Virtual Accounts – Next Step towards a Transaction Hub

As many customers send their payments to the same account, the account number is not a distinct reconciliation item. The payment reference is a free-format field and therefore depends on the correct entry by the payee; it can also get (partially) cut off along the way through settlement and clearing systems. The amount of the expected payment and the actual cash received can be different, subject to bank charges or currency conversions. The date is obviously insufficient as a reconciliation criterion, as many customers pay on the same date on the same bank account, and the exact cash receipt date is generally not known in advance.

The use of virtual accounts for collections has significant potential to resolve the barriers to more automation in the AR reconciliation process. In effect, a virtual account increases the information value of the account number – for example the international bank account number (IBAN) – to a great degree and complements the free-format payment reference with a mandatory bank account number field.

Here’s how it works: ‘real’ bank accounts are specific to the holder and many customers send their payments to the same account (i.e. to the same IBAN) which holds the value that has been paid in. Virtual bank accounts, however, are like a pass-through post-box, as when a payment is sent to the virtual account cash falls right through and gets accumulated on a centralised (real) bank account. A virtual bank account therefore does not hold value, while a real bank account holds value and represents an account in the general ledger of banks.

Due to their purely notional nature, virtual accounts can be created by banks in large numbers without incurring the accounting and regulatory workload tied to ordinary bank accounts. This creates an opportunity for corporates to use virtual accounts on a large scale for collections, most noticeably on a per customer basis.

Corporate Perspective

The difficulties in automating the reconciliation process described above are pronounced in the case of emerging markets (EMs) and that’s also where the use of virtual accounts is most developed at the moment. In euro currency countries the recent adoption of the single euro payments area (SEPA) has, however, paved the way for a broader application of virtual accounts in the corporate environment on an international level.

A payment factory with payments-on-behalf-of (POBO) facilitates the centralisation of the underlying bank account structure for outgoing flows, while the payment and reconciliation process can remain decentralised. A centralisation of collections-on-behalf-of (COBO) in the same manner is often hindered by the difficulty in centralising AR reconciliation as well. The reason for this is that a large amount of COBO subsidiaries would need to be reconciled on (a few) centralised accounts. Virtual accounts can facilitate the application of cash in such a way that the underlying bank account structure is further centralised, while AR reconciliation can stay local – at least initially.

Value Proposition of Virtual Accounts for Corporates

Virtual accounts enable corporates to utilise the bank account number itself, as an additional reconciliation item for collections. Because the bank account number is more standardised and more dependable than the payment reference, a reconciliation process based thereon can be more automated.

The value proposition of virtual accounts for a corporate is hence a decrease in operational costs and operational risks related to AR reconciliation and more readily freed-up customer credit limits, which results in enhanced sales potential. In addition, the resulting cash management structure fundamentally centralises the internal financial supply chain (FSC) by pooling cash right from the start. Cash pooling is no longer required and corporates can utilise cash on a group level in the most effective way.

Potential Implementation Challenges

Potential organisational difficulties in implementing a virtual account structure relate to the further loss of local bank relationships, as well as a potential gradual loss of local client relationships in a scenario of centralised AR reconciliation. From a process perspective, the implementation requires a change of master data on the part of all affected customers (i.e. customers need to update the supplier bank account number at their end).

Lastly, the corporate’s enterprise resource planning (ERP) needs to support the new architecture, which requires filtering the bank statement items on the centralised account according to the virtual account identifiers and apply the cash on the respective clearing accounts for reconciliation. Ultimately, collections on the central account (received ‘on behalf of’) need to be reconciled against (local) ARs and be credited on the in-house bank (IHB) accounts of subsidiaries.

Bank Perspective

Banks face an increasingly commoditised transaction banking landscape. At the same time, large corporates have virtualised internal transfers by setting up an IHB and have increased their bargaining power by centralising bank relationships at head office. Offering virtual accounts is thus a competitive differentiator for banks that want to expand their share of a corporate’s cash management banking wallet and deepen the client relationship.

A virtual account structure potentially cannibalises the fee streams from local accounts and cash pool sweeps. Overall bank revenue is likely to grow, however, because of the newly-gained fee stream from a multitude of sweeps from virtual accounts to header accounts, and the potential increase in investment business after helping corporates to centralise cash more effectively.

From a system perspective, banks needs to create a virtual account architecture, based on the banks current lot of IBANs allocated in the SWIFT system. Figure 1 below offers an example by showing how an IBAN (22 digits in this case) is used to a) identify the bank; b) identify the virtual accounts ledger; c) identify the customer; and d) identify the specific virtual account used. Banks basically need to run a lookup table that maps collections received on virtual IBANs to the ultimate settlement account held by the corporate. With six digits left to be assigned by the client, there would be enough numbers to assign IBANs to 10^6= 1.0m customers (for a single bank branch relationship).

Figure 1: Example of virtual IBAN configuration:

Zanders IBAN Configuration fig 1

Virtual account models offered by banks can differ in several ways. Major distinction criteria are the offered scope of the solution (single vs. multicurrency; domestic vs. international), the provided visibility on collections (intraday vs. end-of-day) the degree of integration of the IT-platform provided (customer vs. bank- managed virtual accounts IBANs), and pricing (per account basis and/or per sweep basis).


Virtual accounts have the potential to significantly improve the economics on the side of cash collections through more automation and accelerated cash centralisation. It is a topic that, in particular, large corporates with decentralised collections across Europe should address. Several banks are currently building up their offering. Professional services firms can play a role, helping companies in assessing the business case and analysing the cash management impact on group treasury level, selecting a banking partner, as well as blueprinting and ultimately doing the configuration for corporates.


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