At a glance
- Treasurers are looking to review cash management services amid a tough environment
- BNY Mellon launched, on January 29, its own virtual account management offering, Virtual Account Based Solutions
- The SME market is yet to be addressed, but holds potential
High interest rates, cost pressures and increasing difficulty in securing liquidity are putting strain on global treasurers.
In the recent CGI Transaction Banking Survey, nearly three-quarters of all treasurers said they were looking to review cash management services, making cash management, alongside payments, the top product area under consideration. Foreign exchange and liquidity solutions are close behind.
Virtual account management, where firms can segregate, track, view and manage their cash using an unlimited number of virtual accounts under the umbrella of a traditional physical bank account, has been a well-known proposition for corporate treasurers looking to find efficiencies.
For the past decade, particularly in Europe, the use of VAM has been increasing. But now VAM products are maturing, according to Deep Patel, payments and transaction banking director at Deloitte. “The features in VAM products are improving,” says Patel. “The real game changer now is the wider availability of externally addressable accounts.”
Banks have been developing VAM services, which came into its own during and post the Covid-19 pandemic.
One of the most recent launches is BNY Mellon’s VAM, at the end of January. BNY Mellon’s offering comprises four solutions underpinned by externally addressable virtual accounts: receivables reconciliation, virtual segregation, liquidity structures, and finally virtual bank accounts for financial institutions. Its virtual accounts are all linked to physical accounts within BNY Mellon, and fully accessible on external payments networks.
Olu Adebiyi, global head of cash management solutions at BNY Mellon, characterises it as a virtual sub-ledger. “Our platform allows firms to break their physical account up in a virtual layer and assign each part a virtual account number. These are accessible to external parties — but in aggregate the balance is held in one physical bank account.
Adebiyi notes that large companies have often complicated account structures with high numbers of accounts across different divisions of their organisations and with different banks. He says that VAM structures "reduce this complexity because our clients will be able to create a high volume of virtual accounts with the different types of hierarchical structures that they might want, and all of these virtual accounts will be linked to a single physical account”.
Multiple virtual, one physical
An “externally addressable” virtual account means that any outside party wanting to transact with a firm’s virtual account can do so directly, without having to pay into a "parent" physical account and include a reference to the virtual account. The external party has no requirement to have a virtual account itself.
The benefit, according to Patel, is that corporate treasurers can have as many virtual accounts as they want with lower overhead costs typical of physical accounts.
Patel has observed a shift in the value propositions of VAM, particularly in the past two years. “Previously, you couldn’t externally get to the account. I could pay into a sort code and account number that represented a virtual account, but still have to pay into the parent physical account with a reference — just like we pay a credit card. But more and more there’s availability of banks being able to offer properly externally addressable virtual accounts.”
Erasing cash blind spots
Patel highlights a 2023 Société Générale example, where a client with more than 1000 physical bank accounts, 120 banking partners and at least 70 enterprise resource plans was able to utilise VAM to streamline the number of physical accounts it ran, reduce operating cash management costs and gain real-time visibility of cash flow, erasing blind spots.
These blind spots can often mask trapped cash, says Adebiyi. “Firms may end up with cash trapped in different parts of the business because they simply don’t have that visibility or access to it. So our solution seeks to help clients manage this. We’re providing the infrastructure to support the centralisation of cash and liquidity across these multiple subsidiaries or affiliates.”
And when cash is centralised and visible, a company can then potentially leverage "in-house banking", where one part of the firm offers a line of credit to another part.
“Firms can actually self-fund their own operations because they’ve centralised collections payments and they’ve established these in-house banks. We then also allow our clients to set unique credit and debit rates across these accounts. So if you have an entity or part of the entity that is funding creating liquidity, and you have another part that is using that liquidity, the treasurer would be able to assign unique rates,” says Adebiyi.
Untapped potential for SMEs
While the benefits of VAM might appear clear for international, large or even mid-sized corporates, particularly those dealing across multiple jurisdictions with a vast network of subsidiaries, one client base that VAM is yet to directly benefit is that of smaller firms, according to Patel.
“VAM stands to be really beneficial for smaller businesses, but the capability needs to be offered in a way that’s suitable for that segment,” says Patel. While he doesn’t believe SMEs are being “ignored”, he does believe that banks are yet to find suitable VAM solutions for them.
“I don’t think there’s been a lot of investment yet in how smaller businesses could get benefit, and I definitely think there’s mileage there. As time moves on, the proposition will be quite mature and commoditised for global corporates, and I think we’ll then see banks looking to invest in how they can unleash this VAM capability for better use in small and medium enterprises,” says Patel.
And if the big, established players don’t, fintech companies will start jumping in, believes Patel. “In some cases you kind of see some of that already. Look at some of the accounting management packages that are available to SMEs. Those types of fintech offerings are trying really hard to integrate payment services, particularly using open banking, so they can move money around and give virtual views of how money is segmented for a small business,” he says.
