Published: September 01, 2018
The industry has created confusion by using the term ‘virtual accounts’ to describe a wide range of products. Here we aim to demystify the terms being used to describe Virtual Account Management (VAM) or Virtual Ledgers, assess the capabilities available today and in future, and highlight the questions that every treasurer should be asking their Virtual Account Management provider.
There are at least three different types of VAM.
A receivables only product, enabling straight-through reconciliation (STR) of receipts, segregated by payer. A corporate assigns a virtual IBAN to each paying supplier to increase visibility and decrease Days Sales Outstanding (DSO) through automated reconciliation.
Another receivables only offering, aiding understanding of which underlying legal entity is being paid. A company with a large number of legal entities with many receipts due uses virtual IBANs as part of ROBO set-up, to enable entity level segregation of funds without compromising cash concentration.
This may be combined with the above for ‘2-level’ virtual receivables, reporting on payer or entity or both, with funding maintained in one physical account.
A solution including payments, receipts and liquidity management capabilities using virtual IBANs, which can report on each virtual IBAN as if it were a real physical account. This offering can realise account rationalisation, enable
On-Behalf-Of (OBO) set-ups or transition physical or notional pooling structures with virtual cash pools. Sub-ledger VAM opens up new possibilities.
Essentially, VAM is a great tool for account rationalisation, allowing corporate treasurers to reduce 30-40% of their accounts compared with 40-50% for a full OBO implementation. Used effectively, it is a cost-efficient means of getting closer to the treasurer’s nirvana of ‘one bank account to rule them all’.
VAM also provides significantly more transparency at the treasury level, by enabling slicing and dicing of information in a way that is either not possible through physical accounts or expensive when done as part of a treasury management system. With a bank-provided virtual account structure, a corporate’s unique business structure can be reflected and organised to track, report, and reconcile bank data. This flexibility within reporting saves time and facilitates tracking of transactions while achieving centralisation.
So with all these benefits, why hasn’t every corporate virtualised?
VAM has not yet reached market maturity and there are objective trade-offs in features currently available. The choice depends on the treasurer’s scope of responsibilities and, ultimately, ambitions. Those for whom geographical scope of VAM implementation is limited to a single market and major currencies can already take advantage of vendor-based single market solutions.
However, treasurers with multi-market or global remits will need to wait a little longer. No off-the-shelf vendor solution for global sub-ledger VAM exists today, and certain functionalities can only be offered through full integration of VAM into a bank’s account platforms. For instance, an entity’s physical bank account can become virtual and keep its account number for the outside world, yet allow the treasurer to adjust the reporting and liquidity structure within the VAM platform. In-house-bank treasuries managing subsidiaries before a spin-off can ensure the entity keeps its account number, even if funding and liquidity are no longer managed by the in-house bank. Deep integration between VAM and the bank’s platforms allows conversion of physical to virtual accounts.
When thinking through the possibilities of VAM, it is important to note that some challenges are not technological but legal and regulatory in nature. Questions on making payments from a virtual account from a location where no physical account is present should be answered through a regulatory lens. Buyers must beware. Banks interpret regulations with varying degrees of liberalism.
2019 is set to be the watershed year for VAM. Banks will offer solutions that are consistent globally, match their clients’ footprints and develop more functionality. The way cash management operates will change beyond recognition.
Corporate treasurers embarking on their virtualisation journey should start by asking their banks the following questions:
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