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Virtual Accounts – Improving Decision Making Through Better Cash Visibility

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It is not rocket science to suggest that it is better to make informed decisions than it is to make uniformed decisions. Studies have suggested that failure is four times more likely when people use uninformed decision-making, regardless of the critical nature of the decision. In 2015, the US Census Bureau highlighted that 235,000 out of the 470,000 firms that failed may have unnecessarily gone under due to one or more uninformed critical decisions.

To make matters more challenging, in today’s fast paced business environment decisions need to be made more quickly than ever before as the consequences of delay can be high. In a March 2019 survey by Alpha which surveyed over 300 decision makers, respondents, 22% of the respondents said their decision making has become faster over the last year and 40% of the respondents said that they wanted to make their decision making faster.

Making the right decisions swiftly is especially vital in the treasury division of an organization, as the decisions a treasurer makes determine the financial health, success and longevity of the company. The world of corporate treasury is complex with several external (macro-economic issues, geo-political trends, global financial implications, currency volatility etc.) and internal factors affecting, influencing and impacting their daily operations, processes, decisions and strategy. To make well informed financial decisions on a daily basis, the corporate treasurer must have easy access to accurate and up-to-date bank information.

The CFO of a typical multinational organization would want to see not just the net cash flow but also the revenues of each subsidiary, the receivables to be collected from each regional dealer and the payables due to each supplier. Having a complete visibility on each of these things would enable him to take the right strategic decisions on the growth of the company.

This is however easier said than done because each subsidiary will have their own supplier and dealer ecosystem and also have multiple accounts, which are located in multiple countries across different time zones. There could be one account for an Indian subsidiary denominated in Rupees, and another for a German subsidiary in Euros. Then there are dollar accounts for travel and expenses in one place, separate from the account handling procurement denominated in Yen. Each of these accounts needs to be compliant with local regulations and follow the regional accounting standards. Mergers and acquisitions add further complexity with more banking relationships to maintain. Most of the corporate treasurers today have daily visibility only of a small number of banks or bank accounts, with the majority of account information being reported on a weekly or monthly basis. Also, while the treasurers can see each of the accounts individually, visibility of the overall position still eludes many of them. According to a recent study by Ovum, a single view of holdings across all bank relationships is at the top of the corporate wish list but only a third of banks offer it.

There is also the not-so-small problem of treasurers struggling to reconcile thousands of payment transactions credited to their collection bank accounts each day because for most of these transactions, information on who paid what invoice is not available. This means the payment cannot be reconciled, resulting in inaccurate cash positions which, in turn, could lead to incorrect financial decisions being taken by the corporate treasurer.
To enable their corporate customers to avoid these visibility issues, a growing numbers of corporate banks are providing them with virtual account management capabilities.

Virtual accounts are bank-issued shadow (sub) current accounts that replace real current accounts and instantly route payments and collections to a linked ‘master’ current account. They have long been used by corporates to improve the quality of accounts receivable reconciliation and payee identification, whereby receivables from particular customers can be allocated to specific virtual accounts and thus the accounts receivable teams know the identity of the payee precisely. This capability allied with solutions such as just-in-time cross-border sweeps allow treasurers to centralize cash and take decisions on making payments exactly when needed.

In recent times, banks are also providing their customers with self-service options – to support faster deployment and more convenient control of the virtual accounts. Corporates can open and manage their own virtual accounts – design complex shadow account hierarchies for a real physical account in line with its business needs. With the clients remaining fully in control of maintaining the account hierarchies, they can choose to open virtual accounts for each business unit, for each client, or for incoming and outgoing transactions – and also at different levels for all of these purposes. They can then make payments on behalf of (POBO) or collections on behalf of (COBO) these business units or their subsidiaries. In addition, treasurers are able to slice and dice reporting according to their business needs because virtual accounts provide them the flexibility to structure, segregate and aggregate data. This provides clarity on transaction streams at the entity or subsidiary level, and the reduction in the number of physical bank accounts brings treasury efficiencies of improved transaction visibility, real-time liquidity and account rationalisation. Corporates can thus reap the benefits of a structure that mimics physical bank accounts whilst harnessing the power of near real-time multi-bank data and reporting to make better informed decisions.

For banks, the benefits are clear – the solution allows them to compete in markets without having a physical presence thus increasing their customer base. They can increase their transaction banking income while their operational costs are lowered through the high STP rates and low IT expenses. There has been plenty of activity around virtual accounts by leading banks across the globe over the last year. In September 2018, Citibank launched Citi® Virtual Accounts which provides corporate treasuries a centralized view of real-time cash positions, enabling them to make more informed funding decisions. HSBC’s next generation virtual accounts – ngVAs, launched in October 2018, comes with the all important element of self–service. In March 2019, Natwest announced the launch of a new virtual account platform for business customers.

While virtual accounts offer a compelling value proposition for banks and their corporate customers, regional regulations around currency controls, intercompany lending, withholding tax, debt-equity ratio and usage of non-resident accounts can place limitations on a company’s ability to implement these structures. COBO specifically can be more challenging to implement since corporates have less control over the payment methods that their customers use. These obstacles are not insurmountable. With the right advice and solutions from their partner bank, corporates can implement variations of the on-behalf-of structures based on their business model and the geographies in which they operate. Simplified banking relationships, better operational efficiency, reduced bank fees, and more control and visibility of their cash positions await them if corporates can get it right.

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About the Author

Avik Dasgupta

Avik Dasgupta leads the transaction banking and analytics solutions marketing at Nucleus Software. With over nine years of IT marketing experience, Avik has authored several blogs and articles on BFSI and travel technology innovations. He has worked in leading firms like Polaris Financial Technology and Cognizant Technology Solutions prior to joining Nucleus Software. Avik has an engineering degree in Information technology from Mumbai University and a management degree in Marketing from the Institute of Management Technology, Nagpur.

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About Nucleus

At Nucleus Software we are committed to providing efficient, modern yet proven software solutions for the global Banking and Financial Service industry. We have been pioneers in developing Retail Banking Software, Corporate Banking Solutions, Transaction Banking, Cash Management and Internet Banking Software since 1986. Our success spreads across more than 50 countries, and we serve our customers globally through our direct and partner operations across US, Europe, Asia-Pacific, Africa and the Middle East. We are known for our world-class expertise and innovation in lending and transaction banking technology. Our two flagship products, built on the latest technology are: FinnOne™ and FinnAxia™.