What are Virtual Accounts? How it Works, Benefits and Examples.
5 min read
Ajay runs an apparel business that processes over 200 payments daily. However, during a festive sale, his business faced an unexpected surge, receiving more than 700 payments in a single day. This sudden spike overwhelmed his payment system, creating a bottleneck in operations.
As Ajay manually reconciled each payment, order processing became delayed, leading to frustrated customers and late deliveries. Additionally, the manual process was prone to errors, and a lack of real-time cash flow visibility made it difficult to manage his operations effectively. Valuable time was spent on administrative tasks rather than focusing on growing his business.
Had Ajay implemented virtual accounts for his business, he could have avoided this scenario. Virtual accounts assign unique identifiers to each transaction, enabling real-time payment tracking, automated reconciliation, and faster order processing. This would have kept customers satisfied and ensured smoother operations.
Read on to understand what a virtual account for business is, how it works, and the benefits it offers.
What are Virtual Accounts?
A virtual bank account is a unique identifier assigned to individual payers, transactions, or purposes. These accounts are not physical but connect to a single primary bank account, also known as a master account.
Remember that virtual accounts don’t hold balances. Instead, once payments are received and transactions recorded, the funds are transferred to the main bank account. Virtual accounts solely act as reference points to track and reconcile payments without the need for multiple physical accounts.
How Do Virtual Accounts Work?
When a customer adds a debit or credit card to a payment app or mobile wallet, the system generates a unique virtual account number tied to that specific transaction. This virtual account number is used for all transactions with your eCommerce store, ensuring that you handle only the virtual account number and never see the customer’s actual card details.
In the case of a refund, the customer may be asked to provide the last four digits of the virtual account number. The payment app then uses this number to retrieve the transaction details and process the refund accordingly.
For instance, if Rahul purchases a laptop from your online store using his mobile wallet, the wallet generates a unique virtual account number for that transaction. This number is used to complete the payment while keeping Rahul’s actual card details secure.
If Rahul later decides to return the laptop, he can initiate the refund process through the payment app. The app will use the virtual account number to locate the original transaction, allowing the system to process the refund directly to Rahul’s wallet without any manual intervention, ensuring a seamless and secure experience.
This method removes the need for manual transaction verification, streamlining your operations and saving both time and effort.
Benefits of Virtual Accounts
Virtual accounts provide businesses with significant operational and financial advantages. Here’s how they can make a difference.
Enhanced Cash Flow Management
With virtual accounts, businesses can track incoming payments in real-time, improving visibility and control over cash flows. This enables better decision-making and reduces delays in fund allocation.
Improved Customer Experience
These accounts ensure quick and accurate payment processing. Customers no longer need to provide extra details or contact support to confirm payments, leading to better satisfaction and loyalty.
Automated Reconciliation
Another virtual account benefit is automated reconciliation. Payments are instantly mapped to the respective customer or transaction, eliminating the need for manual intervention. This reduces errors and speeds up financial processes.
Scalability
Virtual accounts handle large transaction volumes effortlessly. Businesses can assign thousands of unique identifiers without opening new physical accounts, making them an ideal solution for growing enterprises.
Common Use Cases for Virtual Accounts
Almost any online business can use virtual bank accounts. Here are some relevant use cases.
E-commerce and Subscription Businesses
E-commerce platforms and subscription services rely on seamless payment systems. Virtual accounts allow these businesses to manage payments from multiple customers while maintaining accurate records.
Corporate Treasury
Large companies with multiple branches often face challenges in payment reconciliation. Virtual accounts let them assign a unique ID to each branch, making it easier to collect payments and keep track of transactions.
Fintech Solutions
Since fintech companies typically offer large loans, they process them through direct bank transfers. However, they can use virtual accounts for short-term loan repayments. This helps automate reconciliation and improve efficiency.
Difference Between Virtual Accounts and Traditional Accounts
A virtual account is completely different from a traditional account. The table below provides a detailed comparison of the two.
Aspect
Virtual Account
Traditional Account
Nature
Non-physical; exists virtually and is linked to a primary bank account.
Physical; exists as a standalone entity with its own account number.
Identification
Identified by a unique number masking the main account; facilitates secure transactions.
Identified by a unique account number
Purpose
Simplify tracking and reconciliation.
It serves as a repository for funds and is used for various banking activities like deposits and withdrawals.
Account Opening
Easily created online without extensive documentation; no KYC is required for each virtual account.
Requires comprehensive documentation and KYC processes; account opening can be time-consuming.
Fees
Typically incurs no monthly fees; allows for the creation of multiple accounts without additional costs.
Often subject to monthly maintenance fees; additional accounts can increase costs
The Bottom Line
Virtual accounts have become essential for businesses aiming to streamline their financial operations. They provide improved cash flow management, automated reconciliation, enhanced customer satisfaction, and unparalleled scalability.
Adopting virtual accounts is a strategic move for businesses looking to improve efficiency. Partnering with banks or fintech providers offering robust virtual account services, like PhonePe Payment Gateway, can help you optimise your financial processes and stay competitive in an increasingly digital economy.
With PhonePe PG’s seamless integration, businesses can manage payments effortlessly and offer a smoother experience to their customers.
