Virtual account management looks beyond Sepa’s borders

By:
Kimberley Long
Published on:

After the groundwork was laid by Sepa, virtual account management (VAM) had the chance to thrive in Europe. Now the question is how to make it work better for corporates and banks alike, and expand its use outside western Europe and the traditional corporate sector.

Bank regulation can yield positive unexpected consequences. For example, the arrival of the Single Euro Payments Area (Sepa) allowed for the accelerated development of virtual accounts (VAs). And the adoption of VAs has enabled some corporates to dramatically streamline their operations across Europe.

VAM services from banks allow corporates to oversee the accounts they hold by converting them from a physical account into a virtual account, the bank account number of which is issued to that company alone. The bank will ensure the funds are transferred into the pool held in the main physical account. 

VAM allows corporates to easily access consolidated data on incoming and outgoing payments across their accounts. 

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Matthew Davies,
BAML

Matthew Davies, co-head of product management for GTS EMEA, Bank of America Merrill Lynch (BAML), says the need for companies to be compliant with Sepa laid the groundwork for which VAM has been built upon. 

The harmonization of payments across the eurozone meant funds could easily be moved between accounts and across borders. It also removed the need for a physical account to be in place. This allowed for the creation of as many VAs a given corporate would need – in some cases, thousands – which can feed back into a much smaller pool of physical accounts.

This allowed VAs to thrive across the region. The ability to track every client and every individual payment has made VAs a vital tool for treasurers

Martin Runow, global head of cash management corporates, client product solutions, global transaction banking, Deutsche Bank, says: “Each client has the individual number assigned to them. By paying through the Iban [international bank account number], it is 100% identifiable which entity has made the payment. There is security in knowing who has paid. In retail, this is very appealing.”

Pulling funds together through VAM results in the streamlining of complex structures. Having the VAs in place can reduce the need for companies to set up further internal structures. 

Runow says: “There is an aim in the future for some treasurers to have one physical account per currency, and virtual accounts set up where permitted to feed into it. There would be no need for cash pools as there would be one position.”

Additional complexities

The move now is to see how it can be developed further. Work is being conducted to add in additional complexities to how accounts flow upwards into the main physical account. 

“The next step of product evolution is to create more levels of accounts cascading down as well as adding more currencies and payment instruments in more countries,” says Runow. "There have been some developments, but they are still in the early stages.”

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Martin Runow,
Deutsche Bank

Runow says Deutsche won't add cheques and lockboxes to the accounts, explaining he wants to move towards a wholly electronic environment

Bankers are now assessing which other sectors could benefit from having a more granular view as to where payments are coming and going.

BAML's Davies says: “We are also seeing demand from FX brokers. They’re working in a time-critical business and want to settle FX transactions quickly. When the settlement comes in through a virtual account, it can be matched immediately. We have experienced brokers asking to open up to 40,000 or 50,000 VAs.”

New providers in the payments space could benefit from having a defined individual account for each of their users to streamline their processes. 

Davies says: “Another application is by payment service providers, which are looking to offer new services or e-wallets. VAs can segregate the funds on accounts and attribute balances accordingly.”

Deutsche's Runow adds: “Similarly, the process works for corporates like PayPal. It is important for them to be able to quickly identify each specific customer.”

Deutsche worked with PayPal on setting up their virtual accounts to manage their customers. The bank developed its Accounts Receivable Manager for Sepa (ARM). 

ARM enables auto-reconciliation for Sepa credit transfers. It was developed to manage PayPal’s euro-denominated receivables. It allows the company to assign an individual account for each customer to track the movement of funds.

VAM is still restricted primarily to Europe, although Runow says Deutsche is looking into how it can expand into non-euro denominated European countries and Asia. Although there are similar processes in Asia, these operate more through unique identifier numbers rather than with universally recognized Ibans. If Ibans were implemented, they could be included into a global network. 

There are still a number of factors to take into account over whether or not VAs will work for a company across all of its jurisdictions. Questions arise around the movement of funds and the payment of taxes in those jurisdictions. 

Runow says: “We would advise anyone on this path to do the due diligence from a legal and a tax angle. They have to look at the regime of compliance, including KYC [know your customer] and AML [anti-money laundering] obligations. When they embark on a structure like this, it has to be run with a high level of transparency.”

Legalities

The rules of different countries can impact whether consolidating accounts is even a possibility. 

Jane Strøm-Pedersen, senior customer manager at software and services provider Tieto, says: “There are still jurisdictional issues to take into account. There are requirements to hold physical accounts in some countries. Legal aspects must also be considered.”

All of these developments are creating new questions for the banks, and bringing about a change in how they work with their customers. A drop in the number of accounts makes for a less lucrative relationship for the bank. 

Strøm-Pedersen says: “The reduction in the number of accounts is changing the relationship between the corporate and the banks. It is forcing the banks to think differently, as they are losing one of their revenue streams through the loss of multiple real accounts.”

Banks are looking into what they can do to bolster their products and services offerings, and their finances, she says, adding: “[They] are looking at how they can build new services on top of the VAM offering. There’s now the ability for real-time information services, consolidated information services, notification services that will give more value to the corporate treasurers.”

Strøm-Pedersen says, ultimately, it is the corporates that are finding they are in a win-win situation.

“There’s the combination of corporates looking to gain cost benefits from rationalizing the number of real accounts, and the banks offering more value added services,” she concludes.