What Is a Virtual Account? Streamlining Payment Reconciliation In 2022-23

Conventionally, accounts are balanced against the funds deposited in the merchant account. Though this might look straightforward, here are some problems that organizations typically face with physical bank accounts:

A virtual account removes all the above problems.

A virtual account can be defined as a dummy account or a pass-through account. An organisation can create multiple dummy accounts according to customer, transaction, entity, or other business reasons. They are unique account numbers within traditional, physical bank accounts, also known as settlement accounts. They are non-physical accounts that are often used for inward payments, i.e., they are temporary accounts that do not have a physical existence and accept transactions on behalf of a real, physical account.

Virtual accounts

A virtual account functions precisely like a traditional bank account. All incoming and outgoing transactions are captured, and the users maintain their bank balances in these accounts. They are shadow accounts that enable you to quickly identify the payee or source of the transaction.

To explain the concept of the virtual account, consider the following example:

You may have one primary email address in your organisation. Within this ambit, many sub-aliases capture emails relating to specific users or account transactions. Similarly, a virtual account operates within the purview of the central bank account. Within this, several virtual accounts with specific virtual account numbers capture transactions of a particular type. These virtual accounts capture both incoming and outgoing transaction details.

A virtual account, however, cannot hold bank balances. Once these amounts are received, and transactions are recorded, the balances are transferred to the primary bank accounts. It is like a sub-alias or a sub-folder of the main account; virtual accounts allow you to manage the leads and sources of the payees within a primary bank account.

What is a virtual account number?

When you add a debit card or a credit card to a payment app or a mobile wallet, a virtual account number is created, which is then shared with the eCommerce store or retailer . Instead, they only see the virtual account number. Every time a customer adds a new card number to a payment app, this step is repeated.

Usually, if a customer awaiting a refund needs to provide the last four digits of the virtual account number while using a particular payment app. The payment app will access the virtual account number to receive payments and make refunds for all online merchant or eCommerce transactions. Only this specially generated number or a virtual account is used every time a transaction is made.

Features of a virtual account include the following:

  • Monitoring payments
  • Accepting donations
  • Creating wallets
  • Facilitating transactions
  • Time-saving
  • Pocket friendly
  • Enhances customer experience with an online portal

Why do you need a virtual account?

Many organisations have complex fund flows owing to a large customer base. Cash flows from many streams flow into the bank accounts of these institutions. These cash flow streams must be segregated into different heads of account and attributed to each source. Virtual accounts do this job. They seamlessly stream different payment inflows into one by automating the reconciliation process. This makes it less time-consuming and avoids any human errors which may be caused by manual reconciliation.

Since the entire account reconciliation process is automated in virtual accounts, this happens quickly to give the most accurate bank balances. You don’t need to manage these virtual accounts or check for human errors.

Virtual account balances

As mentioned before, virtual accounts are pass-through accounts and do not hold balances themselves. They can be paired with an accounting ledger, which is a bookkeeping account that tracks all accounting transactions. When you pair your accounting ledger with a virtual account, you can optimise balance tracking and monitoring of balances for all your customers.

In a way, virtual accounts represent the pinnacle of digital banking, where you can access the complete details of any transaction which impact your accounting books all in one place.

Key Takeaways

In India, all digital banking applications facilitate the creation of virtual accounts. Very soon, virtual checking accounts are likely to replace all physical accounts, allowing companies to focus on their core business without worrying about and spending time on ancillary details.

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