Virtual accounts – the key to digital banking transformation



In recent years, transactional banking has gone through an innovation revolution. Ushered in by agile, tech-first fintechs, this era has unleashed endless new products and better user experiences. But, as we mentioned in the 2022 virtual accounts management whitepaper, this has left many corporates and their treasurers looking at their current banks and wondering whether they are getting what they need from their banks. They demand deeper, real-time insights into their liquidity position that allow them to react instantly to changes without intervention. 

In response, many incumbent banks are investing heavily into enhancing their cash management and payment platforms. One area in particular is gaining an ever-increasing amount of attention: virtual accounts. Although the concept has been around for over three decades, gaining particular prominence in Asia and the Nordics, it’s only now that treasurers are beginning to see just how vital they are to uplevel cash management and payment offerings. And as a result, demanding them from their current bank.  

In this blog, we’ll examine exactly what are virtual accounts, their use cases and their benefits for banks.  

What are virtual accounts?

The term ‘virtual accounts’ encompasses virtual IBANs, virtual account management (VAM) and virtual ledger management.  

They are, as the name suggests, virtual bank accounts that are designed to simplify the reconciliation of payables, receivables and/or to provide greater oversight of a business’s real-time cash position. 

How do virtual accounts work?  

Virtual accounts are a set of administrative ‘sub-accounts’ underlying one physical bank account maintained in the bank’s ledger, usually known as the master or real account. This real ledger account is mirrored 1:1 in the VAM solution, and is known as a clone, header or sub-ledger account.  

Both the clone and real account stay in sync through a range of accounting techniques. This ensures transaction and balance control are maintained between them both. 

Payment postings to the real account are replicated on the clone, which then allocates the debit or credit to the designated underlying virtual account, using either virtual account numbers or reference IDs. This provides greater transparency by allowing for the segregation of funds and automation of reconciliation without the need to operate several hundred real, on-balance accounts. 

From here, treasury teams can organise account hierarchies and align them to their legal, operational or business function structure. With the virtual account structure in place, treasurers are able to use them to simplify and automate a range of activities that often require a high amount of manual intervention.  

Who is the ideal target audience for virtual accounts? 

Despite an increase in recent years of B2B2C VAM solutions, the key audience for banks remains corporate businesses with complex banking needs.  

This is for two primary reasons: The complex banking needs themselves and the processes in place to deal with them.  

Many of these corporates operate in multiple currencies, have complex supply chains and multi-entity structures. And they have to manage multiple banking relationships while holding onto a high volume of client monies.  

These services require separate accounts. As such, many banks serve their corporate clients via a process called notional pooling. This is a process that uses multiple demand deposit accounts, each maintaining, segregating and reporting the cash for a specific operating area of the business. According to Goldman Sach’s Virtual Account Management report, banks typically maintain 350+ accounts for a corporate client.  

How can banks help corporates with virtual accounts

By replacing the notional pool system with a VAM solution, banks can help corporates tackle those challenges by:  

  • Centralising funds under a single real account, providing instant insight into their business’s overall cash position. 
  • Unlocking working capital that would otherwise have been trapped across multiple local or international bank accounts.  
  • Improving operational efficiency by reducing the time needed for reconciliation, and streamlining supplier and supply chain management and banking arrangements.  
  • Providing greater control through an attended web-channel, often accessed through an existing online banking portal. 
  • Reducing costs by considerably reducing account fees, transaction costs and the costs associated with traditional notional pooling arrangements.  

What do corporates want to achieve?

There’s a clear appetite for this among corporates too. Of the 250 leading treasury and risk management professionals we surveyed to find out their highest priority for the years ahead, we found that:  

  • 34.4% want to improve the efficiency of treasury using innovative technology 
  • 22.2% want better visibility of my cash position and cash forecasting 
  • 17.8% want to streamline and automate their ability to process payments 
  • 13.3% want to better connect their treasury with the other parts of the company’s operations 
  • 12.% want to automate and simplify my bank management and relationship 

What are the benefits for banks in offering virtual accounts? 

For the banks that decide to invest in a VAM solution, there are numerous benefits. 

Protect fee-based income 

Introducing a VAM solution reduces the need for costly traditional cash management products like notional pooling, while still offering similar benefits. 

