Cash & Liquidity Management

Taking control: virtual accounts and centralisation

Published: Sep 2016

Futuristic background

Virtual accounts have been receiving substantial attention lately – and it isn’t hard to see why. This solution offers flexibility for corporates to ease reconciliation, improve cash flows and strengthen credit control. But one of the less discussed advantages of virtual accounts is the ability to move all domestic and cross border transactions of the company into one single location. We look at how this capability might help corporates build the treasury models of tomorrow.

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, especially since 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 in early 2016 by Bank of America Merrill Lynch (BofAML), Matthew Davies, co-head of Product Management, GTS EMEA, noted that the payments solution has been coming up in nearly every client conversation since the beginning of the 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.

Davies 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.”

Anecdotal evidence of the growing popularity of virtual accounts is also supported by survey data. A recent Rabobank Treasury Barometer study found that a majority of treasuries are evolving to a more centralised treasury model, particularly in the area of cash management where 91% of treasurers say their businesses are endeavouring to centralise activities. Virtual accounts appear to be an increasingly popular facilitator for such centralisation projects, with the survey finding that 30% of treasurers are now considering virtual account solutions as an alternative to notional pooling structures.

The SEPA factor

Virtual accounts are actually not especially new or cutting in the corporate world – indeed from the 1990s onwards such structures were offered by certain banks in a number of eastern European countries, used mostly by financial clients. So what accounts for the sudden surge in corporate interest?

Andrew Bateman, Head of Treasury Software Solutions at FIS believes it is the growing sophistication of the solutions banks are now able to offer. Observing the issues that arise when large corporate organisations with multiple entities attempt to centralise, the banks have looked at ways of developing virtual account solutions that can make the endeavour less arduous.

“As companies began to centralise and rationalise their bank accounts, activities like reconciliation became more difficult,” says Bateman. “Banks realised that virtual account structures could help by providing them with the information that they need to perform collections on-behalf-of (COBO). When centralising, virtual accounts aid reconciliation allowing corporates to benefit from lower transaction costs and greater visibility but without adding complexity to incoming payment processing.”

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.

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.

Jean-Francois Denis, Deputy Head of Cash Management, BNP Paribas

“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.”

Dick Oskam, Global Head of Sales for Transaction Services at ING, agrees that the treasury industry is now beginning to look beyond collections to see the centralisation benefits of virtual accounts. By opening virtual accounts for each entity within a group and appending sub-level virtual accounts to these, he explains, clients of those entities can effectively remit to a central account (whether national, regional or global) using their own unique virtual account identifier. Like notional cash pooling, then, virtual accounts could enable corporates to allocate cash without segregating it physically.

It is a capability that could draw a lot of interest from treasurers at a time when regulatory requirements are raising questions around the future of notional pooling. For now, this form of multi-entity application for virtual accounts remains in its infancy. But with speculation that some banks may withdraw notional pooling altogether by the time Basel III rules are fully implemented in 2018, it is not likely to remain as such for very long. Indeed, if the way the banks are starting to talk about and market solutions is anything to go by, the shift may already be underway.

“We speak of virtual cash management – not just virtual accounts – because ours is a comprehensive offering,” says Oskam. The bank claims that the Virtual Cash Management (VCM) solution it formally announced in August 2016, which integrates virtual bank accounts with administrative sub-accounts called virtual ledger accounts (which populate a multi-bank cash management dashboard), is one of the first of the ‘next generation’ of digital cash management solutions. VCM’s liquidity management capabilities are central to this claim. “Whilst we do already see separate virtual account and virtual ledger solutions in certain countries these are usually only domestic,” he says. “It is the combination of the two capabilities – and the fact that it operates cross-border – that makes it a very unique and powerful solution for our customers.”

The next level of centralisation

In rolling-out POBO and COBO in the Nordics, the treasury team at Roche show how it is possible to take centralisation to the next level by implementing new, more efficient treasury management processes across multiple currencies.

In 2013, Roche’s IHB started to implement a full on behalf of setup in the Eurozone. By implementing payments on behalf of (POBO) and introducing virtual accounts for collections on behalf of (COBO), Roche was able to close bank accounts of subsidiaries in various countries. Today the in-house bank (IHB) serves as the only bank partner to 20+ companies in more than ten European countries.

With the expertise gained in these implementations, treasury decided the next step would be to roll-out the full on-behalf-of concept to Denmark, Sweden and Norway.

The base for this concept outside the Eurozone are residential currency cash pools in each country, containing zero-balanced collection accounts per legal (operating) entity and one main account. All accounts in these cash pools are legally owned by and in the name of the IHB and replace the existing bank accounts of the legal entities.

With this the IHB became the single point of contact for the banks, as well as for the affiliates. As Stefan Windisch, Cash Manager at Roche explains: “The affiliates have no need to hold bank accounts with commercial banks anymore; payments, collections, guarantees and all other services are processed or provided on behalf of in the name of our IHB.”

This allows Roche to review all current interactions, processes and operations between the current commercial bank and the entities in the respective countries. Inefficiencies were identified and either de-commissioned or streamlined. Processes such as KYC, account opening – and replacement – and payment communication were organised centrally and brought up to the current standard. This included using xml communication for commercial payment instructions (pain.001), bank statements (Camt.53) or credit advices (Camt.54C).

One of the major gains for Roche with this implementation was to have full transparency on all payment and collection processes by providing one banking system to the affiliate in-house.

With this the affiliate has access to the full range of services required locally, but all provided in an efficient way. For example, one daily bank statement, containing all third-party payments, all cash pool movements, intercompany payments/receivables and interest is provided to the affiliate. Instead of relying on an anonymous bank helpdesk, the affiliate can now approach Roche Group treasury for any cash and bank related topics.

No ‘copy/paste’ exercise

Roche’s IHB has reached the next level of centralisation with the implementation of POBO/COBO in Denmark, Sweden and Norway. The project in these distinctly regulated countries has not been a ‘copy/paste’ exercise. Currency specific requirements needed to be understood, considered and adopted across in the IHB.

Despite being a non-resident in these countries Roche’s treasury team has managed to establish all business relevant bank-related processes to fulfil all payment and collection requirements. Hence, the IHB became their only bank partner and serves these Roche affiliates with an increased portfolio of services, such as one electronic statement for all transactions (internal and external), a lean KYC procedure and a globally compliant SOD setup. All this comes with reduced pricing for the affiliate.

This successful model will now be rolled out to Asia with Hong Kong as a pilot. As Windisch explains: “Running subsidiaries without bank accounts has many advantages for the Roche Group with regard to efficiency, transparency, security, standardisation and cost.”

Going virtual

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.

Broader appeal

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.

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