virtual [ˈvəːtjʊəl] ‘not physically existing as such but made by software to appear to do so’ (Oxford Dictionary)
While the concept of virtual banking products may seem brand new, virtual bank accounts have been on the market for about 20 years. New customer demands, stricter regulations, and the pressure for more cost efficiency are driving a new market momentum, which revitalizes this concept. In the European context, two products must be distinguished – virtual bank accounts and virtual IBAN (International Bank Account Number).
Virtual IBANs are ‘pseudo’ account numbers that allocate payments directly to a real IBAN that is linked to a physical account. For example, companies can assign a virtual IBAN to each customer or invoice. From the customer’s point of view, virtual numbers are no different from real IBANs. For the company, however, this facilitates direct reconciliation and thus significantly reduces the administrative burden. Savings also apply to additional benefits such as insurance, credit cards and other services that are often included with a physical account package, but not always needed. In addition, payments can be send and received worldwide making separate foreign currency accounts obsolete. This can save companies not only a lot of effort, but also much of transaction and account maintenance fees. Foreign companies benefit in particular from virtual IBAN by bypassing the often very long onboarding process of a physical business account in Europe.
Thus, companies can minimize the number of their bank accounts by using virtual IBAN and concentrate their capital. Virtual IBANs are therefore an important step towards centralization. But virtual accounts go one step further.
Virtual bank accounts are similar to ‘sub-accounts’ of a physical bank account.
Companies can open any number of virtual accounts under the main account to create flexible account hierarchies. While opening, closing, and changing physical accounts is bureaucratic and time-consuming, virtual accounts can be set up and managed through a self-service portal at any time. All transactions take place on the main account, so no virtual IBANs are needed. The funds are centralized in one account, while individual procedures, settlements, cash receipts, and disbursements can be viewed and managed separately on each virtual account and at each hierarchical level. Therefore, virtual accounts grant access to the complete assets in real time at any time.
Companies cannot only create virtual accounts for different internal departments, but also for entities that are not necessarily customers of the bank. It is questionable whether a due diligence check is required for customers at the level of the entity held in the virtual account.
Furthermore, according to the FATF recommendations, banks are required to assess and mitigate the risks of new technologies for new and existing products (see Recommendation 15 FATF 2012).
The development and use of virtual banking products can maximize autonomy, flexibility, and efficiency, but it also introduces new compliance risks. Are virtual banking products the new power tool or just another compliance nightmare?
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