With corporate treasurers looking to reduce their banking fees, banks risk losing a portion of their fee-based revenue by not offering a solution that is in-demand and becoming more widely available. 

Improve client-centricity 

By introducing a solution that promotes the reduction of bank fees and simplification of banking arrangements, banks can improve the user experience. At the same time, offering customers a solution that by design drives self-service adoption, banks can empower treasury teams to instruct actions without bank intervention. 

Decrease operational costs 

Providing clients with a VAM solution can also significantly reduce costs. Traditional notional pooling products require a high degree of regulatory oversight. This increases operational costs of an already low-margin revenue generator.  

Furthermore, by handing more control to corporate clients through a self-serve portal, banks can reduce administrative tasks currently handled by the back office. 

Finally, costs can be cut simply by reducing onboarding efforts and maintenance costs. 

Expands the bank’s product portfolio 

By providing a VAM solution, banks can carve out a competitive advantage by meeting a growing demand among corporate treasurers that is not yet widely available through traditional domestically based financial institutions. 

Once a VAM offering is in place, it can be a springboard to further expand a bank’s portfolio, says JP Morgan.  ‘What makes VAM structures powerful is their connectivity with other capabilities related to liquidity, payments, collections, channels and FX. A comprehensive VAM solution has the power to transform a reporting layer service into an effective and powerful business tool.’ 

What are the main VAM use cases? 

The concept of virtual accounting isn’t new. But the technology and client demand has advanced exponentially since its introduction in the Nordics during the late 1980s. 

This has seen vendors dramatically improve the functionality and user experience of their solutions. This means that treasury teams can now address an even broader set of business challenges. As such, there is now a long list of potential use cases for banks and their corporate clients. Here are four key examples. 

‘On Behalf Of’ management 

One use case is ‘On Behalf Of’ management.  ‘On Behalf Of’ management essentially categorises payments and receipts to help automate posting and reconciliation. Given that the movement of money within the virtual structure is only virtual, corporates could radically simplify their account structure to less than a few or even just one real account. In turn, they can drastically reduce reconciliation and day-to-day administrative treasury activities. 

Finally, given that the money is centralised 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. 

Client money management 

Virtual accounts have radically simplified how corporates segregate, manage and reconcile client funds. 

With client money management, corporate treasurers can create virtual accounts for each of their users, assigning them a unique routing reference which is to be entered into the payment credit reference field each time by the remitter. Funds are then collected by the real or master account before being routed to the designated virtual account for easy reconciliation and segregation of funds. Funds are notionally offset and provide corporates with a centralized view of their real-time cash position. 

Virtual cash management 

Virtual accounts can reduce the complexities created by traditional liquidity management methods such as notional pooling and physical cash concentration, as well as being able to easily obtain and manage the real-time centralisation of cash. 

In addition, several market solutions allow you to combine VAM with more established liquidity management solutions like cash sweeping, cash concentration and group lending limits. With these solutions, treasurers are able to blend traditional cash management methods within their virtual structures to further enhance and optimise treasury 


Virtual multi-bank management 

Corporate businesses generally maintain accounts across multiple banks for several reasons, including reducing risk, increasing flexibility or obtaining special lending and/or pricing arrangements. While holding multiple accounts across several banks has its advantages, it also poses several challenges. For instance, it makes it hard to obtain a true picture of a business’ real-time cash position. 

To fix these problems, several solutions offer a multi-bank capability. This provides the ability to view all accounts on a single digital channel, populating account information through inter-bank Swift messaging or open banking. A handful of solutions takes this one step further by offering corporate treasurers the ability to create virtual hierarchies and incorporate virtual liquidity management underneath multi-bank accounts. 

This solution provides treasurers with even greater flexibility, as they are no longer need to choose between bank accounts in order to obtain favourable conditions or a more complete VAM solution. 

How can banks begin offering VAM solutions? 

Building out a VAM offering all starts with finding the right partner. This is where we can help.  

To address growing demand, SAP Fioneer committed to developing a new virtual accounts solution. We enlisted bancon as our implementation partner and, together, have designed and delivered what is now our standard solution. 

This close collaboration and detailed client insight helped us design a compelling client-centric solution that provides financial institutions with a complete out-of-the-box platform. This allows banks to provide their corporate customers with a market-leading cash management solution. 

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