How Virtual Accounts Hold the Key to More Efficient Cash Management

Virtual accounts are not a new concept. Many treasurers will be familiar with the idea of assigning a variety of sub-accounts to various customers – be they internal or external – under the umbrella of a single, physical account. This enables corporates to reduce the number of physical bank accounts they run. In the market, there are two main types of virtual accounts that banks will offer.

Elise Hoyet, Head of Virtual Account and Payment Factory Solutions, Societe Generale, explains her institution’s approach: “We generate virtual IBANs that are attached to a single real account for our corporate customers. There are no accounting characteristics with this type of virtual account, and they serve many use cases for treasurers. We can identify a payer, business line, activity, or project within the same legal entity. It’s also possible to use these virtual accounts to identify a participating entity or subsidiary in a POBO/COBO context.” 

“The most significant difference between a ‘real’ account and virtual accounts is that the client can use an IBAN to identify a subsidiary, for instance, but with fewer administrative charges and no account convention to sign,” adds Elise Hoyet. “It’s very fast to open, deactivate or modify a virtual account, and they don’t require the complete KYC needed with real accounts.”

Indeed, one of the initial drivers for corporate adoption of virtual accounts was to avoid the burden of KYC, as it was an obvious benefit. Today, a more important driver for corporates is the possibility of creating a more agile structure underneath their physical layer of bank accounts.

Edwin Hartog, Head of Global Transaction Banking, Netherlands, Societe Generale, comments: “Treasurers can cut out a lot of physical accounts and replace them with virtual accounts. This not only gives the benefit of lighter KYC but also enables faster concentration of balances. Corporates can quickly pull their balances together at a header level or at the main level defined in the company structure.” 

In today’s volatile markets, the visibility and availability of cash are major advantages of having a bank account management structure that combines physical and virtual accounts. Ultimately, working capital drives the current dialogue around virtual accounts.

“A POBO/COBO set-up is a hugely efficient cash management structure for our clients and virtual accounts are a tool to facilitate this,” explains Elise Hoyet. 

Eliminating the blind spots – Wabtec case study

Wabtec is a global provider of equipment, systems, digital solutions, and value-added services for the freight and transit rail sectors. The company is servicing many countries striving to improve the movement of people and goods across their landscape and providing the best support possible to accomplish that.

Aakar Desai, Senior Treasury Director, Wabtec, comments: “It’s an interesting challenge from a treasury perspective because as we are present and generating revenue in more than 50 countries. Some of these present global currency restrictions, FX risks, and currency fluctuations. Once the currencies are in certain markets, it isn’t easy to repatriate or do a dividend or capital reduction and get it out. Treasury has to be very agile in terms of how we support operations and, from a company perspective, how we manage, consolidate and invest that cash so that it’s helping and not hurting the company. It’s a very delicate balance.”

In the past seven years, Wabtec has also grown exponentially, driven by many acquisitions, which has created its own challenges. 

“In 2016, our revenue was around $3bn, and if you fast-forward to today, it is around $9bn, so three times the revenue in seven years,” reflects Aakar Desai. “Many challenges come with that level of growth. Unfortunately, while we’ve been in this growth mode, elements such as bank accounts have largely been managed in decentralised silos, and we haven’t had a chance to wrap our hands around everything. This was something we needed to address.”

At the start of Wabtec’s cash management transformation, the company had more than 1,000 bank accounts, in excess of 120 banking partners, and at least 70 different ERPs. With this rather unwieldy structure, it soon became clear to Aakar Desai and his team that virtual accounts would have an important role to play in the overall solution.

“The main reason we went down the virtual accounts route was that we were very decentralised,” confirms Aakar Desai. “With more than 1,000 banking accounts, everything was managed by the business units. At corporate headquarters, we didn’t have any visibility of the local bank accounts or information about how much cash was in there and how it was being managed. That was a big blind spot.” 

This issue meant it was difficult for treasury to concentrate cash and use it for other corporate obligations. An additional headache was that, with so many bank accounts, the running costs of maintaining so many accounts were high. 

The main goal of Wabtec’s treasury project was to implement a global cash pooling structure, which included COBO and POBO. Considering the countries in which the company operates, the decentralised structure at the start of the project and the reporting requirements, the team decided that the best way to facilitate that was through virtual accounts. 

