Articles

Physical Accounts and Virtual Accounts Compared

By AFP Staff
Published: 6/12/2025

Whenever an organization implements or enhances a virtual account network, it aims to improve its use of liquidity and manage financial and operational risks more effectively.

Maximizing the benefits relies on establishing a virtual account network that meets the organization's specific needs. This requires an understanding of the specific nuances of the solutions available from potential banking partners and how they can be most effectively utilized.

For multinational corporations, this challenge is magnified, as they may only be able to achieve significant efficiencies through virtual accounts if the activities that have to remain outside a virtual account structure are performed efficiently too.

The table below provides an outline of some of the main differences between traditional physical bank accounts and virtual bank accounts. Specific functionalities vary between banks and according to the jurisdictions in which the virtual accounts are being used.

	Physical account	Virtual account
Holds an end of day balance	Yes	No, a sub-ledger of a physical account
Can operate as a standalone account	Yes	No, must be linked to a physical account
Can settle funds	Yes	Not usually, settlement takes place on the physical account. Some banks can set up funds transfer initiator/approvers at the virtual account level.
Cash positioning	Cash position is calculated from data across all physical bank accounts.	Cash position with bank is updated in real time.
Liquidity management	Cash can be concentrated via formal physical or notional pool or via informal sweeps.	Cash is pooled by definition in real time.
Intercompany transactions	Intercompany transactions are executed via transfer between physical bank accounts.	Intercompany company transactions are executed via ledger entries.
Intercompany loan management	Each intercompany loan may require separate documentation.	Intercompany loan documentation and interest allocation can be automated within the structure.
Ease of set up	Can be time-consuming to establish	Once the physical account is established and the virtual account program is set up, virtual accounts can be set up quickly.
Ease of administration	Signatories, mandates, etc. on all physical accounts must be managed separately.	Signatories, mandates, etc. are managed as part of the single physical account relationship.
Security and fraud prevention	Each account needs to be managed separately.	Virtual accounts are protected collectively, as part of the protection of the single physical account. Ask bank providers about how they manage features like debit blocks, positive pay and account verification processes on virtual accounts.
Reconciliation	Transactions must be separately categorized to be assigned to individual projects.	Transactions can be automatically assigned to individual projects.
Bank account functionality	All core banking services are generally available, according to relevant market practice in the jurisdiction where the account is held.	Availability of core banking services can vary according to bank and between jurisdictions. Ask bank providers about their specific services in each jurisdiction of interest.
Available transaction types	Can process all transaction types, depending on bank’s access to specific payment rails	Transactions are processed via the physical account, effectively making payments-on-behalf-of the virtual account.
Checks	Yes	It may not be possible to process checks via virtual accounts (all checks will settle on the physical account).
Direct/ACH debits	Yes	Ask banking provider.
Tax and other statutory payments	Yes	May require a physical account in the relevant jurisdiction. Ask banking provider.

Want to learn more on this topic? Download the AFP Executive Guide: Virtual Account Management 2.0, underwritten by J.P. Morgan.

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Physical Accounts and Virtual Accounts Compared

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