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Virtual accounts – the next big thing in liquidity management

April 23, 2018 - Ankit Batwara

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In the present globalized world, big corporates have their business operations spread across continents and countries. As a legal entity in different countries, they open bank accounts based on their relationship with different global banks. In these cases, it is very difficult for the global finance controller to see their consolidated liquidity and manage them based on their requirements.
Banking laws are tightly coupled, and account-related information as well as transfer of funds from one account to another account in different countries is governed by the respective countries’ banking laws. And taking services from expensive payment gateways like SWIFT may not be the best solution to manage this.
Virtual accounts, where actual accounts are not disclosed to the payers, are in use for a long time for collection purposes and are an effective alternative to overcome this barrier. This process is widely known as COBO – Collections-On-Behalf-Of. Banks when receive funds in these virtual accounts, pass the respective credits into the actual account of merchant/corporate.
In today’s world, the usage of virtual account has been extended to managing global liquidity by corporate treasurer, as controlling banking accounts and its liquidity in each country is very expensive and expensive to administer. Now, global treasury departments need real time information on funds being paid or received by its subsidiaries across the globe, so appropriate sweeping targets at balancing liquidity functions can be performed and managed better.

Functions in Virtual Account Management

  • Account Management functions include opening of virtual account, linking it with actual account, calculating interest and limits maintenance on virtual accounts

  • POBO, COBO functionalities, where virtual account is used by the corporate for making and collecting payments

  • Real time sweeping and pooling from virtual accounts

Typical structure of Virtual Account Management

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In the above example, in figure 1, without the presence of virtual account, individual banking accounts are maintained in each entity. This in turn increases operational and administrative cost of the corporate. To minimize this effect, virtual accounts are opened under one operational current account. Under VAM, corporate treasury department can view the consolidated liquidity in one physical account and can perform all working capital methodology to manage funds in respective entities.

Benefits of VAM Solution

  • Centralized treasury operations – Better cash visibility and optimization

  • Optimized cash flow – Help clients manage their working capital better

  • Lower costs – Lower transaction cost, administrative and fund transfer cost for physical accounts

  • POBO/COBO/ROBO – Capability to initiate or receive payment in the virtual account while hitting real account from debit/credit

  • STP reconciliation capabilities ­­- Reconciliation at virtual account level

  • Better tracking of inter company funds

Corporate Dashboard for VAM

Corporate treasury department requires a dashboard view of all its virtual accounts, its structure, real time balances and interest component. This would be required so that the global department can monitor liquidity and check for its working capital requirements. This also helps the corporate in better reconciliation of its payables and receivables.

A quick summary of virtual accounts and VAM platforms:

  • Mostly large global banks that have a presence across the globe offer VAM platforms to their global customers. This poses threat to local banks

  • VAM solutions offer corporates to create, manage and monitor virtual accounts

Banks must keep in mind the following:

  • Questions regarding tax, local compliances, KYC formalities and legal impact must be checked while opening a virtual account

  • Putting the customer in control may pose problems for bank in monitoring fraud related activities

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4 thoughts on “Virtual accounts – the next big thing in liquidity management

  • Innovative Solution. Great value for Large Multinational entities or corporations that has footprint in many countries.

  • Innovative Solution. Great value of Large Multinational entities or corporations that has footprint in many countries.

  • Informative with good example. Somehow I see it becomes a big thing in retail consumer market too.

  • Great article. Neatly explained

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