Virtual Accounts: Going beyond receivables
Over the past decade, an increasing number of corporates have begun to use virtual accounts, which have been extremely useful in helping them identify their payors as well as to improve days sales outstanding (DSO). Virtual accounts add value by streamlining and automating the accounts receivables reconciliation process. Furthermore, using virtual accounts has allowed treasury departments to cut the number of physical accounts they had to open to identify their key buyers.
Virtual accounts have largely been used for receivables reconciliation – to resolve reconciliation issues on the collections side – and there has been little or no use of virtual accounts for payments. Corporates and banks alike believed using a payments reference number and payment details, along with on-behalf-of information, would continue to be sufficient to identify the different business units making payments within the same entity.
As corporates have begun to set up in-house banks (IHBs) and other centralised structures, however, they have encountered new challenges. It can be difficult to deploy an authorisation structure across multiple groups of users on a single physical account: For example, as well as in limiting different users so they utilise only their fair share of funds within the account and in facilitating reconciliation requirements at the business unit, location or supplier level.
Corporates have usually addressed these challenges by opening different physical accounts for different business units, factories, or product lines. The 2017 Global Treasury Benchmark survey conducted by PwC revealed that a typical organisation maintained an average of 344 local bank accounts and used approximately seven core banks, as well as 20 non-core banks.
Having so many physical accounts adds significantly to corporates’ administrative overheads and also creates unnecessary additional challenges with control, visibility and cash concentration.
A solution would enable corporates to replace their physical accounts with virtual accounts while still allowing them to retain key characteristics of a physical account: For example, being able to restrict user entitlements, allow clients to have customised payment authorisation matrices and provide end-of-day utilisation reports at the account level.
Top banks are thus building on the success they have had with virtual accounts for collections by introducing virtual accounts for payments with specific capabilities designed to address corporates’ key needs. Virtual accounts available from Standard Chartered Bank, for example, have:
- An authorisation matrix at a virtual account level that enables corporates to maintain customised authorisation flows and restrict user access, so that they can maintain confidentiality over critical payments such as payroll.
- The capability to manage limits at a virtual account level and to monitor the value of total payment flows over a particular period.
- End-of-day reporting capabilities that summarise the total outflow value in relation to their set limits, so corporates can manage their expense processes more efficiently.
- Payment segregation, with payments routed through a virtual account that enables seamless identification and also segregation at business unit, location or supplier level. A unique virtual account number can be assigned to identify each unit, with all virtual accounts corresponding to a single physical account.
Replicating characteristics of a physical account in virtual accounts
All eyes on the future
Using virtual accounts to reduce the number of physical accounts whilst still managing payables and receivables efficiently is a good place to kick off. The ability to cut down the number of physical accounts used by a business via a Virtual Account solution also provides for natural liquidity aggregation across the resulting smaller number of physical accounts.
By extension, this solution can eliminate the need for single currency domestic cash concentration and sweeping structures in many cases, since a corporate’s funds can be concentrated in one physical account on a per currency basis.
For a company operating with multiple currency requirements, the option exists in many markets to deploy a multi-currency, single entity notional pool across the highly rationalised account structure. Such a solution would enable a corporate to not only enjoy the benefits of natural cash concentration that virtual accounts provide, but also the additional benefit of minimising FX conversion costs via the ability to offset debit balances in one currency using surplus cash balances in another.
Historically, this level of treasury sophistication was beyond the reach of many corporates, due to the need for significant technology investment and integration. Today, by leveraging the advanced capabilities provided by banks likes ourselves, corporate treasurers are ideally placed to transform their cash and liquidity management at far lower cost.
Using a complete virtual account solution, such as the virtual accounts for both payments and collections from Standard Chartered Bank, thus provides a cash management solution for corporates that can increase their efficiency and productivity tremendously.
Authors: Shirish Wadivkar, managing director and global head, payables and receivables, and Byron Gardiner, executive director, treasury solutions, transaction banking at Standard Chartered