Virtual Accounts: What a Lender Reads in Them

A business with a thousand trade customers receives a thousand payments a month into one account, many with a missing or mistyped reference. Someone in accounts receivable has to work out who paid what, and what cannot be matched sits as unapplied cash: the money is in the bank, but the ledger still shows the invoices unpaid. Virtual accounts attack the problem at its source. Give each customer its own account number, print it on the invoice, and the number the money was sent to identifies the payer, whatever the customer typed in the reference field.

The same structure serves other purposes. A group can give each subsidiary or project its own numbers, so that receipts are tracked by entity without opening dozens of real accounts. A property manager can give each tenant one. A payment business can give numbers to its own clients, and that is where the harder questions start.

The bank opens one physical account, the master account, and issues a range of account numbers linked to it. A payment sent to any of them settles in the master account, and the bank's statement data reports which number it was sent to. The business's systems use that number to match the receipt to the customer, and with the amount, to the invoice. Many banks also keep a running record for each virtual number, so a treasurer can see receipts, and sometimes a notional balance, per customer or per entity while the cash stays in one place.

Two consequences follow. In the usual structure the money is one deposit, held by the master account holder, and a balance shown against a virtual number is an internal record rather than a separate account. And where numbers are given to subsidiaries, the cash those subsidiaries collect lands in the account of whichever company holds the master, so the group's intercompany records have to show who owes what to whom.

A building-supplies wholesaler, constructed for this page, has 1,400 trade accounts and an invoice discounting facility that advances 80% of eligible debtors. The facility excludes invoices more than 90 days old and, as a term of this example, deducts unallocated receipts from eligible debtors, because the lender cannot tell which invoices they paid. At the month end before the move to virtual accounts, in US$000:

Three months after each customer is given its own number, receipts are matched on arrival. Working back through the month-end balance above, US$270,000 of the unallocated US$310,000 turns out to have paid specific invoices, US$140,000 of them in the over-90 column. US$40,000 still arrives at the old account number unidentified.

Availability rises by US$112,000 with no new sales, because US$140,000 of receipts were being counted against the business twice, once as unallocated cash and once as the unpaid overdue invoices they had in fact settled. The larger gain is in the report. The over-90 column now lists customers that have not paid, not customers whose payment nobody could find, and the lender's view of which customers to worry about rests on a true list. The match rates and figures are the example's.

A real sub-account is a separate deposit. It can be held by a different company in the group, charged on its own as security, or frozen by a court order without touching the rest. A virtual account is none of these: it is a label on money in another account. That matters to a lender taking security over bank accounts, and to anyone assuming that a subsidiary's virtual balance is the subsidiary's asset. Virtual accounts also differ from notional pooling and zero-balancing, which work on real accounts held by different group companies, offsetting their balances for interest or sweeping them into one. Virtual numbers can do part of that job by collecting a group's receipts in one place from the start.

For a receivables lender, the useful comparison is with a collection account, a real account the lender controls and into which debtors pay. Virtual numbers can be issued off a collection account, giving the lender control of the cash and a debtor-by-debtor record of it at once.

DEFINED IN ONE PARAGRAPH → · NOTIONAL POOLING → · ZERO-BALANCING →

On the lending side, virtual accounts are a reason to trust a ledger more. A credit officer reviewing a receivables facility reads the level and trend of unallocated cash as a measure of how well the business knows who owes it money. A business that has moved to virtual accounts and cut that figure has removed one source of error from every borrowing base certificate and made late payers visible sooner.

On the banking side, the bank issuing the numbers faces a different question: who is behind each one. Where a business uses numbers only for its own customers paying it, the answer is plain. Where a payment company or other intermediary hands numbers to its own clients, payments can appear to go to the intermediary while the people actually sending and receiving them are unknown to the bank holding the master account. A 2024 report by the European Banking Authority, the EU's banking authority, set out that lack of visibility as a money-laundering risk and likened it to correspondent banking. Banks in New Zealand, Australia and the UK answer the same question under their own customer due diligence laws.

PRODUCT FILE: INVOICE FINANCE → · AGED DEBTORS REPORT → · THE EXAM HALL: TRANSACTION BANKING →