Why would a Treasury implement virtual accounts?

How to setup virtual accounts in SAP, Part I

What are virtual bank accounts?

In its most basic form, a virtual bank account can be described as a bank account number towards which a payment can be initiated, but where ultimately the credit is going to happen on a “real” bank account. It is a service that is mostly associated with a concept called “Collections on behalf”.

“Virtual account” (VA) is a product that is continuously developed by the global cash management banks. Within the product of virtual accounts, there are many variants and sub-services that a bank could support. Some examples:

1. Multitiered virtual accounts: It is possible to create and assign VA’s to i.e. the level of your operating company. On the other hand, to make collections reconciliation more efficient, the bank could offer the possibility to setup a VA that is assigned to one unique trade customer. Any receipt hitting this VA will then be logically and uniquely linkable to that particular trade customer.
2. Virtual sweeping: If line by line crediting into the master account is not desired, a bank could setup a virtual sweep that sweeps the individual credits from the virtual account into the master account in bulk.
3. Separate virtual account bank statement reporting: A separate bank statement could be prepared on the VA level that reports only the debits and credits that hit that VA.
4. Cross border virtual accounts: VA’s could be setup in a different country then where the master account is held.
5. Intercompany position ledger services: Some banks also provide an additional service to record the intercompany positions that arise from the VA movements into the master account movement and reports on it through i.e. an electronic banking platform. Otherwise such IC position mutations need to be managed in the ERP systems of the company on a daily basis.

In the most typical way, a virtual account structure is setup as follows;

1. The real bank account is held by the treasury entity
2. The virtual account is assigned to the operating entity
3. The customers of the operating company will settle trade invoices by making a payment into the virtual account
4. The bank will apply the cash credit from the VA into the master account, for the benefit of the treasury entity
5. The treasury entity and operating company will need to account for this transaction by maintaining an intercompany position.
6. The operating company can clear off its outstanding invoice against the IC position increase.
7. The treasury company can counter the cash increase against the IC position decrease.

Business Rationale behind Virtual Accounts

So why would a treasury typically start implementing virtual accounts in their cash management processes?

Cash centralization: Cash centralization is ultimately the main goal of implementing any liquidity structure and virtual accounts are an excellent in supporting automatic processes to centralize cash to i.e. the treasury entity.

Centralized bank relationship management (and improved negotiating position): By implementing a centrally coordinated liquidity structure, the relationship with the bank can be centrally managed and negotiation position becomes a bit stronger.

Centralized bank connectivity: By implementing a centrally coordinated liquidity structure, bank connectivity can be centralized as well, bringing further reductions in IT costs.

Daylight overdraft facility requirement reduction: Where a zero-balance type of liquidity structure typically brings the funds into the master account after EOD, for any payments made throughout the day being executed over the master account, need to be funded through i.e. a daylight overdraft facility. By employing a virtual account structure on the other hand, the collections will be credited on the master account throughout the day, effectively funding your master account.

Intraday cash balance reporting: in a virtual account setup, as the credits flow in throughout the day on the master account, it becomes feasible to better estimate EOD balances from intraday statement reporting

Reduction of required bank accounts and associated costs: Depending on the bank and country requirements, typically opening a virtual account requires less effort in terms of KYC, contract work and suchlike, as compared to opening up a real account and hanging the account in the liquidity structure through i.e. a zero balancing agreement.

Reduction of vendor confusion: In a more classical Payment factory/Payment on own Behalf (POBO) model where a centralized Treasury entity executes payments on behalf of its operating companies, it is an often heard complaint of the beneficiaries of payments (i.e. trade vendors) that it is unclear that a payment originated from the operating company, causing issues in their reconciliation processes. Executing POBO through a virtual account attempts to remedy this.

This is the first part of a series on how to set up virtual accounts in SAP. Would you like to read the next parts too? Stay tuned! The next parts will be available soon.