By Ted Howard
NeuGroup peer group members continue to find good uses for virtual accounts; nonetheless, there are concerns about using them.
Virtual accounts mean different things to different people. One view is that to take full advantage, you want to have just one physical bank account and put all affiliates in all countries in a virtual account setup. But some take a more cautionary view.
This push to centralize into one physical account is an offshoot of treasurers’ continuing attempts to streamline processing and centralize global operations; replacing physical accounts with virtual ones, for example, can reduce administrative costs. Virtual accounts are also viewed as a complement to treasurers’ digital agendas for transaction banking, which ultimately will allow them to realize their objectives around real-time payments, visibility and working capital optimization.
A virtual account is fundamentally a ledger record linked to a physical bank account that can be used by treasurers to more effectively manage working capital, while at the same time significantly reducing bank account fees. A virtual account functions much like a traditional bank account but without the associated administrative burden and costs. They’ve been prevalent in Asia for more than a decade, but in more of a receivables context.
And many practitioners believe virtual account structures will be a convenient solution to address some of the pressures currently in the market. Virtual accounts could provide a viable alternative to notional pooling and allow banks to save on regulatory capital costs. Virtual accounts also facilitate a variety of pay-on-behalf-of (POBO) and receive-on-behalf-of (ROBO) structures.
“Customers often oversimplify the value of virtual accounts, thinking they only speed up the way in which one can … open an account under the same entity,” says one banker who is involved in helping companies set up the accounts. “But they offer much more, particularly if clients explore their value in the context of using them for receivables and payables management, in-house banking and managing liquidity.”
The accounts have now reemerged in Europe largely due to the sophistication the product offers and the variety of business structures it can support in both the payables and receivables context. However, at a NeuGroup European Treasurers’ Peer Group (EuroTPG) meeting in late 2018, several group members raised concerns and detailed some of the challenges they face using this approach.
First, virtual accounts lose the audit trail footprint of a physical bank account, which is often relied upon for tax-related supporting documentation. Some fear that this could lead to increased tax audits in stringent jurisdictions, creating unnecessary hassles.
Second, virtual account solutions from banks covering multiple legal entities involve levels of know your customer (KYC) documentation comparable to what’s required for physical bank accounts—so there’s no big advantage.
Third, one member said he faced resistance from finance colleagues alarmed by the word “virtual.” After more internal discussion, treasury changed the name to subaccounts. Meanwhile, some corporates have chosen to implement virtual accounts for limited purposes where the benefits are clear and the risks are contained. One example: using them for accounts receivable reconciliation for customer payments to a single legal entity.
Despite the concerns, some multinationals are forging ahead with virtual accounts, as banks continue making progress in offering them. This has created new opportunities for MNCs in big undertakings like refining in-house bank interfaces with external banks.
And in other NeuGroups, members who favor virtual accounts said their companies use them in smaller markets and developing countries. One member of NeuGroup’s Global Cash and Banking Group (GCBG) said he utilizes virtual accounts in Russia and Brazil for connecting multiple bank accounts using unique identifiers. Another GCBG member said her company has entities collecting Singapore dollars in Singapore, Puerto Rico and Australia that are linked to a virtual account, which sweeps the money to a London-based, in-house bank account at Citibank for cash pooling.
While the mantra for treasurers has changed nominally—from “do more with less” to “do more with the same”—the drive toward achieving more streamlined and straight-through processing and reducing costs via virtual accounts fit the bill. Treasurers can easily create the “dummy” accounts linked to a physical current account in large numbers without incurring the accounting and regulatory workload. They are a particularly attractive option for corporates with decentralized collections across wide geographies and offer the opportunity to transform treasurers’ approach to cash management while improving automation and reducing costs.