The virtualisation of an IT infrastructure, where a collection of software components connects to replace the hardware infrastructure, is a mature concept but one that keeps delivering extraordinary benefits. During the past few years virtualisation has become more prevalent in key corporate financial infrastructures, most notably in how bank accounts are used, and TMI has published numerous articles on how this has enhanced treasury operations among the larger corporates.

Essentially, virtualisation of the corporate bank account structure removes the need for most physical accounts. Instead, it connects a theoretically unlimited number of unique aliases, or virtual, account numbers to a single (or more if required) traditional physical master bank account.

With flows often possible in both directions, and full visibility over all movements, the usage of virtual account structures helps create the type of real-time transactional infrastructure that even large, complex multi-entity international businesses could only have dreamt of a few years ago.

With the virtual account notion now very much a reality, Siemens – a German multinational technology company, and the largest industrial manufacturing company in Europe – has fully bought into the idea. And for Heiko Nix, Head of Cash Management and Payments at Siemens, there will be no looking back, the success of the recent pilot with Deutsche Bank confirming its value.

The pilot, which went live with its first transactions in August 2022, involved the conversion of Deutsche Bank IBANs into virtual IBANs, closing the related physical bank accounts, and creating a SEPA-wide virtual account set-up. As part of a planned wider roll-out, the underlying structure that the partners have created prepares the ground for further automation and simplification of Siemens’ cash, FX and liquidity management processes.

These advantages will be deliverable to a wider set of Siemens’ country operations and entities once all the relevant compliance matters have been merged into the solution. It is, says Nix, a “smart infrastructure for our financial activities”.

This solution stems from Deutsche Bank’s launch a couple of years ago of its ‘in-house banking-as-a-service’ concept. The high-level aim has been to enable clients to realise the benefits of centralising and streamlining accounts more easily, explains Christof Hofmann, Global Head of Corporate Cash Management, Deutsche Bank. So, while some clients may need to call upon the bank’s expertise to set up such a structure, he says the notably tech-savvy Siemens team has been able to travel much of the pathway towards centralisation unaided.

“We need to be able to provide an instant response, and virtual accounts are one essential part that enables us to offer just that”
Heiko Nix, Head of Cash Management and Payments at Siemens

Within that journey, the point of virtualisation for Siemens is about reducing structural complexity, and the delivery of new levels of efficiency to Siemens’ internal cash and liquidity management processes. In particular, Nix anticipates significant enhancements around enterprise-wide monitoring, control and maintenance activities. But an even more important gain for him is time-to-market when, for example, setting up new entities, especially in new countries. “You cannot do business with customers without the necessary banking infrastructure; we need to be able to provide an instant response, and virtual accounts are one essential part that enables us to offer just that,” he says.

With the pilot work having facilitated the conversion of Deutsche Bank IBANs into virtual IBANs, Siemens and Deutsche Bank have taken virtualisation a step further. By retaining the same IBAN in the switch to virtual account numbers rather than a new number being created, it overcomes what had proven to be a seemingly insurmountable barrier for many firms as they looked to centralise their banking structures.

Indeed, Siemens was among those that had held back on earlier adoption of account virtualisation for this reason. “It would have required significant effort for us to inform every customer that they should now be paying into a new bank account,” comments Nix.

What’s more, he notes that simply creating new virtual accounts was likely to see plenty of end-client push-back, with many compelled to enforce drawn out anti-fraud and account validation processes before they would pay into these new accounts. “Being able to transform the existing physical bank account IBANs of our subsidiaries into virtual IBANs removes that obstacle.”

“The switchover had to be immediate so Siemens could continue its operations seamlessly”
Christof Hofmann, Global Head of Corporate Cash Management, Deutsche Bank

There was a final practical issue that required attention before account virtualisation could be accepted, notes Hofmann. “There was no way Siemens could accept closure of any of its entities’ real accounts if their new virtual account number could not be active straightaway. The switchover had to be immediate so Siemens could continue its operations seamlessly and with zero interruptions.” By reconfiguring its internal processes to enable existing IBANs to be usable as new virtual account numbers instantaneously with the start of the physical account closure process, Deutsche Bank conquered this potential showstopper.

The effort applied to making the pilot produce the right results for Siemens means the bank’s approach to virtual account solutions is now configurable for many more businesses. Meanwhile, with Siemens’ journey having already started for its Germany-based subsidiaries, Nix confirms it will soon be rolling out the virtual accounts further afield, starting with the Netherlands. The additional jurisdictions being covered will eventually form Siemens’ European accounts structure with Deutsche Bank. Although most will then be managed through a single physical master account in Munich, current regulations (around tax payments in certain countries, for example) may not permit this set-up to be used in every case.

There is no blueprint for the way this system works so it is a testament to the strength of the partnership that it does exactly what it needs to do and can be tailored to fit the needs of many more businesses. Naturally, it required some groundwork by the Siemens team to establish the operating rules.

For example, it required the project team on both sides to closely analyse and discuss around two years’ worth of the company’s historic transactions, and their related accounting treatments, executed through its subsidiaries’ physical bank accounts. Doing so enabled Siemens to secure a smooth flow of future transactions from the transformed virtual accounts into the centralised physical master account.

“It was a real effort for us and we probably underestimated the work required,” admits Nix. Even now, for some transactions the team is yet to find a solution: from a regulatory perspective, capital injections, for example, could be restricted and the update of direct debit mandates need to reflect the change from the receiving entity to the Siemens account name. “We were talking about possible challenges from the start, so perhaps we should have known at the time that we needed to respond to these specific issues, but we can say that now with the benefit of hindsight!” Nonetheless, he adds, the overall gain in efficiencies has made the pioneering work all worthwhile.

For Deutsche Bank, the close involvement of a corporate partner was crucial in finding the most appropriate outcomes for the solution. “This could not have been a bank solo project; we needed to understand on both sides how the solution should and could be changed for it to truly deliver,” says Hofmann.

Having all transactions booked to the physical account gives Siemens real-time cash concentration across the related structure, potentially removing any need for regional end-of-day pooling. This not only raises the prospect of liquidity optimisation, but it also drives simplification of regular bank account attestation processes and assures full transparency for every counterparty.

With the benefits now becoming quite obvious following the initial go-live, Nix has already been in conversation with other corporates that are beginning to reinstate their interest in bank account virtualisation. The limitations of such a structure that would have dissuaded them from engaging with it a couple of years ago have now been demonstrably eliminated by this Siemens and Deutsche Bank pilot. With the work to overcome the remaining shortcomings ongoing – it is not yet possible to execute cash disbursements, for example – he feels that the value of virtualisation is rising.

Naturally Deutsche Bank has a vested interest in seeing its greater uptake. The bank’s virtual accounts roadmap is part of what Hofmann refers to as a “holistic journey”. The aim is to enable all businesses, regardless of technological capabilities, to move away from more localised solutions and instead head towards the adoption of broad and far-reaching concepts such as real-time treasury, and more specific and modular notions such as in-house banking-as-a-service.

Each of these offerings are derived from an element of consultation with corporate clients, explains Hofmann, adding that workshops and discussions with clients such as Siemens “help to jointly shape their future structure”.

Indeed, Deutsche Bank’s IBAN virtualisation offering is now enabling Nix and his team to deliver genuine strategic flexibility in, for instance, acquisition or divestment scenarios. “In a carve-out, it’s easy to reassign any or all virtual bank account number(s) to a new master account of the carved-out entity, and as far as the customer is concerned, the same bank account details are retained. It’s an idea that was put to us by the Deutsche Bank team and we immediately saw the value and agreed to adopt it.”

Ultimately, Nix sees complexity as the enemy of speed. He knows Siemens needs to develop fast and drive the market to stay ahead of the curve. He also knows that working in partnership to create a marginally but nonetheless vitally different take on the virtual account structure is complementary to the success of key technological trends in treasury, such as API connectivity and the emergence of real-time treasury operations. In taking these incremental steps, the goal of market-leading fast and agile treasury becomes reality.

‘Siemens and Deutsche Bank Co-Create a Virtual Account Structure with a Difference’ was published online by TMI on 6 February 2023 (registration required)

Header picture © Siemens