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Asked and Answered: Your Questions about Virtual Account Management

  • By AFP Staff
  • Published: 8/10/2021

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Are virtual accounts right for my business? How do virtual accounts work in X situation or Y environment? Can we talk about legal entities in relation to virtual accounts? Tom Hunt, CTP, AFP director of Treasury Services, sat down with Rajiv Yadlapalli, head of North American Liquidity Product Solutions Specialists at J.P. Morgan, to get answers to these questions — and more — in a recent webinar: “Virtual Account Management Follow Up.”

Can virtual account structures be used across different banks?

Absolutely. In fact, we see it as a very common use case.

How does the fee structure differ from a regular bank account to a virtual account?

It tends to be cheaper in a virtual account — less documentation, fewer banking relationships, higher degree of transactions that can be internalized. But what we really find is that the more powerful element is how much simpler it is on our clients to integrate, how much more operationally efficient they can get, and how much liquidity savings they can get.

What are the trade-offs or benefits between bank-driven virtual accounts and virtual accounts you build within your company from your in-house bank software?

Banks ultimately are connected to the financial market infrastructure themselves, and the neat thing is, they can create virtual accounts where the routing or the actual execution of that is natively built into the virtual accounts. It is more efficient when you do it with the bank; however, hybrid models can be pursued depending upon what you're trying to do with your virtual account structure.

Is there a typical company size or treasury structure where this solution makes the most sense?

It really depends on what you're trying to do, and what your current banking footprint looks like. It's less about company size and more about how efficient or inefficient your current bank account structure is. The less efficient, the more value you're going to get from a solution like this.

Has anyone explored using virtual accounts for custody of invested assets, and is there any bank supporting virtual accounts for custody of invested assets?

I have not seen anything in the market. I am not aware of any rules preventing it. It’s more of a question of how practical or how much value will that actually provide.

If I'm a treasurer and I use separately managed accounts, do you see those virtual accounts being used in a separately managed account?

I don't see anything necessarily preventing the cash elements. There are other complexities when you're getting into security settlements, DVP transactions. While nothing comes to mind, the question isn’t so much why it couldn't happen as it is, how much value will it get relative to the need?

Can you describe a migration path from existing accounts to virtual? Can accounts be kept as new virtual accounts? Can you reuse the account number in this setting?

The big thing you'll need to ask yourself is whether this is a ZBA between accounts owned by the same entity, or a ZBA between affiliates and something that will potentially create intercompany lending, borrowing, and administration requirements.

In terms of migrating, this is more about your bank provider’s specific ability. For instance, their ability to recycle bank numbers, their ability to transition you from one bank account to the other bank account holding the virtual account structure, etc. Part of it is regulation, part of this is your banking provider's ability to move you from one to the other.

Regarding the reuse of an account number, my experience suggests that, particularly in the multi-entity use cases, you may not want to recycle that account number. You might want to keep two to transition the activities.

How streamlined is the process? If you get a new virtual account number, and the parent is already a banking client, how quickly on average does the KYC process go?

At J.P. Morgan, it is not the usual intense process that would apply when compared to establishing a new bank account. All we are really trying to do is validate that an entity is what it says it is and there is no troubling information in the public record. And then we will make a risk decision. In an appropriate circumstance, it can be onboarded in a day.

Does each virtual account have to have its own tax ID, or is the tax ID on the parent level?

From J.P. Morgan's perspective, the account will only have one tax ID: the tax ID of the parent.

If you issue paper disbursement checks, does the virtual account number appear on the checks or do you need to use the parent/entity account? If the entity account, does that introduce greater risk of fraud or fraud that goes undetected?

The payment is being done through the physical account. And where an on-behalf-of framework exists, that payment will have to comply with all relevant regulations.

You would need to talk to your banking provider to understand how their fraud account controls work with respect to virtual accounts. It's going to differ for each provider, similar to how it would differ with a technology provider.

Does the bank assign a virtual bank account number that we give to payers sending us money? How do you send the wire instructions or ACH instructions?

The short answer is yes. They will assign a number; they will provide it to you so that you can provide it to your counterparties when they need to send funds. That is one of the more important basic features of virtual accounts and why there are advantages in certain cases to using a bank-based offering over an offering from a technology provider.

Does the bank provide separate bank statements for each virtual account, or does the treasury management system issue the bank statement to the separate business even to reconcile?

Every bank has a different offering. They will issue reports that will hopefully look similar to what you would expect economically from a bank statement, and in such a way that hopefully integrates efficiently into your TMS/ERP systems. It is something you should expect from a virtual account experience.

What is the best way that you have seen customers implement ROBO?

I don't think there's a single answer to this question. It really depends on what your objectives are. What do you need from your banking infrastructure? And what is that doing for you internally? Long story short, I've seen certain customers do everything through a full virtual account experience, I've seen others do it through a more simplistic transactional tagging experience where all they want the bank to do is issue a number that can be routed to, and tag that and have it posted to the physical account statement.

Maybe they have a voluminous number of customers they want to tag, but then a smaller list of customers’ counterparties, vendors and suppliers, where they have ongoing activities they would like to accrue and know what their current outstanding balances are. We've seen all of those in practice.

How does the reconciliation of incoming funds work within the one account and knowing which virtual account that belongs to?

