When virtual accounts first reached treasury, the pitch was relatively simple: fewer physical bank accounts and less reporting. Sathish Padmanathan, Head of Payments and Cash Management at Tieto Banktech, explains why the same technology is now being used to help run in-house banks, support fintech wallets and sit alongside stablecoins – and what is still slowing banks down in helping corporates adopt it.
In 2012, Tieto Banktech worked with one of the world’s largest banks to launch its virtual account offering. The brief back then was relatively narrow by today’s standards. Corporates were carrying too many physical bank accounts, each with its own statements and reconciliation burden, and virtual account management (VAM) promised to thin them out. “At that point, the aim was simply to rationalise the number of physical accounts a company held and reduce the complexity of its reporting,” recalls Sathish Padmanathan.
More than a decade later, VAM is back in treasury conversations, and the list of things it is expected to do has grown considerably. In-house banking, sub-accounting and digital wallets are all now being built on virtual account structures, and banks are looking for new ways to get more out of their offerings. “The way treasurers and bankers want to use virtual accounts has changed tremendously,” he says. “There are now many different use cases.”
With interest running high on both sides, the obvious question is whether corporates and banks want the same things from VAM. For Sathish, the answer shows up most clearly in what treasurers are now asking of their banks.
Above all, treasurers want control. “Treasury runs on systems as well as people, and treasurers want to be in the driving seat,” Sathish says. “To do that, they need a high level of self-service, so they can manage their account structures as they want without having to call the bank or submit a request.” Opening, closing and restructuring virtual accounts should, in other words, be something treasury can do for itself.
Banks were hesitant at first, wary of handing too much control to their clients. Over time, though, many have come to see self-service as working in their favour too. “It means their operations teams can spend time on work that creates value, rather than pressing a button to send a file – something the system can do,” he explains. Self-service is now the request he hears about most often in his conversations with banks.
That desire for control is becoming more pressing as the speed at which money moves changes.
When positions move after hours
Instant payments, and round-the-clock settlement, mean that balances in a virtual account structure can change at any point in the day – including when nobody in treasury is watching.
Not every treasurer is rushing to embrace that (understandably). Sathish recently spoke to one treasury leader who summed up a common attitude. “We don’t make instant payments – we don’t want money leaving us instantly,” the treasurer told him. “But we love receiving money instantly, because it gives us more predictability and adds to our liquidity.”
Of course, holding on to outgoing cash while collecting incoming funds as quickly as possible makes sense, but it doesn’t keep instant payments out of the business. “Whether treasurers like it or not, instant payments are already present in corporates, and treasury is dealing with them one way or another,” Sathish says.
His favourite illustration is the EU’s Instant Payments Regulation. “A multinational with accounts in different currencies can see its euro structure change at any time of day as instant payments come in,” he explains. “If hundreds of payments arrive between treasury closing for the day and opening the next morning, that makes a significant difference to the liquidity position. So with instant payments, the treasury function needs to become instant too, in many senses.”
In practice, many treasurers are now working out which processes need to run in real time and which simply need to be on time. Virtual account structures, sitting at the point where incoming money lands, are a natural candidate for the first list. Delivering that, however, depends on what banks can build – and for many, the technology underneath has been the hard part.
Building around the legacy core
Ageing core banking systems have long been the biggest obstacle to rolling out VAM at scale. Core modernisation, Sathish says, was one of the main factors holding back virtual account rollouts. That has started to change, and few banks have needed to rip out their cores to get there.
“Banks are taking smart approaches to contain the complexity of their legacy code,” he says. “Where the legacy core DDA [demand deposit account] system can’t handle complex tasks, those functions move into a sub-accounting layer, and the virtual account offering is built on top of that, rather than directly on the core.”
Speed matters here because treasurers expect it. Implementation timelines measured in years are a hard sell, and corporates have alternatives. “If a bank is slow because of its legacy core, the treasurer will probably go and find another bank that can support them,” he notes.
Once the technology is in place, the question becomes what corporates do with it.
From lease collections to millions of wallets
Asked where the strongest corporate use cases lie today – receivables, reconciliation, in-house banking or payments and collections on behalf of (POBO/COBO) – Sathish’s answer is all of them, suited to the client in question. “It really depends on what kind of corporate you’re talking to,” he says. Businesses focused on collections naturally gravitate to COBO. In the US, escrow structures are popular, particularly among real estate and leasing companies in cities such as New York and Chicago, which use VAM to keep the collection of lease payments clean and traceable.
A newer and fast-growing conversation involves fintechs. Increasingly, they are approaching banks for banking-as-a-service, asking to be onboarded onto VAM or sub-accounting platforms so they can provide accounts to their own customers. The numbers involved can be striking. “Banks are receiving RFPs from customers wanting millions of accounts, because those customers want to offer wallets and digital accounts to their own clients,” he says.
The more varied these use cases become, the more often they run into regulatory requirements that were not always written with virtual accounts in mind.
Who checks the virtual payee?
Perhaps unsurprisingly, regulation is where much of today’s friction sits. “In some countries, regulation is slowing down VAM rollouts,” Sathish says. “That isn’t because VAM itself isn’t compliant – it’s because banks don’t yet have the right controls in place.”
Payee verification (which goes by different names in different countries) is one example. In the UK, Confirmation of Payee can cover payments into virtual accounts. In the Eurozone, meanwhile, Sathish says banks still face practical questions about verification within virtual account structures, including which account should be checked. He hopes further SEPA rulebook updates will help address the challenges.
KYC is the other sticking point, especially for banking-as-a-service. When a bank provides sub-accounting to a fintech that in turn offers wallets or digital accounts to its customers, there is a chain of ownership that has to be documented and tracked. In the US, fintechs or corporates often carry out the checks operationally, although the sponsoring bank retains ultimate regulatory responsibility. In Europe’s more tightly regulated markets, banks often want to do the checks themselves – a considerable operational overhead when a single fintech may bring hundreds of thousands of accounts. The controls exist for good reason, but they slow things down.
Despite that friction, Sathish believes the biggest change for VAM is still to come – in how it is packaged and delivered to corporates.
Physical, virtual and stablecoin in one view
For most of its life, VAM has been sold as a distinct cash management product. Sathish expects that to end. “VAM will become part of an embedded treasury offering from banks to corporates,” he predicts – a view he describes as personal, but one he has been testing with peers across the industry. “Until now it has been a very distinct offering, but the value will come from the wider ecosystem, such as in-house banking, rather than from VAM in isolation.”
Part of that ecosystem is what Tieto Banktech calls hybrid structures, which bring physical accounts, virtual structures and digital assets into a single view so treasurers can see their liquidity across asset classes. One of the firm’s US bank clients, which also offers stablecoins, is piloting the approach, using Tieto Banktech’s platform to build a hierarchy that shows cash pools, physical and virtual structures and stablecoin holdings together.
The project is still at pilot stage, but the early response has been strong. “Treasurers are loving it,” he says. “Today they’re going to different systems and getting different statements to work out how much they really have across asset classes. With this new way of working, we can make their lives much easier.”
If Sathish is right, the next stage of VAM will be to connect together everything a treasurer holds, fiat or digital, so that the information needed to make decisions is in one place, at the right time. And that certainly sounds like a future worth hoping for.
