Virtual account management


Virtual account management

Achieving cash concentration in transaction banking

Goldman Sachs recently entered into transaction banking, the business of helping corporates manage their cash and payment transactions effectively. They believe that next-generation transaction banking is underpinned by four pillars—data, global payments, liquidity management, and virtual accounts. We provide an in-depth view on virtual accounts, their role in transaction banking going forward, and their implications for treasuries.

The traditional approach to transaction banking

Traditionally, cash in corporates is managed using multiple demand deposit accounts (DDAs), each maintaining, segregating, and reporting the cash for a specific operating area of the group or legal entity. Current cash management techniques rely on pooling and sweeping to consolidate cash in a layer of concentration accounts through numerous bank account transactions.

As business needs grow, corporates’ cash deposits get dispersed across a myriad of group and subsidiary bank accounts. Corporates usually have complex account architectures for each entity to support its unique operating, regulatory, and liquidity requirements.

Cash concentration in this environment can be expensive and time-consuming due to complex information-gathering workflows, manual reconciliation processes, different reporting standards and batch-processing methods. All of this inhibits just-in-time funding and optimal working capital utilization.

Virtual account management: A foundational imperative for cash concentration

What’s virtual account management (VAM) and how does it work?

Virtual account management is the method of organizing balances and transactional information within a traditional “physical” bank account.

Virtual account management works by recognizing unique identifiers and using them to allocate transactions to discrete subledgers, called virtual accounts, within a physical account. This way, an incoming or outgoing payment simultaneously posts to the “master” physical account and to the relevant virtual account. An opening and closing balance is also calculated for each virtual account, giving them the same reporting granularity as a physical account, but all within one account.

Goldman Sachs’ virtual account solution, Virtual Integrated Accounts (VIA), provides a unique identifier that can be configured as a clearing-recognized account number. This means that customers of a corporate don’t need to worry about reference numbers. They simply use the virtual account number they’ve been given, and the remittance will automatically post to the relevant physical account and, simultaneously, to the correct virtual account.

This overcomes two potential drawbacks of using reference numbers instead:

  1. The customer needs to correctly send two numbers on the payment remittance—the physical account number and the reference number.
  2. If the reference number is omitted, or incorrect, the payment will still post to the physical account, but will need manual intervention to allocate funds accordingly.

However, in some situations, reference numbers are desirable. Consider, for example, an insurance company that wants to use policy numbers as the virtual account identifier. The Goldman Sachs solution has the flexibility to configure virtual account identifiers as reference numbers.

Virtual account vs. physical account in transaction banking

While virtual accounts are merely a reporting tool, each individual virtual account provides the same segregation of data, balance analysis, and transaction identification that a physical account would.

However, the administrative overhead of opening and managing virtual accounts will be far less than for physical accounts. Furthermore, bank charges associated with maintaining virtual accounts and transacting between virtual accounts should be significantly lower than for physical accounts.

Finally, it becomes practical to open thousands, or even millions of virtual accounts, when doing so with physical accounts would be unthinkable.

Using the self-service feature, which is also part of the Goldman Sachs offering, treasuries can independently maintain virtual account structures precisely to their own specifications. At the same time, the benefits of visibility, control, and reporting that come with a corresponding physical account structure are maintained.

Advantages of virtual account management

The team at Goldman Sachs envisions that virtual accounts will enable a smarter, leaner treasury function, allowing treasurers to concentrate their time on more strategic activities such as managing interest rate and FX risk, forecasting future cash requirements and provisioning cash for current requirements. Their VIA solution will help streamline and automate time consuming tasks, while making others redundant altogether. Virtual accounts can benefit treasurers in five major ways:

Practical considerations for adopting virtual account management

Virtual accounts are a powerful tool that can lead to transformation of the treasury function. Thus, a carefully forged implementation strategy is essential to maximize their benefits. Here are a few factors that need to be considered while adopting virtual account management.

Assessing the objective
Treasurers need to assess their objectives for account rationalization, reporting, receipts reconciliations, and liquidity management while evaluating virtual account management solution providers.

Optimal virtual account structure
Treasurers must determine the optimal virtual account structures based on their operating and legal entity requirements. For example, an entity can have a virtual account structure mapped to operating units, customers, or product lines. These structures should be selected based on regulatory requirements, transaction complexities, and business needs of the entity.

Virtual account identifier structure
Treasurers should consider what sort of virtual account identifier works best for their organization—a reference number, a clearing-recognized account number, or both.

Integration into TMS/ERP
Integration of the virtual accounts solutions is driven by the maturity of the corporate treasury systems and enterprise resource planning systems (TMS/ERP). Treasuries must discuss integration considerations and requirements of their accounting systems with the partner bank to ensure no disruption to business. Treasuries should plan their integration objectives to be strategically coherent with their business requirements.

About Deloitte transaction banking

Deloitte is a leader in transaction banking transformation, serving top transaction and commercial banks, delivering end-to-end advisory services in cash management, treasury and liquidity, payments, and trade finance. Ranked No.1 Global Leader in Banking Sector Payments (Kennedy Research Consulting & Advisory) year after year, many influential market analysts endorse Deloitte as a leading service provider. Deloitte is actively involved with organizations across more than 60 countries to modernize their cash management and payments infrastructure, including processes, operating model, and technology transformations.

Deloitte’s capabilities range from enhancing revenue and billing management, implementing digital experience and core platforms such as DDA, payment, and trade finance ecosystems. Our services have helped clients streamline and enhance a full spectrum of services, starting with onboarding processes though comprehensive front-to-back solutions and enabling new product strategies for clients to roll out services such as real-time payments, virtual accounts, blockchain, and artificial intelligence.

Get in touch

Christopher (Chris) Doroszczyk
Deloitte Consulting LLP
+1 212 618 4044

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