One of my key takeaways from the Association of Corporate Treasurers (ACT) Conference 2018 that I recently attended in Liverpool, UK, on 15-16 May, where 1100 treasurers and lots of commercial banks and vendors packed the ACC venue, was the re-emergence of virtual bank accounts as a hot topic.
The need for LIBOR benchmark reform and alternative risk-free reference rates (RFR) from 2021 onwards, was also much discussed at the annual ACT Conference, alongside other prominent topics like blockchain, PSD2, rising interest in real-time payments and how they align with liquidity risk management, but for me the virtualisation debate was fascinating.
A virtual account is effectively a ledger entry. Fundamentally, it’s a ledger account that allows a corporate treasurer to get a huge bank rationalisation and cost benefit. Virtualising accounts means you can consolidate them, eliminating expense and paperwork. It also enables better visualisation and analytics, which could improve reconciliation processes for example. There is no longer any need to have an account in each country a business operates in, thereby reducing costs.
The ideal is to reduce everything down to just one physical bank account and virtualise everything off that. But as a HSBC spokesperson candidly told a packed room of treasurers at the end of day 1 of the recent annual ACT Conference in Liverpool, UK, that is unlikely to ever happen due to tax and jurisdiction issues. Nevertheless, you could still rationalise down to single figures and get benefits.
Other banks offer virtual accounts too. It is not a new concept, but the spokesperson said the next generation of technology means its time has come around again, as new capabilities and connectivity options make it more feasible than it was in the past.
What is a virtual account?
Virtual accounts look and feel like a normal bank account and can talk to treasury management systems (TMS’) and internal enterprise resource planning (ERP) systems via SWIFT MT940 messaging for instance. A 14-digit number will be assigned that clients can pay into. It may even be able to sit in a notional pool or other such cash concentration structure, depending on any local regulatory restrictions, and can cover multiple or single-entry structures; provide intercompany positions; and so on.
You can have control accounts for accounts payable (A/P) and receivable (A/R) and theoretically as many virtual accounts as you want. At the least corporate treasurers may be able to get down to a small number of actual physical bank accounts in major currencies such as the US Dollar, GB Pound, Euro and so on, increasing their flexibility, oversight and transparency, as well as reducing foreign exchange (FX) and other risks.
Despite the re-emergence of the concept there are still limitations, such as legal uncertainty in some areas like Know Your Customer (KYC) obligations; the fact you cannot collateralise against a virtual account as it’s not real; and potential issues around out-going payment authorisation limits. Pre-funding might be required for transactions at present on some systems, or control accounts need to be assigned appropriately.
Whether corporate treasurers will take the plunge and use virtual accounts in increasing numbers remains to be seen, but the benefits are clear. The amount of them attending the session on the topic at the ACT Conference 2018 showed there is evident interest, and commercial banks are once again promoting the product.
There are other types of ledgers of course, including the distributed ledger technology (DLT) used in blockchain applications, which was another hot topic much discussed at the ACT Conference 2018. But that discussion, and its potential long-term impact, is for another day.