" class="no-js "lang="en-US"> A Fintech Guide to Using Virtual Accounts
Sunday, June 04, 2023
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A Fintech Guide to Using Virtual Accounts

by Daniel Cronin, Co-founder & COO of Integrated Finance

What are virtual accounts?

Virtual bank accounts have a similar functioning to conventional bank accounts. For instance, based on the payment scheme and virtual bank provider, they may have a Bank Identification Code (BIC) and International Bank Account Number (IBAN), just like a physical bank account. Additionally, like traditional bank accounts, virtual bank accounts have their own unique account numbers and can be utilised to receive and send funds. However, it’s important to note that – despite the promotional materials or language used by financial institutions – virtual accounts are not the same as a standard bank account; they do not hold funds or balances, and should be viewed more as facilitating flows of payments than acting as a traditional bank account would.

Virtual banks enable editing of the sender/receiver name on an individual transaction. Account holders can see the name of the individual they sent money to instead of the third party who issued the account, and the recipient only sees the name of the sender in their account statement. This ability to edit account sender and receiver provides a customised experience for managing finances efficiently. Virtual bank accounts are also used as collection methods and facilitate transactions from locations where a company has a commercial presence but not a banking one, allowing them to take payments globally while they operate locally.

Why are virtual accounts important for fintechs?

Simplifying the payment process, virtual accounts only require a name or unique identifier for a transaction instead of demanding a recipient’s full personal and banking information. This reduces the risk of errors and makes the process more streamlined and efficient. At scale, virtual accounts serve as a means for the transfer of funds, acting as intermediaries for the transmission of money. This enables companies that have large client bases to receive large numbers of payments in individual, unique virtual accounts and have those payments consolidated into a single central operational account; streamlining the reconciliation process and reducing operational costs.

Fintechs can also leverage the ease and affordability offered by virtual accounts to provide a better customer experience when compared to traditional financial institutions. Most companies specialise in a single aspect of traditional banking, and the ability to issue virtual accounts is a crucial aspect of their product offering; they give customers complete control over their finances through a modern and customisable user interface, which is more user-friendly than traditional banking systems.

The role of security and regulation

One of the primary objections to using virtual accounts may come in the form of security. In the United Kingdom, if funds are held in a traditional bank then banking authorities mandate assurances that an account with a balance of up to £85,000 will be protected in the event of the institute failing. As virtual accounts do not specifically hold funds, they fall outside of these assurances. Furthermore, they generally don’t have the ability to go in negative balance, which also limits the application for credit insurance.

Some Anti-Money Laundering (AML) experts have raised concerns about current regulations not being designed specifically for virtual accounts, however, the ecosystem has addressed these regulatory challenges through advanced compliance and risk technology designed specifically for virtual accounts and digital banking. AML screening and monitoring solutions are available for financial institutions, including risk data, intuitive case management, and smarter matching, to detect fraud and automate the risk management process. It is crucial for businesses facilitating digital transactions to understand their service usage and implement a tailored risk-based approach to minimise false positives and automate ongoing monitoring.

Despite these concerns, there continues to be a high adoption rate of virtual accounts as businesses continue to utilise the associated economic benefits of being able to operate at scale. It is unlikely that regulators will seek to work against virtual accounts, rather we should expect to see measures come into effect that mitigates potential misuse.

Integrated Finance is a scalable, pay-as-you-grow Fintech infrastructure, helping fintechs generate new revenue streams in local and overseas markets. Read more about their platform here, and find out how it allows you to quickly build in weeks, not months, giving you time back to focus on what you love – creating digital banking products that matter most to customers.

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