SunTec

Understanding Virtual Accounts and the Value They Deliver

Mudit Kumar, Associate Vice President, SunTec Business Solutions
Dominic Prakash, Principal Architect, SunTec Business Solutions
Maneesh TM, Principal Architect, SunTec Business Solutions
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The transaction banking space has gotten tougher to operate in over the last few years. Increasing competition, changing customer expectations, and unprecedented global events have added to the environment of disruption. Amidst it all, financial institutions are exploring new avenues for revenue growth and accelerating transformation of their operational models, strategies, and roadmaps with the intent of offering customers a seamless and efficient experience. One such innovation that is witnessing increased adoption within the transaction banking space is virtual accounts. Under the current volatile market circumstances, virtual accounts are being viewed as promising offerings that can help boost revenues in transaction banking.

What are Virtual Accounts?

Virtual accounts are not new innovations invented by transaction banking institutions now. They have been around for at least two decades serving corporates and SMEs. To describe them simply, they are mini accounts or sub ledgers within a larger physical account that help the customer organize and manage their money better. Virtual accounts have all the features associated with a regular bank account such as opening and closing balances, incoming receipts, outgoing payments. Think of it as an organization’s telecom connection – there is a main board number and several extension numbers under it. A person calling from outside can directly call a specific extension number and an extension can be used to directly call another number outside the organization. Every virtual account has a unique identifier and customers can route certain payments directly into it.

Virtual accounts allow banks to retain operational control of the main account while giving customers the flexibility to organize and manage their money better. Corporates use the virtual accounts to make and receive payments on behalf of the main account. But it is important to remember that money does not physically move between the sub ledgers since they are virtual accounts only; this system helps the client manage their finances better and helps in reconciliation and working capital management.

The Virtual Value Proposition

Virtual accounts offer both the bank and the customer significant advantages. For the customer, they offer an effective alternative to separate cash management solutions. They are embedded into their main bank accounts making them cheaper and easier to use. Organizations with a large global footprint need to have full control on their liquidity across locations. Earlier they would have had to maintain and manage a large network of physical accounts to carry out treasury functions effectively. Virtual accounts help them simplify this and manage their liquidity across locations from one central account. In fact, they are a good alternative for other liquidity management solutions used by an organization. They eliminate the need to open multiple physical accounts, which means they also eliminate the costs associated with opening, closing, and managing multiple accounts. Virtual accounts simplify and improve rationalization and reconciliation efforts. Once the main account is created, customers can open innumerable virtual accounts with very little documentation and at no extra cost.  

For financial institutions, virtual accounts offer a way to reduce operating costs by reducing the amount of manpower or personnel required to manage reconciliation processes. Most importantly, virtual accounts take their customer-centric transformation efforts a step ahead. At a time when competition is fierce and customer loyalty is fickle, innovative features that offer customers flexibility, control, self-service, and ease of doing business are a huge advantage for banks. It will go a long way in ensuring customer stickiness, retention, and business growth. The flexibility of virtual accounts can also help banks tap into new customer segments and geographies. For example, virtual accounts were first seen in Asian markets 20 years ago. They were then adopted by European markets that have been using them for a considerable amount of time. North America is still a largely untapped market with a booming corporate sector that wants value driven offerings like these.1 Early movers in this market will have a significant advantage over others in terms of new client acquisitions and retention of existing ones.

Implementing Virtual Accounts

The question now is, how can banks implement this powerful tool of virtual account management? Their legacy infrastructures certainly cannot support such a complex virtual hierarchy. Banks need state-of-the-art virtual account management solutions that can integrate with their core banking platforms to help connect the physical account to the virtual ones. There are several experienced partners with powerful virtual account management solutions that can help you introduce and manage virtual accounts for your customers.

Today the business of banking must be all about the customer to remain profitable. And customers want control, flexibility, simplicity, and value in their banking relationships. Virtual accounts offer all this and more. Best of all, they are not restricted to certain sectors only and can be used by corporates from every industry and across every imaginable use case. They are an effective way for banks to offer customer-centric, innovative services in a highly uberized market and will no doubt play an important role in 21st century banking.  

To know more about our solution for virtual account management, you can write to us at contactus@suntecgroup.com

Sources:

Binesh K

Binesh holds a management degree from IIM-L and has worked in Management Consulting, EdTech & Insurance sectors

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