BOX STARTS
Spotlight on Europe

As part of its cash centralisation global project, Wabtec partnered with Societe Generale in Europe. Before the project started, the company had 275 bank accounts in Europe, with at least 55 banking partners, 19 currencies, and more than 40 entities. With government regulations in certain countries requiring companies to pay items such as payroll or tax payments through a physical account, the challenge was to be as efficient as possible with the roll-out of virtual accounts while ensuring the necessary physical accounts were retained.

“We’ve been able to take those 275 bank accounts and reduce it to 30 physical and 70 virtual accounts,” reveals Aakar Desai, Senior Treasury Director, Wabtec. “Virtual accounts cost a fraction of what it takes to run a physical account, and it’s much easier to concentrate cash.” 

Wabtec has provided its customers with a virtual account and explained that is the account for them to pay into. Still, from a treasury perspective, this cash all comes into a physical account. As it’s already concentrated, paying for an end-of-day bank sweep is unnecessary.

Clément Lagoutte, Senior Treasury Manager, Wabtec, comments: “Virtual accounts are a quick way for treasury to get our hands on the cash because the implementation and KYC processes are fast. We did the KYC documentation for the header entity, but [we have] more than 40 entities in Europe, [and] we did not have to do the KYC documents [for them]. Previously, this would have taken up to two years, but in less than a year, we’ve opened all of the virtual accounts for the area.”

Building on solid foundations

To strive for the most successful outcome possible, any treasury project that includes the implementation of virtual accounts must be carefully considered beforehand, taking into account the unique nature of the company involved. 

Peter Van Ginneken, Global Transaction Banking - ED Corporate Sales, Societe Generale, comments: “Before starting these kinds of projects, it’s imperative to understand that there’s no such thing as ‘one size fits all’. This type of solution is tailor-made from day one. The client and the bank must learn to adapt during this process because elements such as structures and countries can change over time.” 

Of course, while this might be the first time that a corporate has looked to use virtual accounts as part of their overall cash management set-up, the bank will have plenty of experience in similar projects and can be on hand to advise how to approach the work right from the beginning. 

Elise Hoyet explains: “
The first step we recommend on the client side is to visualise the project: which countries and currencies they operate in, whether they want a cash pool or not, and so on.  There are constraints for a POBO/COBO organisation, including legal, regulatory, and fiscal issues that need to be checked. Then, as a bank, we have to support our clients in their implementation and share our experience

Understanding a company’s specific needs for a significant project such as this requires excellent two-way communication between the corporate and the bank. Both sides agree that this has been a great strength throughout the project.

“In this project, the direct and open communication lines between Wabtec and ourselves during this implementation process was essential,” affirms Peter Van Ginneken.

Clément Lagoutte, agrees: “There has been a constant communication channel between the Societe Generale implementation team and us. They were supportive and swift to answer. Any potential issues on both sides have been assessed and discussed on time. We’ve been able to move forward and not let any issues make life difficult or postpone our various deadlines. I’ve not seen this in previous projects with other bank partners.”

A timely transition generating practical benefits

While there is still work to complete the project, Wabtec is already reaping significant benefits from the great strides made so far. This is particularly critical considering the current interest rate environment, where a treasurer’s ability to consolidate cash effectively directly impacts the organisation’s P&L. 

“When we started this project, we were carrying close to $750m of cash as a company on our balance sheet at all times, sometimes going as high as $900m,” reflects Aakar Desai. “Today, with all of the cash pooling activities enabled through virtual accounts, we have reduced our average cash balance to around $500-525m. A $200m reduction is huge when we were having to pay 6-7% to borrow cash because our cash was decentralised in various places where we couldn’t utilise it.” 

Wabtec has a revolving facility with its banking group that it draws on for operational purposes. Thanks to their new ability to concentrate cash, they can draw less from the corporate credit revolver. 

“If we didn’t have this $200m from reducing the cash balance, we would be borrowing more,” admits Aakar Desai. “On an annual basis, that’s a $12m difference to the bottom line due to the efficiencies we have created through this project, and that’s just on the borrowing side.”

Another impactful benefit the project has delivered is reduced bank fees. Of course, fewer bank accounts bring down the fees to pay, but there is also a secondary level where moving from a physical to a virtual cost structure also lowers fees. And that’s not all.

