Why do we need Virtual Accounts?

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Why do we need Virtual Accounts?

One of Fintech’s more in-vogue products of the last five years is Virtual Accounts. Virtual Accounts go by a lot of different terms, vIBANS, virtual ledgers, named accounts, sub-accounts, ZBAs and quite a few more.

But why are they needed? And what do you need to know about them?

Read on or download our latest White Paper to find out.

Why are Virtual Accounts needed?

Like most inventions, virtual accounts were built with a specific use in mind. The use case being to help businesses reduce errors in payments and referencing, and the pain caused by said errors! Virtual accounts were designed to give businesses some simple benefits. Namely:

  • To reduce (or rationalise if you are a treasurer) the number of bank accounts you had to maintain
  • To simplify cash management and reconciliation
  • And to provide the same level of control and reporting as traditional accounts

Problems with Virtual Accounts

Let me give you a real-life example of only one of the numerous times it has happened to a business.

The following happened to a previous venture of one of our co-founders. The company was growing quickly and in need of some office supplies. Most staff preferred to use Mac instead of Microsoft, so an order was placed for around 10 MacBooks.

As a Fintech player, the company tended to maintain a lot of balances with partner Fintechs. CurrencyCloud was one such partner, and for operational convenience, settled its outstanding bill with Apple through a CurrencyCloud account. The payment instructions were entered, and the Apple corporate account reference number was (correctly) applied, and off the payment went. 

CurrencyCloud generated a proof of payment document later that day just for certainty and that should have been the end of it. However, a few weeks later an email was received from Apple.

“Funds not received, please pay asap”

Our co-founder called them up and explained the funds had absolutely been sent, told them the date and the amount to the penny.

“We do not have a record of that on our system”

The proof of payment and the MT103 was emailed to them.

“We do not have a record of that on our system”

He assured them that payment has been sent and requested to speak to a manager. After about a week he spoke to a manager and went through the same process, explaining that a payment had been made on X date for X amount and with XXX reference. Could you please check for those details only? Their response….


“Because I think you are simply looking at our corporate account record rather than checking your bank statement.”

“We don’t have access to our bank statement, we are the customer service team”

On and on this went until eventually our co-founder realised that Apple, being Apple, probably have a corporate account for 75% of the entire UK corporate market. So, it was time for a change of tack.

“I know you can’t talk to me about other customers, but if you could please check your system to see if you have a customer called CurrencyCloud and if you do I am confident you will find that you have received a payment on X date for X amount and with XXX reference. Moreover, that will not be their corporate reference, it will be ours”

“I cannot comment on other customer information, but I will revert and get back to you.”

“CurrencyCloud”, he continued, “are a Payment Service Provider, and the very nature of their business is that they send payments on behalf of other companies. Doubtless they will have an account with Apple too and what has likely happened is the accounts receivable team saw the sender name as CurrencyCloud, never bothered to check the reference and simply applied it to their account.”

In a week an Apple Manager called back. It went like this:

“I can neither confirm nor deny that we received a payment from CurrencyCloud but if you do have a relationship with them, please get them to write on letter headed paper a message to confirm you are their client and that payment of X on X with XXX reference was intentional and meant for X company.”

After another week this was resolved and finally the credit was applied to the account (doubtless causing CurrencyCloud some of their own reconciliation issues later).

The process took six weeks from beginning to end to resolve. On man-hours alone, it probably cost both the company and Apple the same amount as the initial purchase to resolve. Going through layers of management and approvals and pulling in three businesses distracting them from their core activities.

And all the above because of a single error caused by a manual process that relied entirely on an arbitrary reference.

The Benefits of Virtual Accounts

Now just imagine if Apple had the technology (which doubtless they could implement) to give every single customer their own unique virtual account number. In most countries the standard digit count for an account number is 8 meaning apple could offer 100,000,000 million unique account numbers (per routing/sort code).

This would enable a system where each Apple customer no longer uses a superficial reference number when making a payment, instead they simply pay (in the same normal way) to the account number presented on the invoice.

This removes any possibility for a misallocation of funds. This removes any uncertainty around purpose of payment or identity of sender. It removes the need for manual intervention and fund tracing. For Apple, it empowers them to know if a customer has paid, simply by checking whether the virtual account they have for the customer in question has had any funds pass through it. And this is a very important detail.

Virtual Accounts allow funds to pass through them. They are conduits for fund transmission. It wouldn’t be very helpful if Apple had to go and check millions of virtual accounts every day, and then transfer the funds to a central operational account. The benefits of reconciliation would be dwarfed by the cost of operation. But to be able to have millions of payments everyday collected in separate unique virtual accounts and to have those payments automatically land in a house account – now that is powerful.

With this kind of technology, Apple (or anyone for that matter) could dramatically reduce the cost of running an AR team. It could also drastically improve customer service and user experience, cutting down on invoice cycles and disputes. It would, at a stroke, remove 90% of the manual errors that create the need for heavily resourced and non-revenue generating bureaucratic environments.

Had virtual accounts been deployed, the issue described above would never have happened. It wouldn’t matter what reference was put on. It wouldn’t have mattered that CurrencyCloud made the payment on our behalf. All that would have mattered was the amount of money and the virtual account number that was on the invoice.

As powerful a solution as the above is – that’s not what’s driving their adoption in Fintech. There is something much less marginal at play.

To find out what, download our free White Paper: Virtual Accounts – A Fintech Love Affair.

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