Virtual account management (VAM) has swiftly moved from concept to practice as more organizations look for ways to modernize their treasury operations. The model is simple (in theory): a virtual account provides a reporting layer within a physical account, allowing treasury teams to track activity without multiplying bank relationships.

But in practice, treasury teams tend to have questions. What documentation is required to set up a VAM structure? How does compliance work when regulations demand cash segregation or Know Your Customer (KYC) checks? And how can virtual accounts support reconciliation, reporting and audit needs?

This article addresses these practical considerations, drawing on common questions from treasury professionals and insights shared by industry experts in a companion webinar to the AFP Executive Guide: Virtual Account Management 2.0, underwritten by J.P. Morgan.

Setup and compliance

The most important thing to know about virtual accounts is that you are not setting up a new bank account. “Virtual accounts are not actual physical accounts at the bank,” explained Ela Thakkar, Head of North America Account Solutions for J.P. Morgan. “Virtual accounts give you the ability to apply transaction postings within the sub-ledger, which can then be used to support various reporting requirements."

The distinction makes setup easier than it is with traditional accounts; however, some documentation is still required. Banks may ask for addenda to global account terms, lists of covered entities within a multi-entity structure, and jurisdiction-specific filings.

Compliance requirements also remain. For organizations with cash segregation mandates, virtual accounts can mirror the required structure, but, as Thakkar advised, “Contact your legal and compliance departments and get some counsel on how they need to be able to segregate this particular activity.” Additionally, while KYC and OFAC checks do not apply directly to a virtual account, they remain in force at the legal entity and physical account level.

A more detailed comparison between physical and virtual accounts is provided in AFP’s article, “Physical Accounts and Virtual Accounts Compared.”

Cost and value

The question most treasury professionals ask first is how virtual account fees compare with physical accounts — but the costs shouldn’t be viewed so narrowly. “Fees for virtual accounts obviously vary by banking provider,” said Thakkar, “but for a business, the way to think about it is: What is the cost savings on our end?”

The savings often come from automation and efficiency. By streamlining reconciliation, reducing manual AR and AP tasks, and replacing more complex structures such as ZBAs or cash concentration, virtual accounts can lower internal costs. “A lot of times this depends on the accounts receivables or payables department — what FTE saves can you have when you are streamlining the process?” said Thakkar.

And in multi-entity structures, the value increases. Virtual accounts can consolidate payments and receipts through shared service centers or in-house banks, reducing the number of accounts required and simplifying reporting.

The initial adoption of virtual accounts typically leads to major efficiency gains, as explained in the AFP article, “Achieving Enhanced Efficiency Gains Through Virtual Account Management.”

Functionality and limitations

Virtual accounts are designed for scale. A single header account can support hundreds, even thousands, of virtual accounts, depending on the provider. Each virtual account has an identifier — a virtual IBAN or routing number — that ensures debits and credits are routed correctly. This makes it possible to tailor structures to business needs, whether by department, entity or region while keeping liquidity centralized.

“It functions as a routable number that’s tied to every debit and credit, and it’s posted to that particular sub-ledger capability,” explained Thakkar. “But at the end of the day, the funds always sit in the main header pool.”

Regarding services available for use with virtual accounts, some banks support ACH debit blocking and positive pay at the virtual account level. Currency capabilities differ in that most virtual accounts mirror the currency of the physical account, though a few banks now offer multicurrency options. And if you’re working with cash and checks, you’ll still need a physical account or lockbox.

Reporting and reconciliation

For many organizations, the real power of virtual accounts lies in reporting. Transactions can be separated into standard formats, such as BAI, MT940 or CAMT.053, giving finance teams enhanced data without increasing existing workflows. “It should look very similar [to physical account reporting], only with a lot more detail, given you’re able to get it at the sub-level,” said Thakkar.

This granularity makes reconciliation significantly easier. By mapping identifiers to departments, general ledger codes or cost centers, treasury teams can automate posting. “For a single-entity structure, reconciliation is probably the number one benefit,” said Thakkar.

There is one caveat: Virtual accounts do not generate their own bank statements. Statements remain tied to the physical account, and virtual reporting serves as a detailed cross-reference. To avoid confusion, it’s critical that reporting is correctly integrated into enterprise resource planning or treasury management systems. Thakkar recommends working closely with IT to ensure mapping is done right and duplicate postings are prevented.

Global and domestic use cases

For global organizations, virtual accounts are particularly valuable in multi-entity structures. They are a natural fit for shared service centers and M&A integration, where treasury teams need to consolidate activity across entities and currencies. One of the most common drivers of adoption is POBO/ROBO arrangements.

But the benefits aren’t limited to global companies. “This is the power of using a virtual account solution,” said Thakkar. “For those types of structures, not just domestic but global.” Universities are a good example of how they can be used on the domestic side. By creating virtual accounts for payroll, accounts payable and accounts receivable, these (sometimes) massive organizations are able to achieve clear segregation without having to open multiple bank accounts.

While there are many different use cases for virtual accounts, there are four steadfast best practices for all. Learn more with AFP’s “4 Best Practices for Virtual Account Management.”

Interested in learning more? Fill out the form below to download the AFP Executive Guide: Virtual Account Management 2.0, underwritten by J.P. Morgan.