There is little doubt that demand in the market for cash centralisation solutions is strong. Banking services the world over are becoming ever more digitised at a time when treasurers are being asked to do more with less, whilst increasing cash visibility and control. Amid such a powerful concurrence of challenges and opportunities we should perhaps not be overly surprised that virtual accounts have been a recurring theme in the RFPs landing on the desks of banks this year.
But while a virtual account solution is certainly a powerful enabler of centralisation it is not a panacea. As Oskam explains, it is the same with the so-called virtual ledger: “When we were at the drawing board, we realised that virtual ledger accounts already address a lot of the challenges on-behalf-of structures, but not quite all. SEPA promised more centralisation, but it didn’t solve the issue of interacting, for example, with local tax authorities. In some countries to get a tax refund companies still needed to have a local bank account to receive the payment.”
By pulling together virtual accounts and virtual ledgers this obstacle is removed, allowing full cash concentration and visibility right across the group. Bank account structures can be rationalised, and in-house banks established without any expensive additional software. Straight through processing and reconciliation rates will increase and real-time information will be put at the treasurer’s fingertips.
Since much of the focus has until now been primarily on the receivables reconciliation benefits of virtual accounts many early adopters of virtual accounts have tended to be big billers, like telecommunications companies for example. But Oskam believes that ING’s VCM solution could have a much broader appeal.
“If you look at mid-sized companies with a lot of online sales,” he says, “rather than opening physical bank accounts when expanding into new countries, they could open virtual accounts with us. With VCM that company would be able to sell in different markets without needing, from an administrative point of view, to be physically present. There are many reasons why treasurers might want this solution and because of that we see it as being not only for large corporates but also mid-sized companies and everything else in between.”
There is also a risk management benefit, Oskam adds, comparable to that offered by notional cash pooling. He draws on the recent Greek debt crisis as an example. Ahead of the referendum held by the Greek government on whether to accept or reject the terms of the Troika’s new bailout regime, concerns were growing that Greece might leave the euro and return to the drachma. But using VCM, treasurers need not worry about the fate of their balances in Greece because their cash need not reside in the country physically. “So the centralisation we are enabling is also reducing risks for corporate treasurers,” he says.
For that and all the above reasons, ING believe that treasurers could turn to VCM to help them continue to meet their liquidity management objectives post implementation of Basel III. ING emphasises that notional pooling is a service they still offer and are committed to, but greater choice for clients cannot be a bad thing in these times of regulatory upheaval. “Treasurers will make a choice depending on their needs and ultimately as to which solution fits best.”
New structures, new markets
As banks continue to develop their virtual account offerings, FIS’s Bateman is convinced that we will see ever more sophisticated structures being deployed by corporates. “It could be similar to what has happened in the virtual cards space; treasurers could start creating dynamic virtual accounts and, for instance, create a virtual account for a particular invoice. It would be taking the concept to a deeper level than merely having invoices for all a certain entities coming into a virtual account.”
With no shortage of innovative applications being dreamt up it seems that virtual accounts are going to remain a hot topic in the treasury community for some time to come. In fact, the recent FIS payments and bank connectivity survey highlights that around 23% of treasurers are not aware of virtual accounts and half of those who are aware of the technology have some concerns about how they may operate in practice. This suggests that interest in the corporate treasury community may not have peaked yet. “There are concerns around what banks are actually able to offer,” says Bateman, noting that there remains a huge degree of disparity in capability between the virtual account offerings of many of the leading banks. “If banks are able to satisfy their clients that they can actually deliver these solutions in the way they promise then I think we will continue to see growing interest.”
Interest in virtual accounts is also likely to increase with market coverage. Although the availability of virtual account solutions is not yet universal, BofAML’s 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.
“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 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 back 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.