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The Many Faces & Features of Virtual Accounts

It’s month-end, and credit card bills are smiling at us, gleefully.


Time to track the expenditure, get a mini heart-attack, and then take a vow to do better next month.

And, the sight when most of us open our wallets could be this.


What are virtual accounts

Source: Tenor


Remember the time it took us to cross-check the expenses and ensure our pockets have transacted correctly?

Of course, expense tracking apps can help out when we’re talking about day-to-day chores.


But.


Ever thought about how companies or multinational corporations with thousands of daily transactions take care of this bit?


Whenever a business receives a payment, it would contain all the required information to help its accounting team to just ‘tick-mark’ the transaction, right?


Or, so we thought.


Companies are often caught in the endless loop of open invoices and guessing who made which transaction.


This:

  • Increases the time spent on payment reconciliation
  • Increases DSO or Day Sales Outstanding
  • Takes a significant hit on the team productivity

In other words, companies have to spend hours scanning through bank statements with a fine-toothed comb to ensure the expenses, credits, and debits all match up. This bookkeeping called payment reconciliation drains time and demands efforts and gives rise to inaccurate records.


What are virtual accounts

Source: Giphy


This snowballing further worsens when the company has to send payment reminders to clients, many of whom would have paid already, leading to an abysmal customer experience.


Is there a way out of this? Luckily for companies, be it a budding startup to a fully-fledged enterprise, virtual accounts solve the problem in a jiffy.


First things first.


What are Virtual Accounts?


I recall my first encounter with a virtual account. I passed a few inputs (name, mobile number), and a virtual bank account was created in seconds, pretty much like creating your Facebook/Instagram account.


I was amazed by this concept which is not widely known to many. Memories of physically visiting the bank branch and opening an account flashed across my mind. What a chore was that, after all?

I was curious; How is this possible? How could I open a bank account in seconds without KYC?


As I dug further, I learned more about how virtual accounts work.


Virtual accounts are bank accounts that have no physical existence, are temporary, and transact on behalf of a real, physical account.


Also known as a shadow account, a virtual account has a unique account number that makes it easy to trace the funds coming through it and helps to identify the source or the payer.


Reconciling payments is no longer a worry; efficient and happens in real-time, saving both time and effort.


But, if a virtual account can transact just like a normal account, how is it so different?


Virtual Account Vs. Physical Account


Well, I heard your wondering-hmm. Yes, you are right.


Virtual accounts function just like physical accounts. They have an account number of their own and can transact payments smoothly.


But. That’s just not it.


Virtual accounts come with flexibility and self-service that’s a breath of fresh air to struggling teams running behind payment reconciliation. The operating and maintenance costs of a virtual account is significantly lower than their physical counterpart. And, it’s easy for a business to open hundreds to thousands of virtual accounts while doing the same for physical accounts would be nothing short of a nightmare.


What Are Virtual Account Numbers(VANs)?


Virtual account numbers or VANs are system-generated, unique numbers associated with a single virtual account and mask the physical account it is associated with. These numbers cannot be tracked back to the core bank.


How do Virtual Accounts work?


There are two types of virtual accounts -

  1. Created on top of a nodal or escrow account
  2. Created on top of a business or current account

Don’t worry. We’ll explain each using an example.


Virtual accounts on top of nodal/escrow accounts are temporary. By temporary what we mean is that the funds stay within the account only for a short period, until it’s transferred to the payee.


The RBI has rolled out Payment Aggregator Regulations, similar to payment gateways, where customers are given an option to accept any payments, through many methods such as debit/credit cards, net banking, or UPI.


When you make a payment, the fund goes to a nodal/escrow account of a payment gateway (e.g., PayU, Razorpay). These gateways have a master nodal/escrow account and various virtual accounts on top of it (if required for collections)


For instance, when your local business purchases goods from a wholesaler using NEFT/RTGS/IMPS, the funds can be transferred to a virtual account serviced by the payment gateway and it stays there temporarily until it finally reaches the wholesaler on settlement.


Boy, did we know all these while binge-shopping our favorite eyewear!


What are virtual accounts

Source: Tenor


The second type, where virtual accounts exist on top of a business or current account, is where a banking partner could help in setting up virtual accounts. When a customer transacts through the virtual account, the company will be able to identify the payer's details through the virtual account number.

The company can deduce customer information and reconcile payments with ease. Not just the details, a business can understand an overview of transactions taking place across departments or even geographies. Compliance ensures all regulatory requirements are followed to the dot.

For e.g., virtual accounts could be a godsend for colleges and educational institutions to easily manage the student fees. Each student can be assigned a virtual account number, for instance, based on their roll number and batch details. The institution can easily e-collect fees via bank accounts and use the account number to track from whom the payment has come from.

Do Virtual accounts need a KYC?