“When we embarked on this project, we had many banking partners,” recalls Aakar Desai. “We have reduced the number of banks we do business with, which has meant we have been able to leverage the business and get better rates for transactional costs, meaning lower transactional fees.” 

The efforts to restructure Wabtec’s bank account management structure have led to significant cost savings from a company perspective. Beyond the excellent financial benefits that the project has unlocked is something just as vital to the company’s treasury team – control. 

“Control is critical because today there’s an increased amount of fraud happening,” says Aakar Desai. “To combat fraud, companies need proper controls in place. You can have controls written down in policies, but this can be hard to implement when there are so many bank accounts that many people have contact with. This project has enabled us to centralise the banking administration within the treasury group.”

This is essential, as much of the organisation’s movement of funds is within the treasury group, including moving large sums from one account to another and externally. 

“By having virtual accounts, everything gets concentrated automatically, so there are fewer chances for errors or picking the wrong bank account,” adds Aakar Desai. “A lot of physical controls are automatically put in place, meaning that the company’s susceptibility to fraud has decreased. That’s a big benefit.” 

Having more control and visibility over cash means that the treasury team now has the ability to either invest it or use it as deemed necessary from a corporate perspective, which wasn’t the case before. In addition, treasury is running an IHB set-up in conjunction with the new virtual accounts.

“The in-house bank makes life easier because, while we are consolidating everything from many differentbusiness units through one physical accounting, they still want their activity reported appropriately,” says Aakar Desai. “We can now provide accurate cash reporting for different business units at lower costs because we’re not going to a bank to generate all the reports. We’re able to do it through our in-house banking solution. The total benefits, both quantifiable and intangible, are significant.”

A taste for success

Having achieved so much in just over a year, one would be forgiven for expecting the Wabtec treasury team to rest and enjoy the fruits of their labours. But that is not the case, with Aakar Desai making it clear that they are far from finished, with a few more items on their treasury hit list, one of which is establishing a centralised netting solution.

“If we can net our payables and receivables and reduce the number of FX transactions we have to do, there’s some significant savings to be made and the process gets managed more effectively,” Aakar Desai enthuses. 

There is also much work for the team to do on the POBO and COBO front. While the cash pooling is in place, POBO remains on the to-do list. This is a way for Wabtec to reduce its number of bank accounts further and become more efficient in the process. 

“We want to have less than 150 physical bank accounts, there’s still a way to go before that happens, but we’re making strides towards that,” says Aakar Desai. “Much of what we’re doing with the cash pooling is also enabling us to reduce the intercompany loans that we have between various entities and simplifying that structure. There was a point just a year and a half ago when we had more than 400 intercompany loans, and today, we’re down to 150.” 

The company is also working towards a solution that it can use in certain countries where payments to suppliers from virtual accounts face various obstacles.

“We are waiting for the implementation of the new ISO 20022 norm for international payments to help us because we have an extensive footprint with suppliers in restricted countries,” explains Clément Lagoutte. “We have to show the local regulator that our name is on the payment and the contract, so we will have a hybrid solution, hopefully by November 2023, providing the ultimate debtor name that can be shared with the beneficiary’s bank.”

This is a crucial point, as this ability will help large companies and should facilitate greater adoption of virtual accounts, Elise Hoyet concurs.

“The ISO 20022 migration could be a significant tool to promote virtual accounts and to implement the solution for all the clients,” she says. “It will be more efficient for corporates to have XML on the end-to-end payments process. That could be a great tool.”

For treasurers thinking about implementing virtual accounts for their organisation, finding the right balance between their company structure and their ambitions is crucial. 

“If treasurers can have an open conversation with their bank, I'm certain they can work out the right structure,” comments Hartog. “This normally ends up being hybrid structure, with some a bit more to the left and others a bit more to the right, but that’s for the bank and corporate treasurer to determine.”

Another vital takeaway from the Wabtec example is for corporates to remain flexible to change while implementing a virtual accounts structure.

“The key point is to learn to adapt,” concludes Peter Van Ginneken. “Things change over time, and the virtual account is a structure that can easily adapt and handle changes, particularly like those we have recently seen in the corporate world.”

Elise Hoyet 
Head of virtual account
and payment factory solutions

Peter Van Ginneken
Global Transaction Banking
Corporate Sales

Edwin Hartog
Head of Global Transaction Banking
Netherlands