What corporate treasurers need to know about Virtual Account Management

Virtual Account Management (VAM) is a client-driven virtual banking solution that maximizes liquidity, saves time and costs, and keeps pace with real-time business schedules to move money faster.

Tags: Accounts, Cash flow, Innovation, Real-time payments, Technology
Published: October 06, 2021

The increasing pace of commerce has become expensive and overly complicated.

Money movement is notoriously complex. Corporate finance leaders spend an incredible amount of time organizing Demand Deposit Accounts (DDAs) and their associated transactions for managing cashflow, reporting, reconciliation, and any number of operational and strategic reasons. Compliance and regulatory concerns, technology implementations and analysis add more time and cost to the day-to-day.

As if that isn’t enough to keep corporate treasurers busy, real-time business, consisting of faster payments, customer connectivity and the 24/7/365 transaction cycle has evolved from convenience to table stakes. Businesses that can’t keep pace – from meeting stakeholder demands to internal due diligence, cash management, risk mitigation and controls – won’t be in business much longer.

With the rapidity of transaction cycles beginning to represent pre-Euro cross-border, multi-currency and time-zone business operations, domestic corporates who wish to remain competitive should consider taking a cue from their continental counterparts and explore the opportunity of Virtual Account Management (VAM).

 

What are ‘virtual accounts’ and how does VAM work?

Virtual accounts, also known as Virtual Cash Management, Virtual Solutions and Virtual Banking, along with many other phrasings, are simply digital sub-accounts created within one centralized bank account, e.g., a Direct Deposit Account. Virtual accounts allow for managing cash, analysis, reporting and money movement (intra-company balancing, for example) without the need to open more bank accounts or new banking relationships.

Virtual accounts first gained popularity in the European Union around 2014 to enhance cross-border cash management and transparency while meeting and exceeding continual updates to Open Banking regulation. Initially intended to facilitate innovation and increase efficiency and increasing customer security for digital payments, virtual accounts soon garnered their reputation as an intuitive, fast means for corporates to reduce their number of “physical” accounts and bank relationships without disrupting operations.

 

“For any business that requires ‘intensive’ cash management, such as frequent account openings or closings, precise reporting and
fluidity – like title and escrow companies, suppliers, construction, etc. – it’s not difficult to see how quickly the gains come with virtual accounts."

 

With the maturation of VAM came further use cases and innovation which, paired with the “perfect storm” of the global pandemic and subsequent mass adoption of digital and faster payments, have made some very big waves on their journey across the Atlantic. In the U.S. however, domestically based corporates are still fast followers to virtual accounts adoption. Although there are no current federal regulations requiring virtual accounting structures for business, the features and obvious benefits are driving quick adaptations, innovative solutions and a new way to sharpen the competitive edge.

 

Virtual Account Management benefits for corporate treasury and accounting.

There are several features of virtual accounts that have caught the eye of finance leaders in the U.S., and several more to benefit corporations that might not be so apparent. In every case, virtual accounts can be characterized as a truly customizable cash management solution which unlocks potential for unparalleled efficiency, visibility and security.

Efficiency

  • Accelerated operations without impacting operations. Without needing to establish another physical account, operations aren’t negatively impacted by transitioning to virtual accounts. And, by reducing the number of physical accounts associated with an enterprise or function, a company may harmonize liquidity with strategy so business operations can occur more quickly and freely. 
  • Speed. Keeping pace with real-time business means originating, initiating and receiving transactions across an enterprise 24/7/365. Payments remittance data and reconciliations capabilities are able to “keep up” with virtual accounts for real-time cash management and faster decision making.

Visibility

  • Single-source reporting and analysis over ‘infinite’ accounts. The potential for variable, aligned-to-your-business virtual accounts structures makes a unified view of cash positioning possible, all while segregating business activities under a single physical account. 
  • Centralized liquidity. Virtual accounts allow for real-time cash pooling and sweeps for liquidity events. Business leaders no longer have to rely on “banker’s hours” to capture immediate opportunities across time zones or business lines.

Security

  • Rationalized account structures. With virtual accounts, companies are choosing to significantly reduce their number of physical accounts assigned to varying activities. The newly rationalized account structure reduces gaps and obstacles for cash management, resulting in fewer opportunities for fraud and reduced risk. 
  • Faster payments, less exposure. Virtual accounts management relies on established, centralized payments rails, such as Real-time payments, Same day ACH and wires. Utilizing faster, digital payments rails with (in most cases) embedded remittance data and messaging capabilities strengthens controls and reduces risk for money movement.

Experts weigh in: VAM use cases and the myth of the ‘perfect industry’

“People always ask me ‘what is the perfect use case or industry?’ for VAM,” said Vanessa Angeles, Senior Vice President and head of Treasury Management New Product Development at U.S. Bank, “and the fact is that there is not one single industry or business, size, scale, vertical, or segment that can’t immediately benefit from virtual accounts.”

Angeles cited speed and efficacy, in addition to stronger controls, for the success of VAM in the European Union – and the growing appetite for virtual accounts for U.S.-based corporates.

“For any business that requires ‘intensive’ cash management, such as frequent account openings or closings, precise reporting and fluidity – like title and escrow companies, suppliers, construction, etc. – it’s not difficult to see how quickly the gains come with virtual accounts,” Angeles said.

Other features of virtual accounts that transcend industries, regions and segments, she added, are flexibility and scalability.

“I think it’s easy to take for granted that when we’re talking about ‘very large’ companies -- and I mean those with hundreds, thousands or even more physical accounts – it’s not just the top 10,” she said, “We’re probably talking about the whole Fortune 1000, but virtual accounts are something we’re seeing everywhere, and this kind of ‘DIY banking’ is creating value from the biggest businesses all the way to the bootstrap startups.”

Speaking to the technological benefits of virtual accounts, Madison Donnini, vice president and Working Capital Consultant, said information technologists and CIOs stand together with their finance counterparts in the demand for VAM.

“From a tech perspective, VAM is cool … but from a holistic-business perspective,” she added, “it’s not just payments and liquidity where you’ll see improvements, it’s your whole digital ecosystem.”

Donnini explained that in the modern business environment, money movement and banking decisions will always require analysis and inputs from IT departments. In the past few years, the trend has been increasing weight given to CIO insights; so much that CFOs and treasurers need to be more tech-savvy than ever.

“For future-forward businesses who want to eliminate friction, not create more, when they’re implementing new technology, virtual accounts are extremely attractive,” she said. “When we’re working together with clients and analyzing their tech platforms for new opportunities, the fact that VAM doesn’t rely on outdated script or programming languages is, for the IT stakeholders, a huge relief.”

 

For more information about innovations in treasury management and the benefits of digital-first payment solutions, and how faster payments and virtual accounts can accelerate your strategy, enhance liquidity and reduce risk, connect with a U.S. Bank Relationship Manager.