Liquidity management – the rise of the virtual account
Virtual accounts can be a valuable tool for effective and efficient liquidity management, says Justin Silsbury, lead product manager at Infosys Finacle.
Virtual accounts can be a valuable tool for effective and efficient liquidity management
Liquidity management is often confused with cash management; the two terms are commonly used interchangeably. But although there are many similarities, there exist enough differences to separate one from the other. Accordingly, the trends and business needs regarding liquidity management differ from those of cash management.
Indeed, cash management is more to do with managing a business’s cash flow on a day-to-day basis. Liquidity is more about the processes that sit underneath that enable good cash flow to happen. This involves close monitoring and management of where cash is being held and concentrated and taking measures to make sure that the cash sits where it needs to in order to manage cash flow for the business. These sorts of tasks are very hard to carry out manually.
Justin Silsbury, lead product manager at Infosys Finacle, comments: “One good example of a liquidity management function is cash sweeping. This is where the cash in different currencies across the whole business is swept, ideally into one header account per currency. From there, the treasurer can identify surplus cash reserves and invest in short-term money markets, or, where there is a deficit, cover this to minimise bank charges.”
But the key to this is visibility and automation-being able to see all the cash holdings consolidated to one place mitigating risk or make the surplus work.
On top of sweeping sits the concept of notional pooling; this is where cash holdings in lots of different currencies are taken and then held in one place and represented as a whole in a single currency to get the overall value and thus inform overall liquidity levels that feed into the cash management.
Silsbury explains: “The cash is held in a header account which allows for a consolidated position regardless of the currency and allows for aggregation, which leaves the treasurer with an overall view. The important thing is that no FX trading has occurred, so the currency risk is nil. However, if the account is in credit, then interest is receivable. It’s like a theoretical offset account where the holdings stay in the original currency, but their value as a consolidated and aggregated whole is totalled and usable.”
Virtual accounts
In doing this, the need is to create a virtual account underneath the current account. This has a less operational cost, and the customer can set up sub – or virtual – accounts relatively easily to show an aggregated sum of all the virtual accounts for the purposes of tax, interest accounts, payables, and receivables. In addition, all of these virtual accounts have IBANs, so the corporate can instruct suppliers as to what account they need to use – the amount sits in that individual virtual account but can be reconciled at the top level for an overall view of holdings.
“The challenge is to direct the traffic to where it needs to go rather than having lots of different – payments all being redirected manually. Virtual accounts serve this purpose perfectly as they can have their own IBANs and make the process of directing payments much easier,” says Silsbury.
Virtual accounts can be applied across all segments – the beauty is that as a concept, it is quite straightforward, and as a liquidity management tactic is also easy to implement.
Obviously, a few integrations need to be set up, but once that is done, the corporate is good to go. The average integration and implementation time is five months.
Indeed, virtual accounts have now gained an amount of traction, and there has been lots of discussion and successful case studies around their use. They are well regarded and are a useful and practical tool in liquidity management.
They solve many problems, not least the fact that were they not to exist, then banks and corporates would have to spend a lot of time segregating individual client accounts, which is time consuming, manual, and prone to error. Instead, the top-level accounts act as an easily identifiable umbrellas and the virtual accounts sit underneath.
“The next iteration will be to clarify what virtual accounts can and can’t do. In theory, they are no different from an actual current account in that they serve an important range of functions for anyone needing to manage liquidity effectively,” says Silsbury.
Case study
Bank X launched its new cash management platform with an eye on supporting business globally, operating in multiple currencies. With the increased volatility and complexity of the global business environment, corporate treasurers need to monitor and manage their liquidity positions and working capital in real time, and banks need to support that.
In terms of function, the platform allows complete visibility over cash – no matter where it is held. It is also designed to cater to digital self-service capabilities to manage, control, and mitigate cash and business risk, all from a single portal.
Other key functions include:
- Centralised multi-bank information portal with a consolidated view of cash positions
- Account and transaction level reporting for both domestic and international activities
- Country-level visibility of foreign currency accounts held, and banks used by customers
The platform has allowed the banking client to support UK businesses of all sizes to manage their international transaction and cash management banking needs seamlessly. It will also help to develop and grow relationships with existing customers and support the global growth needs of new customers.
As with all successful implementations, client feedback has, and will, form the platform’s evolution and future development further to enhance much-needed flexibility, openness, and self-serve capabilities.
The Finacle Cash Management Suite, including the Finacle Digital Engagement Hub, Finacle Online Banking, Finacle Payments, and Finacle Liquidity Management solutions power the platform.
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