Virtual account management: time to reap SEPA

Heather McKenzie: Virtual account management has great potential

Virtual account management (VAM) holds great promise for corporates to centralise and reduce bank accounts. Banking Technology‘s payments expert, Heather McKenzie, explains.

One of the promises of the single euro payments area (SEPA) was that it would enable more efficient cash management infrastructures for the euro. In a 2014 study, Economic analysis of SEPA, PWC predicted a reduction of “up to nine million bank accounts” as a result of more efficient corporate cash management infrastructures.

There were other benefits, too. These included potential annual savings of €21.9 billion, up to €227 billion in credit lines and released liquidity from improved cash pooling and clearing. Also “indirect” benefits such as the adoption of electronic invoicing, wider use of XML ISO 20022 and a SEPA cards framework would result from SEPA.

The financial industry, along with corporations, has wrestled with the concept of a single euro payments area since 2000 when the European Financial Services Action Plan was created. Banks and corporates were reluctant to adopt SEPA and it was only until a hard and fast deadline was put into place that SEPA instruments began to gain traction. Migration to the new environment is almost complete.

The main gripe for the heel draggers was cost – implementing new SEPA debit and credit transfer instruments was a costly undertaking for financial institutions and corporates. The promised benefits seemed for many to be too far into the future to warrant such investment.

Of course, time moves on and financial institutions and corporates are beginning to see a light at the end of the tunnel. The focus on efforts to become compliant has eased and now some organisations are looking to reap the benefit of the infrastructure that is in place.

SEPA is an enabler, says Matthew Davies, co-head of product management GTS in EMEA for Bank of America Merrill Lynch. “SEPA has been great for companies because they can now undertake cross-border transfers in the euro zone at a lower cost. But they can also do much more than that and SEPA has created a great opportunity for companies to centralise and reduce the number of bank accounts they have.”

One of the areas of greatest potential is in virtual account management (VAM), which delivers on this promise of reduced bank accounts. VAM solutions have been around for a while, with early forays into the technology based on a single physical bank account that was segregated into virtual accounts associated with individual customers. Payers were required to use a unique reference number to help a company or bank to identify where a payment had come from. The problem with this approach was that very often payers did not use the reference number, placed it in the wrong field, or it was truncated by a forwarding bank. As a result, matching rates on virtual accounts were often quite low.

This obstacle is being overcome with the use of international bank account numbers (IBANs). The principle idea remains the same: a single physical account is operated but divided into underlying virtual accounts, each of which represents a customer. However, those paying into accounts are required to use an IBAN, which is unique to that payer. The idea is that customers are more familiar with the idea of an IBAN and the concept that they are paying into a particular bank account.

VAM facilitates greater client control over payments but also improves how transaction data is brought together, utilised and reconciled, through just a single number which acts as a unique identifier.

By deploying VAM solutions, companies can close numerous external bank accounts and replace them with the one physical account that is comprised of underlying virtual accounts. The concept is being further developed to include payments on behalf of (POBO) and receipts (or collections) on behalf of (ROBO). With the latter, a central treasury can take responsibility for group-wide incoming payments. This will greatly reduce the effort involved in reconciling and matching payments received in subsidiaries’ accounts.

Using VAM, companies can create a multi-level hierarchy of virtual accounts within their bank account structure that mirrors their business relationships. By setting up virtual accounts in this way, each incoming payment is nominally applied straight-through to the correct virtual account because the business entity is set up to be identified by this virtual account. This structure streamlines processing and removes any manual intervention. Under the ROBO structure, incoming payments can be correctly identified to the specific business entity for which it is intended.

Most of the large banks have been offering VAM for some time, but demand from corporates was low. However, pressure on costs and efficiency has driven larger corporates, which maintain scores of accounts, to examine VAM in more detail. The potential of initiatives such as SEPA has begun to be recognised by companies. Companies, supported by the introduction of SEPA, now have the possibility to centralise and optimise their SEPA payment receipts, while simultaneously improving reporting and limiting administration.