On average, a typical mid-to-large-sized corporate client brings with it more than 350 accounts spread across its subsidiaries—the cash for all of which will be managed by a corporate bank. To approach this complex task, many corporate banks have traditionally relied on multiple demand deposit accounts (DDAs) to maintain, segregate, and report cash for specific legal entities. This strategy is based on multiple levels of segmentation, as it requires the bank to pool the enterprise’s cash resources in a layer of consolidated accounts. Over time, managing these accounts will become more complicated due to the simple fact that as businesses grow, their cash deposits will mimic their organizational structure and also get dispersed across multiple groups and subsidiary bank accounts.
These days, however, innovative banks are using virtual accounts to minimize the intricacies of managing multiple layers of accounts for their corporate clients.
What Are Virtual Accounts and What Do They Bring to the Table?
Virtual accounts (VA), to put it simply, refer to non-real accounts that make and receive payments on behalf of real corporate banking accounts, and they work by redirecting the transactions to the existing accounts that they represent in real-time. But because VAs are not real per se, the transactions recorded under them are treated as off-balance-sheet items by corporate banks. These VAs can be organized according to the particular business needs of a corporate client, all without complicating the task for corporate banks.
Having the ability to manage VAs has a number of business applications for corporate banks and their clients. First, it brings a higher level of flexibility to corporate account structuring. While they represent real accounts, VAs are simply stand-ins, and they can be created, assigned to real accounts, and moved around without necessarily complicating the actual accounts that banks maintain for the corporate clients they work with. As such, treasurers have the freedom to fully control the organization of their corporate banking accounts according to the client’s reconciliation and segregation needs.
Second, having the ability to assign VAs to real accounts gives corporate banks a greater level of visibility on the transactions that they are processing. Getting a complete overview of a corporate client’s account portfolio and how each account is related to others heightens a corporate bank’s capability to keep track of transactions and determine where payments are coming from and going to. The data collected from these completed transactions can be used to automate time-consuming corporate account management tasks and address error-prone steps and pain points during account reconciliations.
Finally, having access to VAs enables corporate clients to take a more active role in managing their accounts. This innovation offers a streamlined and more straightforward approach to organizing and sustaining complicated account hierarchies, thus giving corporate clients the option to customize their account system from the ground up should they choose to do so. In fact, having VAs makes it possible for corporate banks and clients alike to build an account organization system from scratch that is uniquely designed to accommodate a corporate client’s goals and trajectory for growth.
It should be noted, though, that while virtual account management (VAM) can simplify corporate account organization, this solution does not completely eliminate the complexities that are inherent to managing mid-to-large-sized corporate accounts. Prior to implementing VAs, corporate banks must tweak the solutions that will host the VAs and ensure that they are compatible with the technology. Banks that are still using legacy systems, for example, may not have the capability to offer VAM within the level required by their corporate clients. The good news is that it’s an option for corporate banks to develop in-house applications that can support VAM. Alternatively, these banks also have the option to get in touch with a third-party services provider that can offer them market-ready applications specifically designed for managing virtual corporate accounts.
The Future for Early Adopters of Virtual Account Management Systems
While VAs is far from a novel idea, it’s only now that many corporate banks and clients are able to appreciate the level of flexibility afforded by virtual account management. For corporate clients, the rise of VAM means that they have every opportunity to consolidate their accounts in a single financial organization, though corporations typically maintain relationships with multiple banks for a variety of practical reasons. At the same time, access to simplified VAM systems brings corporate banks a step closer to open banking, which is a practice that allows banks to collaborate with a third-party financial services provider. In general, the banking industry is moving toward open banking, and being in a position to take part in this practice puts corporate banks and their clients at a clear business advantage today and in the coming years.