A virtual account provides a solution to the problems that every business owner faces during payment reconciliation. The reconciliation process is time-consuming. As your organisation may get payments from multiple sources over time. It becomes difficult to determine who paid for which service. Typically, firms may employ personnel who manually match payment reference numbers to bank statements. But this comes with several complications, including human mistakes, reduced cash flow transparency, and time and resources spent on non-essential business tasks among other concerns
Let’s determine how a virtual account can be beneficial. And most significantly, why?
What is Virtual Account?
Virtual account meaning: It is a passthrough or dummy account. It is associated with a real account, obscuring the original account number.
A virtual account number is generated by the system, is exclusive, and is based on logic. It can send or receive payments on behalf of the actual account. Typically, it is created by payment service providers (PSPs) or banks to facilitate real-time reconciliation for businesses.
Simply put, virtual accounts means that it acts like doors into a room; the door cannot contain money, but it may route the money to the correct area (account). Since each virtual account is unique, receiving payments into a specific account makes it easier and quicker for businesses to determine who initiated each transaction.
Here is a straightforward illustration. Suppose you operate an online Edtech startup. You will eventually have several pupils paying through separate accounts. Needless to say, this will make reconciliation hard. Here, virtual accounts come into play. You can generate a unique virtual number or UPI ID for each learner. For example, virtual account UPI IDs may appear as follows: student ID@xyzbank.
How do Virtual Accounts work?
Typically, they function in two ways:
1. Virtual Accounts made using an Escrow Account
Escrow accounts are accounts in which funds are held by a third party with the agreement of the parties. Here, the third party has the funds until they are transferred to the payee. The duration is therefore transitory. The parties must approve the transactions for the deal to be finalised. Thus, it guarantees the legitimacy of transactions and reduces the likelihood of fraud.
2. Virtual Accounts added to an Existing Account
A current bank account is required to create a virtual account, as the term implies. Using the virtual account number, the merchant may identify the payer. Its API also allows for an overview of the ongoing transactions.
Due to this characteristic, it has gained popularity among NBFCs. Similar to other businesses, they can track the borrowers’ payments. It helps them discover and manage their non-performing assets (NPAs). Additionally, it facilitates the calculation and collection of interest owed.
Banks must adhere to numerous restrictions. It is such that they need to employ an attorney. However, a virtual account handles this as well. With its advanced characteristics, it can comply with legislation.
What is a Virtual Account Number?
When adding a card to a payment app, a virtual account number is generated in place of the card’s actual account number. This number is used when you use the payment app to make a payment (or receive a refund) so that your card account number is not shared with the retailer and does not appear on the receipt. The payment app generates a new virtual account number each time you add a card.
You may need to supply the final four digits of your virtual account number when requesting a refund using the payment app. Your virtual account number is accessible within the payment app.
As a representation of your card for online merchant transactions, the payment app will use either your virtual account number or a specially generated account number.
Features of Virtual Account
A virtual account serves as a conduit to a real account. The following are the features of virtual accounts:
1. Monitoring payments
A firm conducts numerous transactions each day. If the business is engaged in e-commerce, the number increases. Therefore, it may become difficult to track customer payments. The corporation must manually balance the bank statements, which is a time-intensive operation. Here’s where innovation comes in.
By assigning a unique virtual bank account number to each payer, it becomes easier to track client payments, also known as accounts receivable. Thus, the process of reconciliation becomes effortless and error-free. It automates the process of cash collecting and eliminates the need for human reconciliation.
2. Accept donations via numerous modes
Similar to a bank account, clients can transfer money to the virtual account via a variety of means. This consists of IMPS, NEFT, and RTGS. They can also pay via UPI. It facilitates payment at their convenience.
3. Wallet features
The virtual account API enables you to create a wallet for your customers similar to the payment app wallets. Here, customers can easily send, receive, and request funds until they transfer them to their bank account.
4. A facilitator for transactions
All of the mentioned features are astounding. However, they do not end here. The API also facilitates the accumulation of escrow account benefits. It protects against cons and fraud.
Additionally, the actual account number is kept private. Thus, the likelihood of deception is negligible. In any case, you cannot expect a scam to materialise if the fraudster is unaware of the account number.
You may be familiar with the tedious bank account opening procedure. However, this is not the case for virtual accounts. It is possible to open an account from the comfort of your own home. It makes the procedure fairly convenient and effective.
6. Enhancement of customer experience
Consider yourself a customer. How will you respond when a merchant calls you to confirm the payments? You’ll experience frustration, won’t you? Virtual accounts also fix this issue. Therefore, the clients will not become angry and will have a positive interaction with your firm.
7. Pocket friendly
Each time you utilise the payment gateways’ services, you must pay a commission. This fee may seem tiny on its own, yet it adds up to an enormous sum in the end.
