Virtual bank accounts

For organizations, allocating a high number of monthly incoming payments can be both time-consuming and costly. At the same time, erroneous and incomplete transfers can further impede the payment monitoring process. So what can companies do to tackle the flood of incoming payments in the future?

For companies operating nationally and internationally with a high number of incoming and outgoing payments, integrating virtual bank accounts is a rising trend. This is intended to reduce the total number of bank accounts, which in turn primarily reduces and simplifies the administrative effort. What's more, virtual accounts are designed to increase the transparency and speed of individual transactions, thus enhancing companies' international competitiveness.

In an in-house bank, virtual accounts can largely centralize payment transactions and relieve the burden on internal departments (e.g., financial accounting). Such accounts can be used for an efficient cash pooling concept by simply connecting a physical summary account to the parent company. One significant advantage resulting from such centralization is a positive cost-benefit effect. By reducing the number of bank accounts, it is possible to reduce high expenses for account management fees and related charges. Time-consuming post-processing, which is caused by the manual allocation of erroneous transfers, is eliminated by automated allocation using virtual accounts. 

Not only does automated allocation reduce the effort required to reprocess payment flows, it also supports both reporting and financial accounting in the processing and monitoring of payment transactions. Thanks to a fully automated allocation process, manual post-processing of incoming payments is no longer necessary. This frees up capacity for employees, which can be used for other activities.

On top of this functionality, virtual accounts can further support the implementation and setup of in-house banks. By centrally managing intercompany interest, receivables and payables, the workload of the in-house treasury unit can be reduced.

Working with virtual bank accounts starts with assigning a virtual account number or IBAN to the respective business partners (affiliated companies, debtors, etc.). These accounts are directly linked to the general ledger account (real physical bank account), which centrally manages all incoming transactions and then assigns them to the respective accounts on the basis of the virtual account numbers. The sum of the virtual accounts is equal to the balance of the physical general ledger account, as virtual accounts have the same functionalities as a physical account, but they act merely as sub-ledgers within the physical general ledger account. 

By assigning an individual virtual IBAN to each business partner, through which all transactions take place, it becomes possible to create a corresponding overview. This means that each business partner receives its own virtual account, so that fewer physical bank accounts are needed and there is no longer any need to manually allocate unattributable incoming payments. The automated allocation thus reduces the administrative effort for companies. By assigning a virtual IBAN, incoming and outgoing payments for each business partner can be tracked and processed directly via the virtual account.

The setup of an in-house bank as an extension of virtual accounts involves a great deal of effort. For this reason, the prerequisites needed for the implementation of virtual accounts must be backed up by systems. Given the increasing need to centralize the account logic, system providers are addressing this by further developing their in-house banking implementation. This means that more and more companies are taking advantage of the opportunities offered by benchmarking.

However, the legal aspects are not insignificant. The more complex and dispersed a company’s organization is, the greater the number of regulations and restrictions that need to be checked. Under Section 24c (1) of the German Banking Act (KWG), the direct or indirect issuance of a virtual IBAN to payment service providers must be recorded immediately, correctly and completely in the file system of credit institutions. The end customer is recorded as the beneficial owner, while the payment service provider acts as the account holder. This rule does not apply when issuing a virtual IBAN to a customer who is not a payment service provider. Such customers pursue the goal of relieving their internal financial accounting by introducing virtual accounts without the virtual IBAN being used by the end customer (beyond the payment) for other purposes.

Now companies are faced with the question whether it pays off to implement virtual accounts or an in-house bank. And as is so often the case, the answer to this is: it depends on the company structure. 

A small limited liability company, for example, with only two domestic subsidiaries and a manageable number of incoming and outgoing payments with few customers, should use simple cash pooling options to achieve a positive cost-benefit effect. In this regard, standard reporting is helpful as an important supplement. However, when looking at a large corporation with, for example, 12 subsidiaries distributed abroad, an efficient centralization of monetary transactions makes sense. In a next step, selecting a system that can represent virtual accounts coupled with monitoring will need to be considered.

Source: KPMG Corporate Treasury News, Edition 127, November 2022
Authors:
Michael Gerhards, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Daniel Müller, Senior Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG