Material Gains with Virtual Accounts

Fashion leader OTB, parent company of major brands such as Diesel, Maison Margiela, Marni, Paula Cademartori and Viktor & Rolf, is a pioneer not only in its core business, but also in cash management. In 2016, in co-operation with partner bank UniCredit, OTB  implemented an innovative virtual account solution in order to gain efficiency in the centralised collections management. In this article, Gianluca Marcolongo, SSC Treasury Manager, OTB SpA explores the project in more detail.

Project background

OTB has a centralised treasury function which deals with collections for account of several group entities; the drawback was that the collections account was owned by OTB, with the  entity as beneficiary. This meant that customers were asked to specify the beneficiary entity in the remittance information, which inevitably resulted in some confusion and it was difficult to reconcile incoming payments that frequently lacked this information. OTB is a group committed to efficiency and excellence in every part of our operations, so we were seeking to resolve this challenge. This would in turn allow us to improve the customer experience whilst improving our own working capital position by reconciling flows more quickly.

Although we wanted to continue operating on a COBO basis, we wanted the process to be more convenient, efficient and automated. Firstly, the collections account would be in the name of an OTB entity, but secondly, we opted to implement UniCredit’s virtual account solution. We already had a relationship with UniCredit in Italy, and decided to extend this further based on the quality of this relationship and the innovative solutions that they offered.

Virtual accounts and SWIFT

We implemented the collections factory, including virtual accounts, for several OTB entities in February 2017. We use an Italian-based treasury management system (TMS), Piteco, which is integrated with SAP. We are also connected to SWIFT, so we receive information in ISO 20022 format which we then integrate into our TMS for reconciliation purposes, at which point the ledger of the relevant entity is also updated in SAP.

There were a variety of reasons for deciding to connect to our banks via SWIFT. Previously, we had several different banking systems, which created security issues as credentials and access mechanisms were different in each case. SWIFT offered a secure and consistent way of connecting with our banks, with the ability to connect to additional banks in the future as we extend our services to other countries and regions, including the Americas and Asia. 

It has inevitably taken time to transfer our operations fully from the existing, not virtual, bank account ; even now, some customers are still using the previous settlement instructions. However, it was often difficult to explain to our customers the role of OTB as centralised treasury in the group, who our treasury provider was, and why they were paying into its account. Now, using virtual accounts, we have a specific virtual account for each legal entity, which is far clearer for customers, and avoids the need for them to specify the beneficiary name. From an OTB perspective, we have been able to automate the reconciliation of incoming flows and post to the ledger of the respective entity almost entirely, with very few exceptions.

Introducing virtual accounts

A virtual account solution enables companies to provide customers with local IBAN (the ‘virtual’ account), but these are linked to a central collections account. Clients can choose to assign a virtual account IBAN to each entity, through to individual customers, product lines or even invoices. This makes it easier to reconcile the collections account, and post incoming flows to the relevant intercompany account and customer credit account automatically.

Virtual accounts are also applicable to outgoing payments when operating under a POBO arrangement. Clients make a payment via a specific virtual account (which again can be defined per entity, business line etc.) which prompts the bank to apply the final creditor/debtor information to the payment automatically for identification and reconciliation by the end customer.

Virtual accounts simulate the behaviour of a physical account, so reporting can be produced on balance and transaction information. As a result, companies no longer need to maintain separate accounts per entity with complex pooling arrangements. Instead, they can simplify cash and liquidity management by setting up a single payment and collection account per currency, therefore concentrating cash effectively, with full internal reporting for accounting purposes.

Extending the value

Currently, we are providing COBO services only for our business units that are directly involved in production that then sell to distributers globally, particularly in countries where we do not have a local subsidiary, whereas commercial subsidiaries manage payments and collections internally. We already provide cross-border payments for these subsidiaries, but the plan is ultimately to centralise domestic payments as well as collections. Our new treasury organisation based on SWIFT, Piteco, and with the support of partner banks such as UniCredit offers the efficiency, control and capacity to do this. Virtual accounts are likely to be helpful not only for collections, but also for domestic payments, where the plan is to operate on a payments-on-behalf-of (POBO) basis as we have already started to do for France. 

Over the next twelve months, we are also planning to expand our use of SWIFT to manage import letters of credit (LCs). We are working with UniCredit and our other banks to transfer open LC requests via SWIFT and then manage the payment file, such as for partial drawings on LCs. We are also intending to expand our use of SWIFT to other countries and regions, such as US and Asia.