What if you no longer had to pay for it? Well, a virtual account enables this. The banks charge a flat rate rather than a commission. It drastically reduces transaction expenses and functions as a budget-friendly money manager for your business.
Virtual Banks in India
As technology advances, the banking industry is undergoing rapid transformation. Digital bank accounts allow users to immediately establish a secure virtual account. Once they have accomplished this, they will be able to begin enjoying the numerous benefits virtual banking provides. There are many fast-moving options available with virtual banks in India.
Many of India’s leading banks now offer virtual banking services to their customers. As mentioned above virtual accounts have a variety of distinctive benefits. With virtual accounts, smartphone users in India can digitally manage their finances.
Digital banking is becoming increasingly popular in India. Whether you are looking for an account with no minimum balance requirement or an advanced account with premium benefits, there is a digital account for you.
Virtual Account vs Physical Account
If you have read this far, you already know the solution. Virtual accounts are equivalent to traditional bank accounts. Compared to the latter, they are flexible, secure, and equipped with more features. They allow the company to separate the cash flows from several payers. Thus eliminating administrative complexity and burden.
In addition, it is a cost-effective measure. Companies were required to keep numerous bank accounts. It burned a hole in the owners’ pockets. Now, they may successfully run the business with a single bank account. Therefore, they can save on banking fees.
In addition to these features, it facilitates data analysis by separating data relevant to payments and receivables. So that the organisation may make decisions based on facts and data. In short, the company’s entire performance improves.
Who can use Virtual Accounts?
Given the rising digitisation of money collection, nearly all internet firms can utilise virtual accounts.
However, below are a few examples of specific applications.
1. B2B intermediaries and markets
Using virtual accounts, marketplaces and e-distributors can balance payments received from 20,000 or more retailers. With simple reconciliation, they may acquire inventory more quickly and release working capital.
2. Franchise outlets
Large organisations with multiple locations frequently experience payment reconciliation difficulties. They can assign a virtual identifier to each location, facilitating payment collection.
3. Institutions of learning and utility companies
As previously noted, educational institutions and tutoring centres can collect money by issuing students individual virtual bank accounts or UPI IDs.
Moreover, utility industry participants such as gas, electricity, and water firms can assign users with distinct virtual accounts. This will allow users to make timely payments without accessing the biller’s app or website.
4. Financial and insurance firms
Typically, lend-tech and lending organisations prefer bank transfers for collecting premiums and repayments. They can collect repayments/premiums for short-term loans from consumers via virtual accounts.
The company can receive the money on the same day. In addition, reconciliation is automated, providing a consolidated view of cash flow.
Moreover, the following are additional examples:
Fees for government examinations such as banking, SSC CGL, etc.
Cash Collection at Service Centers Employing UPI VPA (QR code payments)
Considering the numerous advantages and great potential, a virtual bank account may replace physical bank accounts in the future. Then why not? It allows a company to concentrate on its main activity without worrying about cash management issues and expensive transaction fees.
Even though the notion has been for quite some time, the adoption rate is quite modest. The future, however, is dynamic. Therefore, you cannot forecast when it will become a topic of conversation. In the meantime, be sure to utilise a virtual account and take advantage of the first-mover edge over your competition.
1. What are Virtual Account Numbers (VANs)?
Ans: Virtual account numbers are system-generated, one-of-a-kind account numbers that allow businesses to accept payments. These are associated with a real bank account. The use of a virtual account number simplifies the reconciliation of inward payments.
2. Can I collect recurring payments through a Virtual Account?
Ans: Yes, you can have your customers set up recurring payments. As a result, there is no need to create a new account each time. And you will be paid on time.
3. How can I open a Virtual Account?
Ans: The procedure isn’t difficult. You simply need to go to the website of your preferred bank and open a virtual account.
4. What kind of companies can benefit from Virtual Bank accounts?
Ans: The use of a virtual account is pervasive. You can use a virtual account regardless of the industry you work in. Whether it’s education, NBFCs, B2B distributors, or any other business.
5. How many days does it take to create a new account?
Ans: The period varies from bank to bank. A new account typically takes 2-3 days to be created. It can then be used to collect cash for business purposes.
6. Can I hold funds in a Virtual Account?
Ans: A virtual account is nothing more than a pass-through account. A virtual account cannot be used to store funds. After the customer makes the payment, the funds are transferred to the customer’s real bank account.
7. Can I withdraw money from a Virtual Account?
Ans: Money cannot be deposited or withdrawn from a virtual account. That is only possible with a real account.
8. What is the difference between virtual banking and online banking?
Ans: The entirety of a virtual bank’s transactions is conducted online, whereas “online banking” is a service given by traditional banks.
10. What is the difference between a virtual account and a current account?
Ans: A current account is a bank account that allows you to deposit and withdraw funds. Funds can be deposited or withdrawn without prior notice in this case.
A virtual account, on the other hand, is a passthrough account. Money cannot be withdrawn or deposited here because it is only used for reconciliation.