What is Virtual Account? Streamlining Payment Reconciliation

Read blog to understand virtual account meaning, examples, use cases and how you can create them for easier reconciliation!

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Virtual accounts act as a secure blanket for a business’s physical account. There is no physical existence of a virtual account; in fact, it is a digital, temporary account used to process transactions on behalf of the actual physical account. A virtual account is best for businesses that are expanding not just locally but globally, and are versatile in terms of doing business in more than one sector. It is quite helpful for those who are more into handling thousands of customer payments every day.

What is a virtual account?

 A virtual account is a business supporter account made to mask the original physical account. It helps businesses know exactly who paid them and for what, allowing businesses to verify that recorded financial transactions are accurate. It eliminates the need to open multiple real bank accounts. You can get your own virtual account set up either through a bank or a payment service provider. 

A virtual account number is linked to a primary and physical bank account. It is a system-generated, unique virtual account that acts as a “dummy” account for secure, real-time transaction reconciliation. It has the ability to send and receive money on behalf of the actual physical account.

Virtual Account Example

Here is a simple example to understand the concept of a virtual account.

Let’s say you run an online edtech startup. Eventually, you will have numerous students paying through different accounts. 

Needless to say, this will make reconciliation hard. 

Now, this is where virtual accounts come in. 

You can create a unique virtual number or UPI ID for each student. For instance, the virtual account UPI IDs may look a bit like this: student ID@icicibank. 

How Do I Create a Virtual Account?

Let’s try to understand how a virtual account works. 

Sign Up With Payment Service Provider

The first step is to partner with a payment service provider that provides a virtual account system. 

Essentially, there are two ways of going about it. You can partner with a:

1. Bank
2. Third-Party Payment Player like Cashfree Payments

(We will be diving deep into the pros and cons of both options in a later video)

Once you sign up and submit the required documents, the payment player will activate your account. 

Create Virtual Account

Now, you have to create and assign a unique virtual account for each of your users. 

However, if you have thousands of customers, it’s better to use APIs to create them automatically and instantly. 

For instance, Cashfree Payments offers developer-friendly REST APIs.

Share Virtual Account Detail with Users

Next, share these accounts with your customers. You can share via:

1. SMS
2. Email
3. Whatsapp
4. Your proprietary app

Collect User Payment

Your user will pay to their assigned account via any UPI app or net banking options. 

Ensure that your payment aggregator provides all popular payment options. 

Related Read: How to Choose Payment Gateway?

Receive Reconciliation Notification

Once the user makes the payment, you will be instantly notified of the transaction and related details via webhook. 

This makes payment reconciliation a breeze!

But why should you consider customer virtual accounts in the first place?

Benefits of using a Virtual Account

Virtual accounts are best when it comes to doing business globally on a larger scale. They help businesses not only receive payments but also make payments without revealing the business’s actual physical account. Below are some of the benefits of how advantageous and efficient a virtual account can be:

1. Easy & Quick Tracking

When in business, everything should be as precise and quick as possible. With a virtual account, you can keep a seamless track of when money comes in and when money goes out without keeping your physical account at risk. Every customer associated with your business will be given a unique virtual account number, so whenever a transaction is processed, the system will immediately know who sent the payment and its purpose. It is a complete 360-degree solution to your everyday hassle of keeping track of payments. 

2. Fast and real-time reconciliation

When a business grows, the number of transactions increases rapidly, and manual tracking of who paid what and why becomes time-consuming, confusing and prone to errors. This is where a virtual account helps to keep track of receivables, thereby allowing payments to be auto-matched with customer records. The reconciliation process is automatic with no manual or human intervention, saving businesses a lot of time. 

As a Cashfree merchant, you are actually immediately informed via webhooks when a customer completes their payment. 

Moreover, you can use the Autocollect Dashboard to:

• Check Payments received
• Manage settlements
• Get instant email or phone notifications when a customer makes a payment

3. Increased Security with no confusion

Since every payer would have a different and unique virtual account, the risk of fraud would be reduced. No more guessing or manual matching of payments. This helps to eliminate the need to share personal and sensitive financial details. 

4. More Control & Transparency

You can set up your virtual account through a bank or a payment service provider. Once established, your dependency on banks is reduced, leading to faster turnaround time. A virtual account gives customers the flexibility to make payments as per their preferred method, thereby providing better and more organised cash-flow management, reporting and audits. 

Virtual accounts support NEFT, RTGS, IMPS, and in many cases UPI, hence more control in customers’ hands. 

Related Read: What is Instant Settlement Payment Gateway?

