What is virtual bank account, its features and how it works

Generally speaking, a virtual bank account is not very different from your traditional bank account. They both perform the same functions, only that virtual accounts can be fully operated from a mobile or desktop platform.

Virtual accounts are also equipped with a unique identification number and are able to carry out payments in the same way a normal account does.

Banks do not classify them as separate from physical accounts while conducting transactions or completing accounting tasks.

The major difference between a traditional and a virtual account is that the latter doesn’t hold or contain a closing balance. Instead, it is linked to a primary account that does.

The virtual or online virtual bank account functions similarly to a traditional bank account, only that it does not have the ability to hold a balance.

This is because it doesn’t settle any payments. They can only receive money, collect necessary information about the sender, and pass it over to a primary account.

The way a virtual account works is via a primary physical account. This physical account acts as a holding base, while the virtual account acts as a vessel that carries transactions to and from the primary account.

The physical master account alone can carry consolidated balances from all linked virtual accounts and settle transactions. Essentially, a virtual account works as a sub alias of your physical master account.

This allows you to monitor and manage the lead, or source, of a payee in a single location: your main settlement account.

Virtual accounts are provided to businesses by different banks and payment service providers based on the country the business is working in.

In India, for example, virtual accounts are provided by banks such as Axis, ICICI, HSBC, and so on while these virtual accounts and their activities are regulated by the RBI or Reserve Bank of India.

In Singapore, on the other hand, Singtel & Grab, Sea Limited, and other banks provide virtual accounts while the regulatory body is the MAS or Monetary Authority of Singapore.

Australia, on the other hand, operates in a highly regulated environment that is primarily overseen by three independent government agencies: the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, and the Reserve Bank of Australia.

While a virtual account is designed to work essentially like a physical account there are, however, some differences between the two.

As the name suggests, a Virtual bank account operates exclusively online and does not require any physical location. On the other hand, a physical account in a traditional bank requires a physical location to operate out of.

Another point of difference is that physical accounts usually require minimum balances to be maintained while virtual accounts don’t. The service fees for physical accounts are also typically higher than those of virtual accounts.

Additionally, virtual accounts have to be linked to a primary physical account to function. On its own a virtual account cannot hold a balance, it can only receive money, collect necessary information about the sender, and pass it over to a primary account.

The exact process for opening a virtual bank account for business will differ from country to country and provider to provider.

To be eligible to open an online virtual bank account for a business you will either need to have a registered business or meet the required transaction volume.

Generally speaking, you will need to provide documentation as proof of business, residence, and so on. In India, for example, you will need to complete a KYC process to be able to open a virtual bank account.

While the list of benefits is long, virtual bank accounts do still come with some limitations:

• Users may sometimes face technical difficulties due to glitches or planned maintenance.

• Some may prefer the human interaction, the face-to-face service that traditional banks come with.

• The adoption rate for virtual accounts is still relatively low because there is a reluctance towards being early adopters amongst most treasury departments.

• Regulation and regulatory bodies often pose a challenge to the successful implementation of a virtual account program.

Virtual bank accounts are becoming more and more popular as an increasing number of businesses are starting to realize the benefits of using digital banking.

Not only do virtual accounts present a more modern, efficient form of banking but they also come with a heap of benefits that traditional banks are unable to provide.

Not only virtual accounts but digital financial services are being adopted at a rapid pace across the world. In India, for example, in 2022 the adoption rate was at 80% as compared to the world’s 64% as per the Minister of State for Commerce and Industry.