This is one of the more important questions you should ask them; it is an inherent core function of virtual accounts. They should prove to you that their reporting will tag everything, that they will be able to show you what the reports for the virtual accounts look like versus the physical bank statement. But pretty much any legitimate virtual account offering now can support this. They can reconcile it, and they can also be transparent where you will get dual reporting.

How are bank reconciliations impacted by utilization of virtual accounts? For example, does the number of bank reconciliations get reduced?

This is one of the core savings and value to the client. Let's say you're doing the multi-entity structure and you've appropriately set up your inter companies, and let's say you used the bank to help you. You will have fewer accounts, so fewer things you need to do — formal bank recs and audits — and you will use that data to make your process vastly simpler.

Can you layer a virtual account over a controlled disbursement endpoint or a solution?

It would make sense to check with your banking provider and internal counsel, but I am not aware of any reason you could not do this. It comes down to the bank's ability to support the technology needed to make that happen and whether it is a bona fide recognized payment, or whether you need to rely on other internal activities to evidence that to your internal accounting staff and tax staff.

Do you need debit blocks on all virtual accounts or just the actual bank account?

If you are worried about payments coming in or want to block debits, the simplest answer is just to rely on the traditional physical account experience where your provider would stop that. It would impact all the virtual accounts because they're part of that physical account. But again, every bank will have a different way of meeting the capability, so you should follow up with your banking provider.

Can the sub or virtual accounts be for a different legal entity under a virtual account structure?

Yes. But I would say two things: Number one, can you meet your payment needs in that case? Are there validations on behalf of the payment capabilities in that market, or from your banking provider, that can allow your participating entity to meet their requirements? Are there expectations from, for example, a tax authority that the payment was made from an account legally owned by that virtual entity?

The second thing you need to consider is once an on-behalf-of payment is done, it can create an exposure for the participating entity. Is that something that is acceptable? What requirements do you need? And are you operationally meeting those? Now the good news is these are things that J.P. Morgan is aware of and has built capabilities to support.

Are there any issues with having the entity and virtual accounts belonging to different legal entities?

Let's say you're doing it in a country that doesn't support or doesn't recognize on-behalf-of payments, you might find that your internal accounting and tax staff might not be too happy. Another example is where you are not comfortable that it's permissible for that virtual entity to enter into an intercompany loan with the parent.

You really have to think of the legal issues around those bank accounts in the line of virtual accounts and ask your legal group to work that through with counsel and tax just to make sure you're not creating a taxable event where you don't want to.

A physical account is owned by a legal entity. It has a unique tax ID. Can you use multiple virtual accounts within a single bank account if the business units themselves are separate legal entities with different tax IDs?

Yes, but you have to understand that those affiliates with different tax IDs do not have a bank account relationship if they don't have a separate physical account. That means it's a different form of relationship. I like to think of it as they're receiving banking services through the physical owner's bank relationship.

Are your various tax departments supportive of the move to virtual accounts? Did you have to do any convincing to get them on board? And do you hear from clients interacting with their tax groups, either at a domestic level or international, outside the United States?

It's important you don't just push it down your organization. Sit with the relevant functions and have a conversation about what we’re trying to do with our bank relationship. Show them the benefit they're going to receive — maybe they'll get better and more streamlined reporting, better transparencies. It's not just a benefit to the treasury group to streamline accounts and save money on bank fees and things, there's truly some other benefits to the broader organization, and that is probably a good place to start when you're having these negotiations internally.

I get worried if I hear from my clients, "My tax department requires my virtual account reports to show that virtual accounts tax ID," because then I think potentially there's a misunderstanding within the client's organization.

For subs, which are a loan party to a credit agreement and require the ability to borrow directly from the credit facility, does it make sense to set up a virtual account versus physical? Is it going to a virtual account, or would it have to go into the legal parent account?

I don't see anything with a virtual account that changes the relationship of how that party borrows from their credit facility. So that basically stays the same.

I think the next question is making sure that the mechanisms you have with the back office of the bank who's lending to you can basically wire it the right way, where it's recognized as a receipt on behalf of internally. This is usually not an issue. I think the bigger issues may stem where the subsidiary has asset-based lending facilities and their own restrictions, which might prevent them from entering into intercompany lending with the affiliate. Usually that's the bigger issue that comes up in the space more than the virtual participant having its own credit relationships.

Are there risks or concerns with balances being solely in one entity account with one bank?

We want you as a client to optimize your activities, but also where it makes sense for you to invest or redeploy funds, you should. We will help you sweep those funds and access other vehicles; we'll work with affiliates and other providers you might have. But nothing should prevent you from making prudent counterparty risk decisions.

What account number is input when creating the wired payment?

When you're using a bank-based service, it would be the account number issued for the participant or entity that is economically receiving that payment. Note that the bank may need to disclose the physical account number to comply with relevant payment rules and regulations.

Learn more about virtual account management with the AFP Guide to Virtual Account Management.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of J.P. Morgan, its affiliates, or its employees. The information set forth herein has been obtained or derived from sources believed to be reliable. Neither the author nor J.P. Morgan makes any representations or warranties as to the information’s accuracy or completeness. The information contained herein has been provided solely for informational purposes and does not constitute an offer, solicitation, advice or recommendation, to make any investment decisions or purchase any financial instruments, and may not be construed as such.
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