization’s entire financial position. This granular visibility plays a crucial role in effective risk management.
Cost reduction
Virtual accounts allow to reduce the number of real accounts and hence reduce costs. In addition, physical cash and real transactions reside in only one master account. This means that corporates can significantly rationalize the need for physical sweeps and complex pooling agreements.
Cash flow management
The ability to manage cash flow more effectively is the key benefit of VAM. This helps businesses to allocate funds or move money within the company more effectively. Other fintech solutions can also be integrated through VAM, such as third-party accounting and invoicing software, to give fuller oversight of business activities.
Case study: Deutsche Bank
An example of a corporate bank offering Virtual Account Management is Deutsche Bank, which explains here how it rolled out a virtual account structure for its client, Siemens.
The process involved converting all IBANs into virtual IBANs and closing the related physical accounts. The aim is to work towards a centralized banking structure across its subsidiaries. Currently Siemens has virtual accounts running in its Germany-based subsidiaries. And plans to roll the system out further, starting with the Netherlands.
Having all transactions booked to the physical account gives their clients real-time cash concentration across the related structure. This potentially removes any need for regional end-of-day pooling. This raises the prospect of liquidity optimisation. And it also drives simplification and assures full transparency for every counterparty.
Finding the right VAM partner
Fintech companies and challenger banks are disrupting the banking landscape with innovative offerings. To stay competitive, traditional banks need to augment their product portfolio with forward-thinking solutions like VAM. A technology provider, such as SAP Fioneer, can provide your bank with the technology needed to implement VAM.
To ensure having the right partner at your side, here is a checklist for choosing a VAM provider.
- Functional capabilities: Does the solution meet your bank’s specific needs? Evaluate the breadth and depth of the product features, including account structuring, cash management, payments and collections, reconciliation, reporting, etc.
- Integration ability: How easily can the solution be integrated with your existing systems? The best VAM solutions will seamlessly work with your bank’s existing ERP systems, treasury management systems, and other digital infrastructure.
- Scalability: Does the solution scale to accommodate the size and complexity of your bank’s operations? Whether it’s the number of accounts, transaction volume, or geographic spread, ensure the solution can grow with your bank.
- Cost: Evaluate the total cost of ownership of the solution, including licensing, implementation, training, maintenance, and upgrade costs. Consider the return on investment that the solution can deliver.
- Future-proofing: Does the solution incorporate the latest trends and technologies, like AI, machine learning, and automation? A future-ready solution can help your bank stay competitive in the long run.
The future of corporate banking with Virtual Account Management
Virtual Account Management will become a standard feature in corporate banking as banks look to build stronger client relationships through improved service levels, increased transparency, and better responsiveness to client needs.
Now is an opportune time to invest in VAM. It is a strategic move that can propel your bank forward, helping you:
- Keep pace with industry trends
- Meet client expectations
- Maintain a competitive edge in the evolving banking landscape
- Attract new clients and retain existing ones
- Boost revenue. Our data shows banks benefit from 15%-25% higher revenue per customer with VAM
SAP Fioneer can help you provide virtual accounts through our SAP Fioneer Virtual Account Management solution.
Find out more about Virtual Account Management and how your bank could benefit by attending our upcoming webinar: The Technology Treasurers Need: Transforming Cash Management with Virtual Accounts. Register here.