This post provides some insights on Virtual Account Management, a key Solution sought by Corporates/ Financial Institutions from banks offering Cash Management Services.
Background: The key function of a Product Manager handling Cash Management is that of a Solution Provider to clients. Virtual Account Management is a key tool in his/ her repertoire for addressing clients’ transactional banking requirements.
The need: Through offering a comprehensive Virtual Account Management Solution, a bank seeks to address a key need of a Corporate/ Financial Institution: that of ‘remitter identification’. A significant volume of Collections for a Corporate/ Financial Institution is electronic in nature and in the absence of a mechanism to identify the remitters, Clients would struggle to reconcile these electronic receipts. The importance of this Solution can be gauged from the below quote by Mr Walter Wriston, ex Chairman & CEO, Citibank:
“Information about money has become almost as important as money itself”.
Some typical use cases: Some scenarios where Virtual Account Solutions are required –
· An FMCG/ Pharma company receiving funds electronically from its Distributors across the country
· An Insurance company (having a ‘Hub and Spoke’ model) receiving surplus funds from a Branch/ Divisional Office
· A Co – operative Bank (Indian example) receiving funds to the credit of a customer where funds get credited into the Co – operative Bank’s account with the bank providing Cash Management (the Virtual Account Solution helps the Co – operative Bank perform a book entry and credit its customer’s account)
· An Educational Institution receiving Fees from parents
· A start – up receiving funding from multiple Investors
· An e-commerce company receiving funds from bidders as Earnest Money for an auction.
Some Large Multinationals have Virtual Account Structures currency wise.
Typical Virtual Account Models: The most common Virtual Account Model comprises the Client sharing a Master File for upload into the Core Banking System of the Cash Management Bank. The File contains unique identifiers for various remitters as well as fields that correspond to the concerned remitter, so that when the inward credit hits the Core Banking system, the latter could fetch the desired details and display the same in customer’s account statement. Alternatively, there are some banks who open actual accounts for remitters (with restrictions). While most banks have in – house solutions for Virtual Account Management, there are external Service Providers offering cost – effective Solutions as well. The decisioning on these aspects shall vary from bank to bank.
It is also true that certain Solutions require the Product Manager to have a greater understanding of clients’ specific needs and tailor the solution accordingly – a cookie – cutter approach won’t work.
Remitter Identification: Typically, in the Model where only Virtual Accounts (not physical ones) are opened for remitters, the Client is requested to share remitter wise unique ‘keywords’ (typically alpha numeric) that need to be suffixed to the Client’s Core Banking Account Number when the electronic payment is being made. Upon receipt of the transaction, the Core Banking System of the Virtual Account Solution Provider bank searches for the details pertaining to the respective remitter that have been shared by the Client and displays the same in the account statement.
In case of an FMCG/ Pharma company, these details can be Distributor Name and Distributor Code; in case of an Insurance company, these details can be the Name and Internal Code allotted to the Branch/ Divisional Office making the payment; in case of a Co – operative Bank, the details can be Name and Account Number of its customer; in case of an Educational Institution, these details can be Student Name, Class, Roll Number and so on.
Web based module: While it is common practice to allow a Web – based module (WEB CMS) to Clients for Cash/ Cheque Collections, some banks do offer a similar platform for Virtual Account Management as well in order to further help Clients in reconciliation.
Limitation:
· In case the remitter fails to follow the instruction, remitter identification would not be feasible.
Next stage: The next stage of Virtual Account Management shall cover Payables Management using Virtual Account Management model; however, this is not widely used yet.
What are your views on Virtual Account Management? Where do you see this Solution moving forward in times to come? Would appreciate your responses.
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