Treasury Today Country Profiles in association with Citi

Treasurers flock to virtual accounts

Paper origami birds flying to the light

Over the past year, many of the RFPs received by leading banks in Europe have shared something in common: that something is virtual accounts. But when will companies in other regions be able to benefit from the solution?

Ask almost any leading bank what the hottest innovation in cash management is right now, and you are likely to get the same answer. Virtual accounts have been widely adopted by insurance companies, FX brokerages and pension funds for many years. Now, thanks to the harmonisation of the European payments landscape, the solution has been turning more than a few heads in the corporate world too.

At a roundtable discussion hosted last week by Bank of America Merrill Lynch (BofAML), Matthew Davies, co-head of Product Management, GTS EMEA, noted that the solution has been coming up in nearly every client conversation over the past year.

“This year almost every RFP we have seen has included virtual accounts, either as a core part of the requirement or as a peripheral part that is on their roadmap,” says Davies.

He is far from being the only banker seeing this trend either. “There is a growing interest, and it is something we are seeing in many RFPs at the moment,” says Jean-Francois Denis, Deputy Head of Cash Management, BNP Paribas. “Some clients are already implementing projects and require solutions, while others are simply interested in finding out what we can propose. But overall the trend is there – and it continues to grow.”

The SEPA factor

It was with the arrival of the Single Euro Payments Area (SEPA) that virtual accounts really began gaining momentum. Since completing migration to SEPA, many companies have been busy centralising their collections and payments processes in a quest for greater operational efficiencies. Increasingly, SEPA has enabled companies to use one central location for euro accounts and, in some cases, even rationalise multiple accounts down into one single euro account.

One of the challenges that comes with that, however, is the reconciliation. When a treasury is collapsing multiple accounts down into a single account there is often a challenge around understanding precisely who is being paid for what. As Denis explains: “Treasurers need to be able to allocate the funds to the subsidiary of the group that the funds belong to.” This is where virtual accounts come in.

Imagine a company using a payment-on-behalf-of (POBO) solution that uses non-virtual account methods. When the payment beneficiary receives the payment, on their account they will see it is not from the subsidiary it is doing business with but from the account owner (who in many cases is the shared service centre or parent company). This leaves them with the challenge of working out who exactly has paid them. If the payment gets rejected in clearing and is returned, the parent doing the POBO also has to figure out who it is it has been making the payment for, so that it can be returned to the subsidiary.

All of this is solved automatically by virtual accounts. In a virtual account scenario within BofAML, as the actual virtual account detail (VA Name and VA Account Identifier) is passed on to the beneficiary, when the beneficiary receives the payment it can see it has come from the ‘virtual’ account of the subsidiary. Equally, should a payment be rejected, the company paying on behalf of the subsidiary can see straight away which virtual account the payment has come from and return it to the right subsidiary.

“This is where it gets quite powerful, I think,” says Davies. It is also where the advantages of a virtual account solution that uses virtual account numbers, not reference numbers for the underlying account – as some banks still use – are the most apparent. “You can’t make a payment from a reference number – it always has to be from a physical account. That is why we think this is the winning virtual account solution for treasurers.”

BofAML says that more than half of the client conversations they are currently having about virtual accounts concern centralisation projects. A few years ago, it was a mere two out of every ten clients. “Now even if clients are not looking at centralising their accounts immediately, they are saying that they want to achieve this sometime in the future, and asking what they need to do now.”

Beyond Europe

Although the availability of virtual account solutions is not yet universal, Davies says that there is no reason why the solution cannot be expanded to include other regions. But any future expansion in coverage will ultimately be determined by the appetite of the bank’s corporate clients.

“There is no bank that is providing this globally, yet. But every bank is now looking at how to take what is evolving out of Europe and deploy it globally, because frankly that is the demand we are getting from our clients,” says Davies. “They are saying, 'we love this but we want it everywhere, not just in Europe'.”

BNP Paribas’ Denis agrees. “The availability in terms of country coverage and payments instruments is very variable on the market today,” he says. “For instance we have deployed the solution in more than ten countries today and on both domestic SEPA and international payments. Some banks will have it deployed in fewer counties and some, perhaps, only within SEPA. So the availability is quite not really equal at the moment, and that is one of the ways I think this will evolve in the years to come.”

Progress is already being made by the banks on this front. In Asia, BNP Paribas’ solution is already live in 11 countries. Guillaume Flies, Head of Collections at BNP Paribas told Treasury Today in 2015 that the bank will not be stopping there. “As for other regions – the Middle East and the Americas, for example – we are also considering ways to develop our solution in the countries and markets where we see the strongest demand,” he said.