As notional pooling’s star begins to fade, banks are delivering greater functionality in virtual account structures to help corporate treasurers better manage their cash flows. Joy Macknight reports.

Liquidity management

Cash management and forecasting is never far from corporate treasurers’ minds. The Association for Financial Professionals’ 2017 Strategic Role of Treasury Survey found that 64% of respondents see this area as the key priority for their departments over the next three years. However, treasurers at multi-national companies are hampered by numerous bank relationships, a plethora of group and subsidiary accounts, and treasury operations across countries and currencies.

Today, many banks are touting virtual account management (VAM) technology as the answer to better visibility into, and control over, corporate cash flows. And while virtual bank accounts have been in use for more than a decade, mainly for receivables reconciliation purposes, banks are now providing a much broader offering, incorporating accounting, payments and channel functionality.

“We are developing a whole suite of virtual account capabilities, which are providing opportunities for corporates, particularly around centralisation, simplification and driving greater efficiency,” says Sue Dean, head of treasury services for Europe, the Middle East and Africa at JPMorgan.

Explore the benefits

VAM gives corporates access to all the traditional global cash management capabilities, but through a self-service model. “Corporates want to be able to self-serve because it gives them flexibility in opening and maintaining accounts, both in terms of the number of accounts and how they build their treasury structure,” says Jane Strom-Pedersen, senior sales manager at Tieto, a software and services company that has built a VAM platform for banks. “VAM can also help corporates optimise liquidity management, automate treasury processes and improve working capital management.”

Initially, the target segment was medium-sized companies, those without enterprise resource planning (ERP) and treasury management systems (TMS); but upper tier corporates have also showed an interest in VAM.

“Large corporates often have a disjointed technology environment, with many different flavours of an ERP system,” says Ms Strom-Pedersen. “VAM can act as the glue that holds it all together – sitting in the middle between the real accounting system, the TMS and ERP. VAM enables treasurers to centralise funds and gain insight into their cash and liquidity positions, while at the same time matching invoices at granular level and delivering enhanced reporting.”

Matthew Fuellhart, a director at consultancy firm Monosphere, adds that VAM provides a new business and operating model, allowing banks to service their global cash management business at a vastly reduced operating cost. “VAM is a bank channel and platform offering myriad corporate cash and liquidity propositions,” he says.

“On a self-service basis, corporates conduct their own cash management activities, such as setting up structures, sweeping rules, and so on. In a single best-of-breed platform, VAM offers traditional treasury front-office TMS functionality, such as risk management and dealing, end-to-end payment processing services, such as those offered by a Swift service bureau, as well as consolidated and granular cash forecasts from ERP invoice data, all in real time with native connectivity to banking systems.” 

The VAM design

One of VAM’s fundamental value propositions, according to Mr Fuellhart, is the corporate’s ability to rationalise physical accounts with an unlimited number of virtual account structures, to achieve the financial control, segregation of duties and reporting that could previously only be performed with individual physical accounts. “In the virtual platform, a single physical account is mirrored, and subsequently sub-ledgered by virtual account structures, to support the operating requirements of a legal entity’s business units, such as accounts payables and receivables, or a group’s subsidiaries, in the case of a corporate in-house bank,” he explains.

“The need for more than one account per functional currency is eliminated because the financial operations that business units currently perform with a physical account are conducted on a virtual account. The savings in bank fees, bank account administration and transaction fees to move funds around physical accounts are material, and increase with the banking complexity of a corporate enterprise.”

From the bank’s perspective, Ms Dean says: “Virtual accounts lie under a single header account held with the bank. The corporate manages their virtual accounts on the bank’s proprietary system, such as JPMorgan Access, which gives the client the ability to set up virtual accounts and allocate account numbers.”

As such, these accounts do not appear on the bank’s balance sheet. This is an important point, because it differentiates VAM from notional pooling, another cash management tool favoured by corporates. The changes brought in under Basel III have driven up the cost of capital sitting on banks’ books. Consequently, some institutions have either decided to pass on the cost to corporate customers or withdraw notional pooling altogether.

Client comfort

But whether VAM can step into the gap formerly occupied by notional pooling depends on the customer, according to Timothy Bartlett, senior liquidity commercialisation manager at HSBC, speaking on a panel entitled ‘Demystifying on behalf of and ‘virtual’’ at EuroFinance’s International Treasury Management conference in October. “The client needs to be comfortable with closing in-country physical accounts and opening a physical account, or accounts by currency, in a central location, bearing in mind that these accounts may also be non-resident,” he said. “The corporate may have to keep an in-country account open for mandatory reasons, such as tax or salary payments, but these are solely pass-through accounts.”

Vanessa Manning, head of cash product for Europe and the US at Standard Chartered, speaking on the same panel, agreed with Mr Bartlett but also stressed that VAM has been developed in response to client demand. She pointed to PwC’s 2017 Global Treasury Benchmark Survey, which found that, on average, multi-nationals maintain an average of eight core banks and more than 20 additional banks, holding an average of 344 bank accounts with local banks. Given the estimated cost of between $2000 and $3000 per year to operate each of those accounts, she highlighted the “huge savings potential”. Layer in advanced analytics and the ability to do intercompany reporting using VAM, and the corporate gets the same effect as a cash pool but with less administration. “These are the reasons VAM is on the corporate’s wish list,” she added.

Ms Manning reported considerable interest coming from corporates expanding into emerging markets. “Whether acquiring or setting up an entity in a new country, straight away many choose a virtual account solution,” she said. “This is because it is a quick set-up with self-service control around adding new suppliers and entities within the structure, with less fees. It also provides a basis for a physical account, if needed for regulatory requirements.”