A KYC for a virtual account is not mandatory since the bank conducts the same for the underlying physical escrow or business account. However, the recent RBI guidelines mandate that payment aggregators/facilitators conduct adequate KYC for the end merchant receiving funds from the virtual account.


These accounts add an extra layer of protection against fraud for remote payments. For instance, the virtual account numbers can be set based on the type of usage as single/one-time or multiple/recurring.


  • Single usage: the virtual account can be deactivated after a single transaction and is aimed for one-time usage. Popular examples include transactions taking place for shopping.
  • Multiple usages: the virtual account number is provided based on the customer's unique identifier, say their phone number using which they can transact any number of times.

How can Payments be Made to virtual accounts?


Like we already mentioned, a virtual account is just like a physical account in terms of transacting and usage.


You can transfer funds to a virtual account through traditional bank transfer methods such as NEFT, IMPS or RTGS. Each virtual account created on the Decentro Platform also has a UPI ID and a UPI QR associated with the account. This helps our customers to accept payments via UPI as well.


How do Virtual Bank Accounts Benefit Businesses?


Virtual accounts come with many benefits that make banking & transacting easy for both clients and financial institutions. Here are some of the advantages of using virtual accounts for your business.


1. Automated Payment Reconciliation


The first and most obvious advantage of using virtual accounts- organizing payment reconciliation. When a business deals with thousands of transactions on a day-to-day basis, payment reconciliation can get quite tough.


An e-commerce business will have payments coming from multiple sources such as payment gateways, direct bank transfers, wallet payments, and transactions funded by loans. A finance executive will have to extract statements from each of these sources and then reconcile/match those with the actual funds received in the bank accounts. Ah, it must be a nightmare to keep track of so many transactions.


Using virtual accounts solves all these issues in no time. Like we mentioned before, your banking partner can help you open as many virtual accounts as needed and manage your payments. If your business has a subscription model requiring recurring payments from customers, look no further.


2. Reduced Expenditure


Virtual accounts are the ideal alternative for businesses who want to save on payment gateway transaction costs. Instead of paying a small percentage of the transaction amount, businesses can pay a fixed cost for each payment processed. This is very helpful while dealing with high ticket transactions.


3. Organized Financial Management


This could be seen as an extension to simplifying payment reconciliation. When you have an account of where the money flows in from, managing finances becomes uncomplicated. And, that’s exactly what virtual accounts help you do.

Accept fixed or variable amounts, enable the account for one-time or recurring transactions- you make the call.


4. Improved Customer Experience


We know it’s a little brutal, but customers today belong to the no-nonsense category. The last thing they’ll expect is a correspondence from you checking if a payment has been made. Just like word of mouth referrals do wonders, it wouldn’t take much time for the bad word to spread too.

Enrich your customer experience by organizing your cashflow & financial management. No more bothering customers cross-checking if they have already paid.


How can Decentro Help Your Business?


Decentro has built infrastructure on top of the bank’s virtual account APIs. Each virtual account created in the Decentro platform has multiple capabilities such as its own ledger (to track transactions, balances), and UPI compatibility (to enable all UPI payment use cases including payment requests, links, and QR).


Decentro can help your business in setting up virtual accounts and managing the same. Here are a few very interesting use-cases where our APIs can help your business -


How a virtual account works

Automate Money Movement


Let’s take the example of a B2B marketplace rich with a network of buyers.

Assume this marketplace facilitates the transactions between restaurant owners and farmers to collect farm produces & other products. To manage these payments easily, each restaurant would be allocated a unique virtual account. After purchasing, the restaurant owner deposits the funds in the account of farmers. The marketplace would cut the due commission from this fund, which can be directly managed via our seamless payout APIs.


P2P Payments


Want to enable virtual peer to peer payments functionality inside your game or application? Look no further, as virtual accounts are just the right fit for you as well as your customers.


Offline collections


Simply generate and share dynamic UPI QR codes and payment links for any offline payment use cases of your customers, like school fee deposits, repayments for loans, rental payments, shopping at stores/malls and many more.


Dealership Finance Management


Wish to streamline finances for your vehicle dealership outlets? Decentro will help set up virtual accounts for customers through which the funds can flow. The dealership commission would be duly credited from the account and the remaining goes to the manufacturer. Simple and efficient.


I guess you could call it a wrap. Hope we could tell you the A-Z of virtual accounts.


Still have questions?


Feel free to drop us an email at admin@decentro.tech

We’ll be happy to assist you with any requirements.


Until we see you next time,


Oh, wait! Merry Christmas and a happy new year from all of us here at Decentro. Hope 2021 is kind to all of us! :)


Cheers!


P.S. If you wish to be a part of this revolution, we're hiring! Please apply on AngelList to find your next challenge.


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