In theory, a large corporation in the United States can open a demand deposit account, or DDA, in a day. In reality, however, the process typically takes between three and five weeks. Regulatory compliance requirements — including the stringent process of verifying documents and validating information, implemented after the 2008 financial crisis — are only partly to blame. Other reasons include manual onboarding processes and technology challenges within banks. Though the delay frustrates corporate customers, many banks have yet to shorten the wait.
One technology solution that can overcome myriad hassles for both banks and corporations is virtual account management, or VAM. More banks are starting to offer this option and tout the advantages of it to corporate clients. Bank of America, for example, announced in June 2022 that it was planning to launch VAM in the U.S. The banking giant had it available only in Europe — specifically, the United Kingdom, Ireland and the Netherlands — prior to that.
Faster Account Opening Appeals to Banks and Corporations
VAM can overcome onboarding challenges for banks, while also benefiting corporations. Over the past several decades, regulatory requirements because of terrorism, fraud, and the global financial crisis have made it more difficult to open business bank accounts. Know-your-customer due diligence, which entails multiple validations and procedures, is the biggest time suck in the account-opening process. Banks are required to write custom client contracts to meet multiple federal and state regulations.
The lack of a completely digital customer onboarding platform at many banks complicates matters further. The process of onboarding is mostly manual, leading to time being lost between multiple steps along the way. While there are platforms that offer a complete digital onboarding experience, many banks are still unable to fully leverage the features of those platforms, partly because of the lack of internal system connectivity in banks’ technology architecture.
Partial digital onboarding solutions developed by banks require heavy customization and are not integrated with other platforms the way that they would need to be in order to provide a satisfying onboarding experience. One way to resolve this is to transform the banking infrastructure, but that requires multiyear investments, whereas VAM can alleviate the pain more easily.
A Simpler Solution:
Transforming a bank's infrastructure to achieve a seamless onboarding experience for corporations takes years. Virtual account management provides an effective shortcut.
VAM also enables customized cash management for corporations. Typically, their business needs require opening multiple DDAs (sometimes even hundreds or thousands, depending on the size of the corporation). The task involves significant administrative costs and human effort, and VAM plays a big role in minimizing this for corporations.
Vanessa Angeles is U.S. Bank’s head of new product development for treasury management. In a post on the bank’s website, Angeles says VAM can benefit all industries, from “the biggest businesses all the way to the bootstrap startups.” She adds that it is particularly helpful for any businesses doing “intensive” cash management, such as frequent account openings or closings, including title and escrow companies, suppliers and construction firms.
How Does Virtual Account Management Work?
As the name suggests, VAM is based on the concept of virtual accounts. Corporations can use the self-service module of a bank’s VAM platform to create virtual accounts, which are not real DDAs, but “dummy” accounts, or subledgers, with unique identifiers. This helps segregate cash virtually, but transactions within those virtual accounts are routed to one underlying DDA. Consequently, VAM is a method of organizing balances and transactional information across a corporation within one traditional DDA.
VAM platforms easily integrate with core banking platforms and digital corporate banking platforms. They provide near real-time linkage between accounts holding actual money and the virtual accounts. And they support the creation, deletion, modification, and definition of complex account hierarchies. Cash management is the major chunk of corporate banking business and VAM provides robust support for any bank’s cash management strategy.
“VAM platforms easily integrate with core banking platforms and digital corporate banking platforms. They provide near real-time linkage between accounts holding actual money and the virtual accounts.”
— Niranjan Govindaram
Corporations can improve efficiency by using VAM. They can allocate one virtual account for each business unit, or they can allocate virtual accounts on an even more granular level. This will help in identifying the exact unit that initiates any payment transaction, even though the actual funds will be debited from one underlying DDA account. This can be done on the receivables side as well. VAM also affords flexibility, so they can open, close, or make other changes to the virtual accounts as needed.
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The Benefits of Virtual Account Management
The direct and indirect benefits of VAM include:
• Controls and visibility of cash positions. The activity in the discrete virtual accounts is visible within one DDA, providing control of cash positions and crucial insight needed for real-time decisions.
• Account rationalization. VAM helps with account rationalization because it greatly reduces the number of DDAs that corporations need. It enables tracking all the transaction activity from one DDA and allows the account structure to be modified immediately in accordance with the needs of any business unit of a corporation with the help of in-house banking.
• Comprehensive reporting. Tracking and reporting cash at very granular levels within a corporate entity — for example, at the product level, region level, or customer level — is crucial. Details on account balances and transactions are required across business units to effectively support strategy and meet organizational needs.
• Efficient liquidity management. Virtual accounts can enable corporate treasurers to centralize cash without the need for complex, sweeping structures, helping to provide better funds availability, optimized account balances, and effective cash forecasting. Flexible virtual account structures assist organizations in efficiently managing balance contributions and available funds for each entity, lend working capital cash to subsidiaries efficiently, and implement rule-based interest allocation, all without cash leaving the actual bank account.
• In-house banking, or IHB. With the advent of VAM, more corporations are using the self-service module provided by banks. Corporations can run centralized treasury functions even if they do not have large bank account networks. IHB operates across a range of functions, such as cash concentration, foreign exchange, and funding. Many corporations have surplus liquidity in one location but need to borrow in another. IHB makes it easier to optimize liquidity across the enterprise, lowering overall borrowing levels and maximizing returns from investing surplus cash.
The Challenges with Virtual Account Management
Regulation and compliance: There are no current U.S. federal regulations for virtual accounting structures. But that’s not the case elsewhere. The main challenge with virtual accounts — for both banks and corporations, especially in certain jurisdictions — is the complex and ever-changing set of regulatory and compliance restrictions that impact their usage. The use of virtual accounts within a single country is complicated enough, and the difficulty increases exponentially for those that intend to deploy VAM across multiple countries.
Bank bureaucracy: Some global banks that offer VAM make the process of opening and closing these accounts less than straightforward. Corporations may be required to first close the DDAs they wish to replace before virtual accounts can be created. This adds upfront costs, cutting into the potential savings that the corporations are expecting to get from VAM. Because banks are essentially losing money by helping corporate customers replace their DDAs with virtual accounts, such projects may be a lower priority for them.
VAM Implementation — The Story So Far
VAM has been in vogue in Europe and Asia for the past decade. Adoption by corporations there, while slow initially, picked up because those that implemented VAM saw positive results. Now the product is an important one for banks in that part of the world to have.
In the U.S., major banks have been offering VAM for the past few years and corporations have been quick adopters, as they generally find the benefits outweigh the challenges. They value the speed, convenience and flexibility that it allows, including the ability to open and close accounts quickly and easily.
In the corporate banking world, VAM is emerging as a promising solution and banks that embrace it are well positioned to attract and retain customers.
About the Author:
Niranjan Govindaram has 16 years of experience in corporate banking and specialized expertise in payments and cash management.