5. Lower Operational Complexity and Cost

Creating a virtual account number for clients helps streamline business transactions. Virtual accounts help you eliminate the need for KYC and procedural issues that lead to delays. All of these are sorted through automation, thereby leading to lower operational costs. 

6. Simple & Developer-friendly Integration 

As your service provider, Cashfree Payments provides detailed guidelines for integrating the virtual account into your platform. You can use our simple-to-use APIs to integrate and accept payments through virtual accounts. 

Thereafter, you can create as many virtual accounts as required with no external dependency. This way, your virtual accounts can scale along with your customer count. 

7. Built-in Compliance Support

Choosing the right third-party payment provider, such as Cashfree Payments, will reduce regulatory and compliance hassles. We at Cashfree Payments are committed to our clients’ needs and security, and therefore take care of all your regulatory requirements. This approach reduces the unnecessary bandwidth of Cashfree merchants, thereby allowing them to worry about other business-related decisions. 

Why Outdated Virtual Account Management Systems are Killing Your Business

Virtual account management systems by traditional banks are often not suited for tech-first companies. 

As a fast-growing corporate or SME, it is safer to choose a PSP that scales with your business. 

Let’s have a look at some of the reasons why outdated virtual account management systems can hurt your business. We will also shed some light on their new-age competitors and the offerings they bring into the mix. 

Challenge	Solution By Virtual Accounts
Limiting Virtual Accounts to Bank Accounts	Offer Virtual UPI IDs as well
Limited Payment Modes for Collection	Offer All Popular Payment Modes
Being Restricted by Banking Hours	Move To Real-Time Systems
Inefficient Reconciliation	Real-Time Reconciliation Through APIs
Outdated Technologies	Tech-first Scaleable Solutions

Challenge #1: Limiting Virtual Accounts to Bank Accounts

India is being touted as the world’s leader in the fintech space. One of the reasons is our advanced real-time payment system like UPI. 

In fact, UPI is the most preferred digital mode of payment in India with 64% of the market share. 

Customers prefer UPI as it is user-friendly, easy to use, and works in real-time. In such a situation, it is only logical for businesses to create virtual UPI IDs to collect payments as well. 

Solution: Offer Virtual UPI IDs 

New-age virtual account systems like Cashfree Payments allow you to create virtual UPI IDs. 

This way, you can collect hassle-free payments while reducing the chances of user churn or friction.

Challenge #2: Limited Payment Modes for Collection

Talking of customer satisfaction…

7% of carts are abandoned due to a lack of preferred payment mode. As a merchant, you need to ensure that your payment gateway offers all the popular modes. 

However, most legacy banks only allow payments through NEFT or RTGS. 

This can lead to drop-offs and significant loss of revenue. 

Solution: Offer All Popular Payment Modes

New age virtual account system offers payment modes like:

• UPI
• IMPS
• NEFT
• RTGS
• Cheques
• UPI apps such as PhonePe, WhatsApp or Google Pay

Challenge #3: Being Restricted by Banking Hours

We live in a digital world where customers can order anything 24×7. 

Unfortunately, a lot of virtual account systems are yet to catch up to the same speed. Outdated players are restricted by banking hours. 

This leads to delays in settlements and reconciliation. 

For a fast-growing business, a lack of cash visibility and constant cash flow can hamper business operations. 

Solution: Move To Real-Time Systems

Modern payment players allow you to collect payments instantly and in real-time. In fact, if you opt for Instant Settlement, you may access your customer funds within  <15 minutes as well.

Challenge #4: Inefficient Reconciliation 

Traditional systems let you reconcile your payments once a day,

Moreover, these statements are sent as files sent over email which risks human errors. 

Solution: Real-Time Reconciliation Through APIs

Through modern solutions like Cashfree Payments, you can receive Payment confirmation via API. This is a real-time system update for the receipt of funds. 

Challenge #5: Outdated Technologies 

Last but not the least, the alpha-numeric bank accounts provided by banks do not work on many of the older bank interfaces. 

Moreover, they are not optimized for mobile and limit your access. 

Solution: Tech-first Scaleable Solutions

New age players like Cashfree Payments support fully numeric virtual accounts that work on all bank interfaces. 

Moreover, they scale their solutions to any tech advancements making your business future-proof. 

Who Can Use Virtual Accounts?

Given the rapid digitization of payment collection, virtual accounts can be used for almost all online businesses. 

However, here are some specific use cases for illustration. 

B2B Platforms and Marketplaces

Marketplaces and e-distributors can use virtual accounts to reconcile inbound payments received from 20K+ plus retailers.

With easy reconciliation, they can purchase inventory faster and open up working capital.

