Strategic Treasury

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The Reality of Virtual Liquidity Management We speak to industry experts at Deutsche Bank about virtual accounts and the need for virtual ledger management - which they suggest can truly transform the way treasurers manage their liquidity, not only overcoming today’s liquidity challenges but also preparing for tomorrow’s headwinds.

The Reality of Virtual Liquidity Management

The Reality of Virtual Liquidity Management 

By Vanessa Manning, Head of Liquidity and Investment Solutions, Global Transaction Banking, Deutsche Bank and Paul Cuddihy, Structuring Head for Global Solution Development in Cash Management, Deutsche Bank

 

Never ones to accept the status quo, Vanessa Manning and Paul Cuddihy,  Deutsche Bank, talk to Eleanor Hill, Editor, TMI, and explain how virtual accounts can fall short of expectations, and the need for virtual ledger management (VLM) to truly transform the way treasurers manage their liquidity.

 

Box 1: Virtual accounts: a refresher

The term ‘virtual accounts’ is often used (sometimes erroneously) to refer to different solutions that fall under the same umbrella. To clarify, what many banks and treasurers call ‘virtual accounts’ are in fact virtual IBANs.

Meanwhile, the term ‘virtual accounts’ is also sometimes used to refer to administrative ‘subaccounts’ of one physical bank account, usually known as the ‘Master Account’. Under the Master Account, corporates can open, close, and modify as many virtual accounts as required by the business. They can also organise account hierarchies as they see fit. Since the Master Account forms part of the cash management bank’s ledger, this kind of solution is increasingly known as Virtual Ledger Management (VLM). 

One of the main benefits of VLM is that cash can be earmarked as belonging to a particular virtual account. This means that corporates can allocate funds without needing to segregate them physically. VLM can also help with overcoming some of the challenges associated with payments/collections on behalf of (POBO/COBO) structures.

 

Eleanor Hill (EH): What major liquidity management challenges are corporates still struggling with, despite advances in technology and initiatives such as the Single Euro Payments Area (SEPA)? And what additional macro trends are shaping the way treasurers approach liquidity management today?


Vanessa Manning (VM): Cost and transparency are still significant barriers to efficient liquidity management. In spite of the hype around potential post-SEPA consolidation benefits, very few corporates have reaped the promised rewards. We estimate that multinational companies (MNCs) with considerable EU positions have only achieved, at best, circa 30% of the anticipated account rationalisation and simplification efficiencies. 

As a result, finding the next generation of cost-savings, simplicity and working capital optimisation, is high on the corporate agenda. And given market developments such as instant payments, treasurers are increasingly seeking solutions that will deliver real-time information, real-time liquidity, and real-time risk management and decision-making. 

Achieving these goals may well require a fundamental re-engineering of treasury workflows and even architectures, however. So, more and more treasurers are asking the question: what liquidity structures should I be building to ensure my treasury function is fit-for-purpose not only today, but also tomorrow?


Paul Cuddihy (PC): Additional drivers behind the current trend for re-thinking liquidity and concentration structures are FX and interest rate volatility – not least the desire to manage negative yield, which still has a two-to-three-year outlook across the Eurozone. The rising dollar is yet another factor here, together with money market fund (MMF) reform in the US and Europe. A simplified account structure, combined with real-time information to support better risk management, is the order of the day. 

Elsewhere, the treasurer’s expanding remit and growing commercial focus is feeding into new liquidity management requirements. Take the impact that a company’s collections model has on customer experience through e-commerce channels, for example. By making the collections process as seamless as possible, the treasury department can demonstrate how it can directly support revenue growth.


VM: Treasurers also want to become better strategic partners to the business, which means they have much higher expectations for automation and standardisation in their liquidity management. In this digital age, no treasurer wants to spend their time simply managing payments and investments or tackling straight-through processing issues. Treasury has moved on; and so too must liquidity management.

Often, though, this is easier said than done. Many corporates, especially those that have recently undertaken M&A activity, have huge challenges with respect to their IT infrastructure, and how fragmented it is. With multiple systems operating side by side, corporates are struggling to standardise and automate. Budgetary constraints are only exacerbating the issue. Therefore, treasurers are increasingly turning to their banks in search of new solutions to support their transformation and optimisation journeys.


PC: Alongside these liquidity management trends sits a growing desire – among treasurers and banks –  to overcome cumbersome corporate-to-bank processes around bank account opening, management and maintenance. Know-your-customer (KYC) workflows remain a particular headache. Corporates are looking for much swifter processes, in a self-service environment, whereby they can easily open accounts as required and react to the needs of the business – such as quick M&A support. This is leading treasurers to look towards virtual account solutions, as well as emerging virtual cash management tools.


EH: Could you explain what virtual accounts actually are and what benefits they deliver? How do they differ from the other virtual cash management solutions out there?


PC: Used across Asia for some time, virtual accounts – in the guise of virtual IBANs (see box 1) – are now growing in popularity across Europe and the US as banks roll out a market standard. In a nutshell, these are dummy IBANs issued by the bank which re-route payments to a real IBAN – and then into the underlying physical bank account associated with that real IBAN. 

Virtual IBANs can help corporates to increase their reconciliation rates, improve days sales outstanding (DSO) and unlock working capital. Additional benefits include the ability to rationalise bank accounts and sweeping structures, delivering a certain level of automated cash concentration.


VM: Virtual accounts are just one piece of the puzzle, however. Because of the drivers and trends that we talked about earlier, corporates are increasingly looking to rethink their treasury and operations processes to cater for instant payments and instant liquidity, as well as accelerating their account rationalisation reviews. At the same time, they are seeking more efficient ways to operate their in-house banks (IHBs) and are therefore starting to explore new hybrid models. 

Consequently, some corporates are now beginning to look beyond virtual accounts to the possibilities of virtual cash management, with virtual ledger management (VLM) starting to come into its own. 

 

Fig 1   Efficiencies gained through Virtual Ledger Management 

Fig 1   Efficiencies gained through Virtual Ledger Management

 

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