A Dutch flavour

ING has developed its own version of VAM, a proprietary tool which it calls virtual cash management (VCM). As Dick Oskam, global head of sales for transaction services at ING, explains, the Dutch bank’s solution is cross-border and offers full cash concentration at any point in time, leading to better visibility and optimal reporting. In addition, it optimises reconciliation, while retaining the benefits of having in-country accounts needed for tax and salary payments, for example.

“We provide a single bank account for a corporate, for example in Germany, and offer a range of virtual bank accounts in different European countries,” he says. “The virtual accounts, for example in Spain, can be opened in the name of the local entity and that account exists in the local clearing system. But because money never remains in those accounts, the corporate can treat them as virtual. This makes our solution unique.”

Fundamentally, it is two solutions in one, Mr Oskam adds. “On the one hand, it offers the benefits of reconciliation that traditional virtual accounts offer; but at the same time, we offer a full cash concentration solution within the same system. We decided not to label it as a virtual account solution because VCM goes beyond traditional virtual accounts,” he says.

In other VAM solutions, the corporate has one header account per country in the bank’s system and subsidiary accounts are managed by the corporate. In ING’s version, there is one physical bank account in a specified country and the virtual accounts are administrated by the bank. “We set up virtual account structures for our customers, and then they can set up the virtual ledger accounts themselves,” says Mr Oskam.

With IT company Tieto’s assistance, the bank designed a virtual ledger system with so much functionality that clients have compared it to a TMS, says Mr Oskam, returning to Mr Fuellhart’s earlier point. Recently, a European multi-national issued a request for proposal (RFP) for a TMS and ING’s VCM solution has been shortlisted, competing with two TMS providers. “This is a unique situation, for normally we would compete with other banks. It is the first time in transaction services that we are competing with a TMS vendor in an RFP,” he says.

ING has tested VCM with more than 100 clients. “In the US, for example, customers find VCM interesting because it provides a lot of upside for cash concentration and managing positions in Europe,” he says. Virtual accounts are offered only in the European countries where ING has direct access to local clearing.

Practitioner experience

Speaking on the same EuroFinance panel as Ms Manning and Mr Bartlett, Hans Maarten van den Nouland, global head of liquidity and cash management at pharmaceutical company Merck Sharp & Dohme, gave his account of the corporate’s move to a virtual solution. As one of the world’s largest users of notional pooling, which was managed to zero daily, the corporate was shocked to learn that its house bank was going to substantially increase its fees for providing the product in light of Basel III changes. In the absence of a dedicated bank VAM platform, the treasury department developed its own VAM solution, expanding on the receivables reconciliation concept.

“Instead of dynamically creating a virtual account for each customer or supplier, we issued one for each entity,” said Mr van den Nouland. “There is a legal owner at the top – the treasury company – and each subsidiary has a virtual account. From the bank’s perspective, the balance in the header account goes to zero [like the net notional pooling position] daily. In addition, daylight overdraft facilities are no longer needed because there is only one entity and we don’t have to worry about guarantee issues.”

Merck’s subsidiaries currently involved in the notional and physical pooling structure will be moved across to virtual accounts. “If a subsidiary is in our notional pool, then it should be able to do virtual pooling,” said Mr van den Nouland. “Those that are not allowed to participate, say in India for example, would not be on the frontline for virtual either.”

Mr van den Nouland, like many others, voiced his concern that regulators may in future apply the same treatment to virtual accounts as notional pooling, but also highlighted the transaction transparency inherent in a virtual account solution. “We are going through the banking channels and retaining the visibility and control mechanisms that are important to regulators,” he explained.

Suraj Kalati, global head of liquidity at HSBC, agrees with Mr van den Nouland’s final point. “The VAM solution provides the enhanced reporting capabilities corporates need to comply with regulations and provide greater transparency into the transactions moving through their entities,” he says.

A complementary solution

Most banks agree that VAM is not a direct substitute for notional pooling. “Companies will still need notional pooling and treasurers see value in this product,” said Mr Kalati. “There is also a group of customers that need some type of reporting efficiency and pooling aggregation efficiencies, but that may not mean notional pooling in the traditional form. The VAM solution helps them achieve their operational goals without bank balance sheet constraints.” As such, the bank is not planning to withdraw notional pooling.

Likewise, ING will continue to offer notional pooling through its subsidiary Bank Mendes Gans. “VCM is complementary and we will use it to help our clients be more efficient and thus reduce their overall cost base,” says Mr Oskam. “That is not only limited to bank fees but also reducing internal administration costs, for example.”

According to Arnab Sinha, management consultant with Accenture’s banking practice in the Netherlands, it is important not to counterpose the two solutions. He believes that this approach has hampered banks’ success in promoting VAM to corporates. “In an effort to reduce regulatory costs, banks were trying to offer VAM as an alternative to notional pooling, but this has not appealed to corporate treasurers,” he argues.

Instead, banks should position VAM as a new digital cash management proposition in the market. “They should combine other aspects, such as real-time payments and open application programming interfaces [APIs]. Doing so can enable VAM to be more efficient, offer self-servicing, provide data insights and drive much-needed digital transformation in the corporate treasury,” says Mr Sinha.

Ms Strom-Pedersen agrees that the Payment Services Directive 2 and APIs will open up new possibilities for VAM. “This will allow us to combine the virtual structures with another bank to get a multi-bank liquidity overview,” she says. “That is a powerful proposition for those banks that want to have an aggregator position in terms of offering their corporate clients a multi-bank structure in VAM.”

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