European banks are in the midst of a ‘perfect storm’ of negative interest rates, regulatory pressures and market disruption, and are in search of new sources of value. A recent Accenture roundtable discussion concluded that European banks have the opportunity to develop innovative transaction banking offerings using virtual accounts, such as virtual cash management, to address changing market needs and create new business models.
The roundtable, co-hosted with Cashfac (a leading cash management technology provider), was organized in Amsterdam on January 31st, 2017 and saw participation from industry leaders from European transaction banks, as well as a trade body and a fintech.
Accenture led the discussion by providing insights on the evolving transaction banking landscape and the promise of virtual cash management, and explored the role virtual accounts can play in driving a growth strategy for banks. Cashfac demonstrated the key capabilities enabled by its proprietary “Virtual Bank Technology” and illustrated how it has enabled transaction banks and corporate treasurers to realize their strategic ambitions.
Key takeaways from the discussion include:
- The potential of virtual accounts goes beyond liquidity management solutions and alternatives to notional pooling to address Basel III capital requirements. Together with open APIs (catalysed by PSD2) and instant payments, virtual cash management enables better management of payments, efficient collections, data insights and self-servicing capabilities. In essence, virtual accounts can be a key driver of the digital agenda for transaction banks while supporting innovation in corporate treasury products and services.
- Strategic growth objectives for transaction banks can be enabled using virtual cash management, allowing increased client acquisition. Banks can evolve as regional or global champions using virtual accounts (including through white labelling to other banks) to provide account and other value-added services remotely across borders. At the same time, virtual accounts can be used in new ways to power innovation and new business model propositions (e.g. line of credit offered via consumer travel cards or assigning individual accounts to taxi drivers working for taxi platform companies, for administrative efficiencies and value-added services).
- As an emerging innovation, the uptake of virtual accounts in Europe will depend on the impetus of the transaction banks in driving customer advocacy. While corporate treasurers might have some reservations on changing established and stable business processes, the long-term benefits of such solutions will be widely felt once there is enough understanding and adoption amongst the corporates.
- There is no “one size fits all” approach for using virtual cash management. The solution of choice for each bank must be qualified based on the specific characteristics of its client segments and local market considerations. As an illustration, in the real estate market, commercial rents are often a combination of different funding components such as rent, insurance, tax, fees, resulting in reconciliation challenges. Banks serving providers in this market should prioritize accounts receivable solutions for these client segments that can bring efficiencies in collections and allow easy administration.
- While the promises and benefits of virtual cash management are evident, there are clear ‘known-unknowns’ in areas such as tax, legal implications, KYC (know your customer) and data privacy rules that must be further explored. As market participants wrestle with such questions, the consensus is that incumbent transaction banking players must act with urgency and innovatively—to realize the full opportunities presented by virtual cash management.