Next-generation virtual accounts

Read time: 4.5 mins Added date: 03/09/2024

Lloyds Bank’s Tim Pyecroft, Managing Director and Head of Corporate Sales, Global Transaction Solutions explores how companies can benefit from virtual accounts, how the bank’s Externally Addressable Virtual Accounts (EAVAs) can offer new opportunities for efficiency, and why it makes sense to carry out a ‘spring clean’ before implementing virtual accounts.

Business people reviewing documents at a desk

Virtual accounts have been available for some time and continue to evolve. Modern virtual accounts solutions can help companies reduce costs, increase operational efficiency and reduce fraud risk, while providing a better experience for both treasury teams and customers alike. At the same time, self-serve features (included with some solutions) also mean that treasurers can take their account structure in their own hands, in real time, via an API – opening and closing accounts on demand as needed.

So, what do companies need to know about virtual accounts? How can newer and enhanced solutions like EAVAs provide further benefit? And why is working with your cash management specialist to undertake a bank account review and ‘spring clean’ an essential part of a virtual account implementation?

Benefits of virtual accounts

In a nutshell, virtual accounts offer the ability to create externally referenceable ‘sections’ within a single physical account. These sections can then be allocated to different customers, suppliers or parts of the business. Companies can benefit from this approach in a number of ways:

1. Faster reconciliation and cash application. Unlike traditional (physical) account structures, going virtual means an overarching physical account holds all the funds, but they can be usefully sectioned off into different areas to better support efficient treasury operations without physically separating the funds. Reconciliation is rapid, and the company can quickly apply cash to customer credit lines, allowing customers to do more business with the company more quickly.

2. Cash centralisation and mobilisation. “Unlike physical accounts, where you are at the mercy of physical sweeping and timing cut-offs, the funds are already mobilised - and centralised in one place,” says Tim Pyecroft, Managing Director and Head of Corporate Sales, Global Transaction Solutions at Lloyds Bank. “And mobilising it is simply an accounting entry – not a case of physically moving it between different banks or accounts.”

3. Productivity gains. Some virtual account structures offer a self-serve element, meaning that companies can open and close their own accounts online in real-time via API, with instant access to new accounts. This is highly appealing for treasury teams looking for more control and productivity gains, particularly those that are highly acquisitive and need to open up large numbers of accounts.

4. Streamlined structures. EAVAs can provide ways for companies to build tailored structures that match and mirror their business which can then be managed centrally. Further centralisation can be achieved by utilising EAVAs to create Payments on Behalf of (POBO), and Receipts on Behalf of (POBO & ROBO) and in-house bank structures.

So which companies have the most to gain from adopting virtual accounts? “We see broad application of virtual accounts across different industries – and the structure and activity of the company is more a determinant of suitability. In the end it is about having a quality conversation with your transaction bankers to shape the best solution for your business,” says Pyecroft.

For example, virtual accounts are particularly helpful where companies have complicated structures or need to segregate funds across different customer or supplier accounts; for companies with franchise accounts; and for investment platforms that need to apply a rate of interest to individual customers’ accounts, to name a few.

Whilst many of the benefits of virtual accounts are enduring, as the UK interest rate remains high (even after the announcement of 1st August) it is important to concentrate cash effectively, striking the right balance between security, liquidity and yield. Pyecroft notes that treasury teams are increasingly being asked to deliver more with fewer resources, and some businesses have been affected more than others by post-Covid shock. “Working capital is still very much a priority for clients – and the simplest working capital management tool is knowing where your cash is and mobilising it efficiently.”

Evolution of virtual accounts

Virtual accounts have continued to evolve in recent years. Initial iterations focused on intra-company accounts, where external addressability wasn’t such a key priority. But as companies started to realise the broader potential for virtual accounts operationally, the need for external addressability became clearer: “Companies saw it would be great if their customers could just treat a virtual account as if it was a ‘real’ bank account when they were paying into it.”

In light of this evolution, Lloyds Bank has developed its EAVAs solution, which Pyecroft describes as a “significant upgrade on previous iterations of virtual accounts.” The solution is available to clients using Lloyds Bank Gem®, and subscription fees apply. EAVAs have their own account number, so a virtual account structure is seamless in experience for their customers.

Companies can therefore achieve better payment processing and straight-through automated reconciliation with minimal workarounds, while benefiting from an easily maintainable structure which enables them to open and close accounts as needed.

The importance of spring cleaning

Getting ready for virtual accounts should involve cleaning up the company’s account structure so it can better support the operating and financing of entities across the group. This avoids bringing a dormant account structure into the virtual counterpart.

‘Spring cleaning’ can be very helpful before adopting a virtual accounts structure.

Collaboration matters

To support the spring-cleaning effort, banks are becoming more proactive at helping their clients clean up their structures. “We feel it is important to be sitting beside our clients and doing the practical work together. You learn a lot from how clients intend to use the accounts, and you can help shape and advise along the way to get the right outcomes” says Pyecroft. This not only streamlines the company’s account structure and reduces risk, but can also reduce the operating overhead of managing those accounts.

“One company I’ve worked with had 20,000 bank accounts globally,” he recalls. “If each of those accounts costs you, say, £1,000 in overhead per year to manage, you can unlock some pretty serious operational savings without any tech resource or build – simply by thinking it through clearly.”

Where to begin

For companies considering virtual accounts, Pyecroft says it is important to ask the right questions before choosing a particular provider.

“I have seen situations where treasurers have signed up for solutions missing the features they really needed – such as external references, interest allocation, cross-currency payment and self-serve functionality,” he recalls. “It was because they didn’t know to ask, but also the provider certainly hadn’t gone out of their way to highlight those gaps. To find out later that key pieces are missing on technology can be frustrating and costly – so it pays to measure twice and cut once.”

“Finally, your cash management and payments specialists are here to answer all of your questions and help you identify what you really need to support your treasury,” Pyecroft concludes. “We design these structures for our clients every day, and we're here and ready to help.”

Article first published in Treasury Today September 2024.