What You Need to Know About Virtual Accounts

You can use virtual accounts to deliver one of the most innovative digital products in commercial banking. These accounts give your corporate customers real-time visibility into cash positions and payment activity. They also offer your customer streamlined reconciliation and easier cash management. You and your customers can achieve all this without the hassle of creating and managing multiple physical accounts.

As your bank grows its digital services repository, this solution can help you build better client relationships. This capability also positions your bank as a leader in treasury innovation. In this article, you’ll learn what virtual accounts are, how they work, and why they should be a critical piece of your commercial banking strategy.

What is a Virtual Account?

A virtual account is a special type of digital account number. One physical bank account, known as a master account, connects to it. The virtual account doesn’t hold funds but rather serves as a reference point for tracking transactions.

Here’s how a virtual account can be used. If your corporate client wants to track payments from 500 customers, your bank could create virtual accounts. These accounts would link to the main account. The client would then assign each virtual bank account to a specific customer.

When customers send payments, the funds go into the master account. The account identifiers show who paid what automatically.

Virtual accounts can also represent subsidiaries, departments, or vendors, giving your client flexibility in how they organize and reconcile transactions.

How Do Virtual Accounts Work?

• Your corporate customer opens a master account with your bank.
  • This master account is typically a standard checking account that holds the actual funds.
     
• Your bank creates multiple virtual accounts - sometimes referred to as digital account identifiers, tracking accounts, or reference numbers - under the master account, each with its own unique reference number – like an account number.
  • These reference numbers allow businesses to identify transactions easily.
     
• The corporate client assigns each identifier to their own customers, subsidiaries, or vendors.
   
• They include these numbers in invoices or payment instructions.
   
• Customers or counterparties send payments to the reference number, but the funds themselves settle in the master account.
  • The tracking account itself does not hold money; it acts solely as a reporting mechanism.
     
• The identifier records the payment reference for reporting and reconciliation purposes, not the actual funds.
  • This works for both incoming payments (accounts receivable) and outgoing payments (accounts payable).

Example of a Virtual Account

Imagine a global client with numerous customers. Rather than creating individual bank accounts, you provide reference accounts instead:

• Customer A is associated with virtual account #101
• Customer B is associated with virtual account #102

When each customer pays, their payments go into the master account. Your client’s ERP or other treasury system automatically matches transactions using the virtual account identifiers.

Virtual Accounts in Commercial Banking

By integrating this capability into your commercial digital banking platform, you position your bank as a leader in treasury innovation.

Strategic Advantages for Your bank

When you offer these types of accounts, you can strengthen your commercial banking strategy. Here’s how:

• Differentiate Your Services: Provide a modern solution that simplifies cash management for corporate customers.
• Boost Client Retention: Help businesses reduce complexity and improve visibility.
• Drive Digital Adoption: Integrate virtual accounts into your digital banking platform, making it easier for your corporate customers to manage payments and reconciliation in one place.
• Enable Scalable Growth: Allow your customers to add virtual accounts without the cost and compliance burden of opening multiple physical accounts.

Operational Benefits to Your Corporate Customers

Virtual accounts empower your customers to streamline treasury operations and improve financial control. Here’s what they gain:

• Simplify Accounts Receivable: Assign account identifiers to individual customers or business units for easy tracking.
• Multi-Entity Visibility: Consolidate funds while maintaining clear reporting for subsidiaries or departments.
• Optimize Treasury Operations: Reduce the need for multiple physical accounts and improve liquidity management.

By connecting these virtual accounts to your digital banking platform, your corporate customers can manage payments, reconciliation, and reporting all in one place.

Industry Insight:

“Corporate customers need clear visibility across multiple banking relationships. Virtual accounts and API-driven integrations are closing these gaps and creating new value propositions for banks.”¹  - Jessica Cheney, VP of Product Management, Bottomline

Analysts predict virtual account management will grow at CAGR of 18.4% through 2032², making this an opportunity to differentiate your services.

1.     Bottomline.com

2.     growthmarketreports.com

Considerations and Limitations of Virtual Accounts

Before offering virtual accounts, there are some things to keep in mind. For example, you should consider:

• Regulatory Compliance: Ensure adherence to local banking and reporting regulations.
• Dependency on Master Account: All virtual accounts rely on the master account. If it is frozen, under review, or experiencing technical issues, linked virtual accounts will be impacted.
• Technology Integration: Confirm compatibility with ERP, digital banking platform, or other treasury system for seamless operations.
• Limited Functionality: Virtual accounts cannot perform all operations of a physical account, such as issuing checks or certain payment types.

Expanding Digital Cash Management

Virtual accounts are just one part of a broader strategy to modernize cash management. Banks can combine virtual accounts with other digital tools to deliver greater efficiency and compliance.

For example, virtual cards allow businesses to issue unique card numbers for specific transactions or vendors, reducing fraud risk and strengthening audit trails. This complements the visibility virtual accounts provide for incoming and outgoing payments.

Conclusion

Virtual accounts aren’t just convenience; they’re the catalyst for innovation. They enable your bank to deliver a tailored solution for complex treasury needs, reduce operational friction, and open doors to advanced analytics. In doing so, you create a competitive edge that goes beyond traditional banking services.

Learn more about Virtual Accounts