Virtual transformation of business banking

Banks face immediate challenges from new regulation, agile tech-savvy competition and increasingly demanding customers, but by using technology creatively many of these threats could become opportunities. Some banks are already stealing a march on their competitors with innovations such as virtual accounts making banking easier for businesses.

Transformational events are on the horizon, whether from increasingly stringent regulations including Basel III, opening up the transactions process with the European Commission’s Payment Services Directive (PSD2), or commercial challenges from peer-to-peer lenders and the latest fintech innovators, requiring large banks to respond quickly.

The focus of any response by banks has to be on customer service, the foundation that underpins the future success of the banking industry, especially business banking. With eyes opened by consistent product innovation in retail banking, business customers are more demanding than ever.

So how are large traditional banks behaving more like their agile fintech competitors and delivering products and services that customers need and are compelled to use?

While corporate finance or treasury functions have evolved consistently to comply with new legislation, business banking systems have remained relatively static. As a result the most basic activity of managing cash and understanding a company’s true position is a complex and expensive process.

Traditional business bank accounts are simply not fit for this purpose for many organisations. The bank account structures sit outside the business allowing little control or flexibility. At worst this absorbs valuable time and effort to iron out its idiosyncrasies. Putting real control in the hands of corporates transforms their ability to manage cash effectively, while also helping banks to streamline their processes. Virtual accounts have become the de facto solution to this challenge for leading banks.

Though the term “bank in a box” is an oversimplification, it does help to explain the value of virtual accounts. There is no need to request that your bank sets up an account for a new subsidiary, spends time accruing different interest rates for a number of bank accounts, or sweeps or pools cash across bank accounts. These processes become self-service and consequently easy to streamline and automate. Businesses no longer need to reconcile data received from banks to fit with the way they need to report and analyse their accounts.

Virtual banking technology adoption is being actively demanded by corporates and encouraged by banks. The slow evolution of business banking to incorporate digital channels is accelerating, moving quickly from offering simple statement and transaction data to a broad array of sophisticated integrated payment and receipt services that are capable of accommodating virtual banking technology.

An early adopter of virtual accounts is one of the UK’s biggest insurers LV=. Andy Young, head of finance at LV= Financial Services, explains: “With Cashfac’s virtual accounts technology we’ve created 35,000 virtualised accounts linking to one ‘real’ client bank account and removed the 35,000 real bank accounts we held previously. Now we can transfer our client’s money between accounts using Cashfac technology without touching the banking system.

“We don’t need the bank to open additional bank accounts; we have one bank account and we split that into virtual client accounts ourselves, freeing up a lot of transactional processing from the bank. This reduces administration for each of us, while at the same time enabling us to take the overall pot of money that now resides in one bank account and diversify the risk across our bank relationships, reducing the exposure for our policyholders.”

The most forward-thinking banks are embracing this technology and investing in delivering the most functionally rich cash management services to support centralised payments or collections factories, and even offer the prospect of in-house banking capabilities. So the perfect storm about to hit the banking industry doesn’t signal doom, but rather offers new opportunities to provide more sophisticated services focused on the future.

Cashfac is a UK-headquartered fintech firm that works with banks around the world to deliver innovative corporate cash management solutions. For more information please visit