Franchise Outlets

Large corporations with various outlets often face issues in payment reconciliation. 

Virtual accounts can help them assign a virtual ID to each outlet; thereby streamlining payment collection.

Educational Institutions and Utility Companies

As we mentioned before, educational institutions and coaching centers can collect payments by assigning unique virtual bank accounts or UPI IDs to students. 

Moreover, utility industry players like gas, electricity and water companies can assign unique virtual accounts to users. This will enable users to pay timely without visiting the billers app or website to make a payment.

Lending and Insurance Companies

Usually, Lend-tech and lending companies prefer collecting premiums/repayments through bank transfers. They can use virtual accounts to collect repayments/premiums for short-term loans from users. 

The business can receive the payments within the same day. Moreover, reconciling becomes automated giving a consolidated view of the cash flow.

Furthermore, here are some more use cases for virtual accounts:

1. Examination Fees for government examinations like banking, SSC CGL, etc
2. Collections at Service Centers using UPI VPA (QR code payments)

 Key Features of Virtual Accounts

Virtual accounts have made the lives of business owners much easier and more efficient. This surely saves valuable time and also reduces errors, as all transactions are automatically handled. Below are some of the features that make virtual accounts the best way for businesses to do business and grow without hassle. 

1. Unique Account Number

Each customer is assigned a unique virtual account number. The uniqueness ensures that every transaction can be easily tracked to the right payer. This helps to eliminate the confusion and reduce human error on why and who made the payment.

2. Global reach of your business

Having a virtual account allows businesses to reach worldwide, as virtual payments support multiple currencies. With the provision of virtual payments, the business can receive payments made by customers in different currencies, thereby reducing the cost of conversion and ensuring complete security. 

3. Quick processing of transactions

Every virtual account setup helps to process funds instantly, because every virtual account number is mapped to each customer. This process helps to save time, reduce errors, and transactions are auto-reconciled.

4. Mapping to Single Account

Since virtual accounts are nonexistent, there are multiple virtual account numbers that are mapped to a single primary account. This helps to secure the real physical account where the money is actually settled. 

5. Real-time updates

Once your virtual account is integrated, businesses start to receive alerts via email or mobile phone every time a payment is made. This allows businesses to access the payments in real time and take necessary actions, if any.

What Can We Expect From Virtual Accounts in The Future?

As tech advances, so does customer expectations. 

With numerous changes in the pay-tech industry, virtual account functions are bound to evolve. 

Here are some payment needs virtual accounts might answer in the near future. 

Cross-Border Virtual Accounts

For a lot of corporates and startups, global business expansion may be on the cards. They might want to accept payments in different currencies through single virtual accounts.

As a result, we might see a demand for multi currency and cross border virtual accounts in the near future.

Advanced Cash Forecasting

Virtual accounts can also help SMEs in cash forecasting in terms of expected credit. 

Experts believe that the industry will witness a revolution for this use case. Machine Learning techniques will become an integral part of cash forecasting and allocation processes. 

Conclusion

Virtual accounts simplify businesses, reduce their manual effort, and allow them to focus on growth rather than management of payments. Virtual accounts are an absolute must for modern businesses that are scaling and plan to go worldwide without worrying about payment handling. By providing unique virtual account numbers, businesses eliminate challenges related to automated payments, real-time visibility and errors that are usually a concern in traditional payment methods. To control voluminous transactions, virtual accounts provide assistance in keeping the business’s payment part organised, compliant and in control of the flow of transactions happening every day.

FAQs Related to Virtual Accounts

Can I hold funds in a Virtual account?

Virtual account is only a pass-through account. It is not possible to hold funds in a virtual account. 

Once the customer makes the payment, funds are forwarded to the real bank account

Can I withdraw money from a virtual account?

It is not possible to deposit or withdraw money from a virtual account. That can only be done through a real account. 

Is any KYC required for creating a virtual account?

KYC procedures are not necessary to create a virtual account- unlike a real bank account.

What is the difference between virtual banking and online banking?

Virtual banking and online banking are synonyms. 

What is the difference between a virtual account and a current account?

A current account is a bank account where you can deposit or withdraw money. Herein, funds can be deposited or withdrawn without any prior notice. 

On the other hand, a virtual account is a pass-through account. You can not withdraw or deposit money here as it is only used for reconciliation purposes

What is a virtual account number? How do I get a virtual account number?

A virtual account number is a unique identifier for each customer created by the business. Most businesses go with a set format for creating virtual account numbers for customers.

For instance,

Let’s say you are a real estate owner of 100 houses. If a tenant is occupying apartment no. 21, their virtual account number can be [sampleprefix][21]. The prefix is usually static value.