Transaction banking is no exception to the unprecedented challenges that the banking and financial services industry faces today. With traditional business margins eroding consistently, banks are looking to contain costs, eliminate inefficiencies and streamline operations in every function. Moreover, to match the agility of non-bank entrants such as payment institutions and service providers (PISP), banks need to come up with innovative cash management solutions for their increasingly demanding corporate clients.

A cash management solution is not new for the corporate banking business. But what corporate and SME customers need today is a solution that ensures smooth reconciliation for payment and collections, and provides enhanced control over liquidity positions to optimally meet working capital requirements. A Virtual Account Management (VAM) solution is what will help banks and corporate customers here, offering a cost effective way of maximizing working capital management by adding or introducing non-physical or virtual accounts linked to a real physical account.

Understanding Virtual AccountsA corporate or SME client has on an average 6 banking relationships, with close to 100 or more accounts across those relationships. With one physical bank account for all the payments and collections, it is a challenge for corporates to keep track of their payments, collections, account receivables and account payables.

Virtual accounts are dummy accounts for routing payments to one underlying real or physical account. The actual fund transfer happens through the main physical account, but with a virtual account allocated for each payer, an enterprise has greater visibility and control over working capital.

Virtual Account Management (VAM) solutions allow corporate or SME customers of a bank the flexibility to design the hierarchy and structure of their virtual accounts.

Leveraging Virtual Account Management (VAM) Solutions for Flexibility and Control

Payables and receivables in a corporate enterprise are spread across multiple layers – global, regional or domestic. Moreover, multiple types of transactions and operational payments take place through different enterprise operating accounts at different banks. Dispersed account structures of an enterprise and hence the absence of a single source of truth makes reconciliation inconsistent. Limited automation to track payments from various payers also makes the process prone to errors.

For a bank, multiple internal systems within the bank add to cash management complexity. Another challenge before banks is the long cycle of integration with customer ERP systems.

A Virtual Account Management (VAM) Solution reduces the administration cost and effort, by connecting multiple bank accounts, thus increasing the visibility of funds and control over working capital.

VAM solutions provide corporate and SME clients user friendly self-service capabilities and the flexibility to manage their virtual accounts while banks control the real or physical account, providing a cost effective way of centralizing funds.

The Virtual Account Management (VAM) Solutions Banks Need

Most of the VAM solutions on the market are point solutions or over the top (OTT) solutions built as a wrapper on top of online banking, current account systems, payment processors, and liquidity or cash management systems of banks. Since these solutions are not integrated with the bank’s IT landscape, they cannot be scaled easily. Furthermore, in the wake of new regulatory requirements such as PSD2 that require banks to open up their account management systems to third parties, a complex financial accounting structure that cannot be changed on demand can significantly slow down operations.

What banks need is a VAM solution that is integrated with the bank’s core IT landscape, and its payment hub components such as message processor, re-router and settlement manager. This system also needs to lend itself for ledger posting, liquidity posting, and account reconciliation. What’s more, banks must be able to provide their corporate and SME customers with access to their A/R and A/P records on-demand and on the device they choose. This requires that the VAM solution connect seamlessly with any customer touchpoints such as portal, online banking or mobile banking through an Omni-channel hub.

With the retail banking business facing challenges from the new entrants in the sector, banks will need to strengthen their corporate banking business. Solutions like the Virtual Account Manager can be a huge asset here.