The reality of Virtual accounts
London, 04 September 2024 –
The reality of Virtual accounts. The future of modern banking.
Virtual accounts are a transformative tool for electronic money institutions and payment institutions.
By leveraging virtual accounts, EMIs and PIs can enhance security, streamline operations, and maintain robust regulatory compliance, all while optimising their financial management processes.
As the financial industry continues to evolve, adopting innovative solutions like virtual accounts with licensed partners like Bank of London, will be key to helping businesses stay competitive and deliver exceptional value to their clients.
In the rapidly evolving financial landscape, electronic money institutions (EMIs) and payment institutions (PIs) need to navigate a myriad of challenges, from managing risk to ensuring compliance and efficiently handling finances.
Virtual bank accounts play an important role in e-commerce, marketplaces and fintech offerings.
We sat down with Charlotte Bullock, our Chief Product Officer, and Dan Turdean, our Product Director, to get a rundown on the many ways improve risk management, compliance, and overall financial efficiency.
What is a virtual account?
While virtual accounts function in similar ways to physical bank accounts there are important differences. Firstly, they don’t actually hold balances like physical accounts.
They operate digitally as ‘sub accounts’ that allow for the segmentation of transactions and link to a ‘master’ bank account which would always be a physical account.
These virtual accounts or virtual solutions as they are also often called can be set up very quickly and are easy to modify and manage. They incur lower costs than traditional bank accounts too because there is no need for multiple account fees or administrative overhead.
Their flexibility and cost-efficiency makes them ideal for businesses needing to segment and monitor transactions for various needs.
- Charlotte
How have they evolved?
Virtual accounting has been around for a while, having been introduced in the Nordics during the 1980s. Growing or larger businesses often have multi-currency needs, work with complex supply chains and operate with multi-entity structures.
Virtual accounts help address needs like this thanks to having a unique identifier linked to a physical bank account.
This allows firms to segment and track transactions without the need for multiple physical bank accounts.
This segmentation provides granular control and visibility over financial activities, making virtual accounts a strategic asset for firms using them.
- Dan
As a simplified analogy, think back to a time before we had digital wallets when we had real notes and coins in our purses or leather wallets.
If you were budgeting and managing your money in your ‘wallet’, you might move notes or coins to another section or pocket. Virtual accounts operate in much the same way.
They have come to the fore to help businesses such as payment institutions and EMIs manage the movement of money with a centralised view, in multiple currencies for multiple needs while providing control, access and flexibility.
That is extremely useful when a firm is working with many customers that each have their own money flow and balance requirements.
- Charlotte
How can virtual accounts help a business?
The use cases are endless.
Let’s start with how virtual accounts managed with a licensed banking partner can enhance a firm’s approach to risk management.
By using these virtual solutions, EMIs and PIs can monitor transactions in real-time across multiple sub-accounts and identify unusual patterns that could indicate fraudulent activities.
This enhanced oversight helps in the early detection and prevention of fraud, minimising potential losses.
Secondly, segregated client accounts and underlying virtual accounts enable the segregation of client funds from operational funds.
This separation ensures client money is safeguarded and not co-mingled with the firm's operating funds. And reduces the risk of misuse and helps enhance trust with the client’s end customers.
Then there is the ability to create dedicated accounts for different clients or transaction types, which in turn simplifies the reconciliation process.
Automated reconciliation reduces errors, accelerates financial reporting, and improves overall financial accuracy.
Virtual accounts provide innovative solutions to regulated institutions by enabling them to offer externally addressable bank accounts to their customers.
The virtual International Bank Account Numbers (vIBANs) allow those end-customers to receive and make payments and see what is happening with their accounts in terms of money flows and balances in real-time – like a real bank account.
When providing dedicated virtual accounts to each customer, use cases for the EMI or PI expand further, as it allows them to each get an account with a virtual IBAN – an externally recognisable virtual account. Which they can use to collect payments, pay out, or any other way they would use a physical account.
- Charlotte
The ability of virtual accounts to be part of a broader approach to effectively using compliance as a superpower is a major benefit too.
That’s because these accounts facilitate adherence to regulatory requirements by providing clear and auditable records of all transactions.
This transparency is crucial for compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
With virtual accounts, EMIs and PIs can implement more robust Know Your Customer (KYC) and Customer Due Diligence (CDD) processes.
Individual virtual accounts for each customer make it easier to track and verify customer identities, ensuring compliance with regulatory standards.
This is also a more robust and transparent approach than using omnibus accounts where user deposits are pooled together without segregation.
Not only that but firms engaged in various projects or business lines can allocate separate virtual accounts for each project or line of business. This segregation aids in precise project accounting and financial performance tracking.
Together, these internal approaches to transaction reporting help on the broad regulatory reporting front.
Regulatory bodies often require detailed transaction reports. Virtual accounts simplify the generation of these reports by consolidating transaction data in a structured and organised manner, ensuring timely and accurate compliance reporting.
- Dan
Considering how a business can optimise its approach to financial management, virtual accounts do offer real-time visibility into cash flows across different segments of the business.
This enhanced visibility allows firms including EMIs and PIs to make informed decisions about liquidity management, ensuring optimal cash flow for operations and client transactions.
We touched on this earlier but there is an efficiency consideration our clients really appreciate.
Maintaining multiple physical bank accounts can be a costly and administratively burdensome.
Virtual accounts reduce the need for numerous accounts, lowering banking fees and administrative overheads while giving the client firm detailed financial control.
- Charlotte
At the same time, many of the businesses we work with want to grow well beyond where they are today.
As they do, demand for managing more accounts and transactions increases.
Virtual accounts provide a scalable solution on this front by allowing institutions to effortlessly expand their financial operations or take on more clients that all need their own account without the need for complex infrastructure changes.
- Dan
How quickly can virtual accounts be set up?
This depends on the needs, operating model and complexity of the client business. From our side in terms of delivering a go-to-market capability, it can be done extremely quickly, within a few weeks.
Importantly, we have our Developer Studio, and we have one of the most comprehensible bank APIs in the UK.
We have a sandbox capability that is free to use and enables businesses to start testing ahead of any contract signing. This makes it all a very quick process in that regard.
- Dan
About Bank of London
A Safer Model for Business Banking Bank of London operates a distinct business model. Unlike traditional banks, it does not lend, invest, or leverage deposits. Instead, all deposits are held in full at the Bank of England, ensuring they are always available on demand. This eliminates the risk of ‘bank runs,’ offering businesses a safer, more secure banking alternative.Along with its safe deposit model, Bank of London offers a comprehensive suite of services, including:Deposit-as-a-Service (DaaS) - with all client funds held with the Bank of England.
Bank of London is authorised by the Bank of England’s Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
