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

As finance and financial management grow to be more and more digital every day we have new, more advanced tools of finance coming up.

Even banking and bank accounts have become more digital than ever before. This digitalization has given birth to one of the most talked about modern tools of business - the virtual bank account.

Banks and payment service providers across the globe are developing and pushing virtual bank accounts as an upgrade to traditional forms of banking.

However, before jumping on the bandwagon, you must consider the implications and prospects of what is a virtual bank account and how it may benefit your business in the long run.

What is a virtual bank account?

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.

How do virtual bank accounts work?

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.

Examples of virtual accounts

In today’s day, there are numerous virtual account providers across the world. Some of the most prominent providers of virtual accounts in popular regions include:

India: As one of the largest, most populous countries in the world India has a lot to offer in terms of digital banking. The concept has boomed in the country and there are several providers out there today.

However, some of the best examples of virtual bank accounts in India include Kotak 811, Axis Bank ASAP, Digisavings by DBS, Indus Online Savings Account by IndusInd Bank, and Pockets by ICICI Bank

Singapore: Singapore is another major hub for doing business in Asia and has granted 4 digital banking licenses in 2020: Singtel & Grab, Sea Limited, Ant Financial, and Greenland Financial Holdings

Australia: Australia also falls among the list of countries that have seen a boom in digital banking. Some of the most popular examples of digital banking and accounts in Australia include the Up Everyday Account, Revolut account, Hay account, and ANZ Plus account.

Who grants virtual accounts to businesses?

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.

Virtual account vs physical account: Explained

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.

How to open virtual bank account for business?

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.

Key features of virtual bank accounts

1. Highly secure platform

Virtual accounts function on highly secure platforms and therefore provide a guaranteed level of security. Virtual accounts use virtual IBANs which are encrypted to ensure consumer data is always kept secure.

The encryption of the platform makes sure that an extra layer of security is provided that physical accounts don’t.

Additionally, virtual accounts come with multi-factor authentication and biometric login features to your mobile apps and online bank accounts for added security.

2. Ease of access to banking services

Unlike a traditional bank account, virtual accounts do not require a physical location to operate out of.

This makes for much easier access to banking services. Virtual accounts can be easily accessed online from a mobile device or a desktop, anytime and anywhere.

3. Multi-currency support

Another key feature of virtual accounts is multi-currency support. You could be based out of one country and still pay and receive money in multiple currencies from different countries.

For example, if you were a merchant based out of India and wanted to accept payments from the US, all you need to do is create an online virtual bank account that accepts USD payments.

This means you no longer have to set up multiple bank accounts in different countries to work with multiple currencies. Not only does this feature help companies expand their global reach but it also reduces costs on forex fees and conversion charges.

4. Faster processing of transactions

Virtual accounts work way faster than traditional accounts do. With a traditional account, there would be a lot of hoops to jump through before making a transaction successful.

However, with a virtual account, it is possible to make same-day or even instant transfers, making the processing of transactions much faster.

5. More visibility into business spends

Another great feature of virtual bank accounts are the dashboards or payment platforms that come attached to the accounts. These dashboards or platforms allow you to track and manage every single penny you spend with that account.

This can help you highlight areas of spending, identify spending patterns and gain an overall increased level of visibility over all your business spending.

6. Low cost & more savings

You can save a lot of money in banking fees simply by using a virtual account.

Traditional banks typically charge high FX transfer fees. Virtual accounts, on the other hand, have their own pricing models that usually come with small convenience fees, much lower or zero transaction fees, and no hidden charges.

Related read: How to open a business bank account in India

Understanding the limitations of virtual bank accounts?

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.

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