Virtual bank accounts: traditional banks, regulation and beyond

This article wraps up a three-part series that covers everything businesses need to know about virtual accounts.

In the previous instalment, we discussed the differences between virtual and traditional accounts, the relationship between fintechs and virtual solutions, and how to get started with such solutions.

Now, we're ready to explore regulations, the views of traditional banking, and the future of virtual accounts.

Traditional banks and virtual accounts

Banks that generate substantial revenue from transactional facilitation and treasury services generally view virtual accounts positively, as they offer greater control for their clients regarding reconciliation and liquidity.

At the same time, it is essential that banks with substantial involvement in the sector make use of these accounts to remain competitive.

Nevertheless, not all parties agree on the usage of virtual accounts as a pseudo-banking solution, which has led traditional banks to be wary of their deployment.

Financial risk for traditional banking

From the perspective of a bank, the ability to attract and retain blue-chip clients is highly dependent on the balance sheet and global operations. Losing access to a major currency would have a devastating effect on the bank's revenue stream, especially since the 80/20 rule will almost certainly apply.
Therefore, when a business offers multi-locational virtual accounts for their customers, it can be hard to calculate the potential risk associated with servicing this business.

Banks thus have the right to approach this cautiously. The challenge for startups is to provide a unique solution that surpasses what is currently available, and remain compliant.

Regulators and virtual accounts

Regulators likely see the potential of virtual account numbers for Fintech-driven innovation. However, some Anti-Money Laundering (AML) experts have expressed concerns that the current regulations governing virtual account usage were not specifically designed with these accounts in mind.

That said, the ecosystem has since addressed many regulatory issues with advanced compliance and risk technology fit for virtual account usage and digital banking. For example, AML provides screening and monitoring solutions for financial institutions, using a proprietary combination of risk data, intuitive case management, and smarter matching. Such solutions are designed to detect fraud and automate the risk management process. They can help businesses detect transactions from suspicious locations, highlight deviations in behaviour from new accounts, and more.

It is important that businesses facilitating digital transactions have a clear understanding of how their services are being utilised, and apply a tailored risk-based approach to reduce false positives while automating ongoing monitoring.

When it comes to consumer protection, the majority of virtual account usage is currently limited to the corporate sector. Nevertheless, if fintechs begin to offer these accounts to entities whose primary goal is not consumer protection, it is likely that regulators will take a more active role in the industry. Regulators need to take into account both the risks and benefits of virtual accounts, as well as their potential to stimulate the sector.

Clearly, regulators are aware of the product's high adoption rate and associated economic benefits. Thus, it is unlikely that regulators will seek to impede its efficacy. Although it may be difficult to contain the product, the goal should be to regulate its usage in a manner that mitigates potential misuse.

What does the future hold for virtual accounts?

Virtual accounts will remain a part of the commercial landscape for the foreseeable future. This is due in part to the current level of usage by small businesses—a situation that renders it impractical for states with substantial industrial trade to avoid the product.

While there is potential for AML disasters, we are confident that businesses can survive these tests and that the level of adoption will remain high. Going forward, the key is for all involved parties—participants and regulators alike—to learn from the experiences and create a more resilient network while still preserving the integrity of the banking system.

One step in the right direction is SWIFT's plan to migrate from its existing MT messaging system to the richer MX format based on ISO 20022 principles. This transition may be slow, but it will give banks and startups the ability to share more data in a more accessible way at the transactional level, allowing for more meaningful assessments.

It is clear that virtual accounts are just beginning to prove their value and it would be wise to be on the lookout for new opportunities.

If you are on the lookout for new revenue streams in local and overseas markets, book a demo today and we’ll help you to make sure no money is left on the table.