October 23 , 2018

Forget Virtual Accounts! In-House Bank with Modern Matching Solves the COBO Challenge

by Working Capital Optimization, Cash Management, In-House Banking, Accounts Receivable Automation, Accounts Receivable Matching

If you work in Finance or Treasury, virtual accounts and Virtual Account Management (VAM) have inevitably crossed your radar screen. Virtual accounts have been the next big thing in global cash and liquidity management for some time now. But are they really living up to this promise? In this blog, I will focus on the collection of receivables and explore how a global Group can best build a centralized collection on-behalf-of structure in a multi-bank environment.

modern Matching

Most of the talk around virtual accounts has focused on the ways how they can help improve payment and collection efficiency, replace cash pool arrangements, and enable payments on-behalf-of (POBO) and collections on-behalf-of (COBO) structures, where all outgoing and incoming payments of a Group are channeled through one external bank account.

It is a hot topic. Centralization of cash and finance processes continues to be a key objective for many corporate Treasurers as they are reaching for real-time cash visibility. Centralization helps free trapped liquidity from local subsidiaries and bank accounts, and it allows optimization of working capital on a group-level. Against this backdrop, it is easy to understand the buzz around the virtual account offering from banks. They are, after all, a new way for Group Treasuries to simplify their bank account and cash management structures and increase transparency and control.

Challenges with virtual accounts and COBO

In Accounts Payable, centralization and payments on-behalf-of structures have in the recent years become more common with Payment Factory solutions. Streamlining the collection of receivables, on the other hand, has proven to be a more challenging task in Group Treasuries.

In many organizations, handling customer payments is still a decentralized, time-consuming and highly manual process, which leads to a large amount of idle, unallocated cash in the Group. The lack of uniform practices in identifying the customers and the customer invoices makes it cumbersome to build Collection Factories in a global operating environment.

Virtual accounts are now offering one solution to this. In practice, each customer (or in some cases, each invoice) is assigned an individual virtual account number, which they’ll use when making payments to any entity belonging to the Group. The payments are then routed to the Group’s external bank account. The virtual account number serves as remittance information on the account statement so that the original payer can be identified in Accounts Receivable.

As such, virtual accounts do centralize the collection of payments and rationalize the bank account structure. Especially if the Group has only one banking partner, setting up virtual accounts is fairly easy. But the more banking relationships the Group has, the more challenging it becomes to utilize virtual accounts for centralizing the collections. Managing the virtual account structure requires significant time and work both from the Group Treasury, as well as from the Accounts Receivable function and the IT department. Keeping the customer-specific virtual account numbers up-to-date in a constantly changing business environment is a huge effort, and even more so if the Group ever wants to change banking partners.

In addition, the Group Treasury’s problem with the inefficient receivables process is only half-solved with virtual accounts.

This is because identifying the customer is not enough for an efficient and automated account reconciliation process. The Accounts Receivable department also needs to be able to match the incoming payment to the correct customer invoice to allocate the payment accurately.

Let’s take the example of a customer who is bundling several invoices into one payment. In this typical case, the virtual account number will not be enough for the needs of the Accounts Payable reconciliation process. The payment data from the bank account statement and the invoice data from the ERP system are not enough for the Accounts Receivable department to identify who has paid and for what. If the established COBO structure does not include additional information from other systems, such as payment advices, to boost the reconciliation of the incoming payment transactions, the AR department will not capture the full advantage of the opportunities opened up by the centralized collection of receivables.

How to gain the full benefits of COBO

Collection on-behalf-of structure can be built without virtual accounts. For corporate Treasurers, who are managing global liquidity in a multi-bank environment and aiming for full centralization of cash and finance processes, setting up an in-house bank is a better fit.

An in-house bank gives the Treasury a wider set of tools for deepening centralization and performing transparent group-level cash management. In addition, a COBO structure in an in-house bank that is managed by the Treasury also means a high level of independence from banks. Combined with a modern Accounts Receivable Matching tool, an in-house bank also allows the Group Treasury to take a step further and gain the full benefits of the centralized collection of receivables through automated reconciliation.

In this setup, the incoming payments are received to the Group’s external bank account. The transactions on the bank account statement are automatically matched against the open receivables from the Group’s entities’ Accounts Receivable. Additional enrichment data, such as payment advices and other remittance information from third-party sources, can be imported and used in the reconciliation process. After this, the matched transactions are allocated to the entities internal bank accounts in the in-house-bank with all the information for account posting.

The benefits of centralizing receivables and setting up COBO with an in-house bank go well beyond the ones that can be achieved if doing the same with virtual accounts.

The Treasury can simplify the Group’s bank account structure and minimize banking costs just as with virtual accounts. As the internal accounts in the in-house bank can also be used to make internal payments, more savings can be made from transaction costs and avoided value date losses.

What’s more, the increased cash visibility together with the faster reconciliation of receivables allow the Group Treasury to better manage and utilize working capital on a group-level. The aggregated cash of the entire organization can be put to good use and, for instance, the entities’ short-term financing needs can be covered with pre-set internal account credit limits and automated interest calculation.

Centralizing the collection of receivables one way or the other will give the corporate Treasurer better visibility of the Group’s liquidity position. With an agile and highly automated reconciliation process, a COBO structure can also provide faster access to cash. If you need to see it to believe it, watch a recording of our webinar, where I demonstrated how to build best practice receivables matching and bank account reconciliation processes.

  

Jouni Kirjola

Jouni Kirjola


Jouni has over 10 years experience in corporate cash management and has deep expertise in cash forecasting, payment factories and in-house banking, and process development. Previously Jouni has worked in product management, consulting and R&D.

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