Managing payments across different customers, currencies, and countries can quickly become complicated. Businesses may need to identify hundreds of incoming payments, reconcile transactions across markets, and manage multiple banking relationships. Virtual bank accounts were developed to make much of this easier.
This article takes a closer look at virtual bank accounts, often referred to simply as virtual accounts. We’ll explore how they work, their benefits and limitations, how they differ from traditional bank accounts, and the step-by-step process of setting one up.
What Is a Virtual Bank Account?
A virtual account is an account distinguished by a unique identifier yet still tied to an underlying parent or master traditional bank account. The actual funds reside in the parent account rather than the virtual account itself, meaning a conventional bank account sits behind the setup.
For financial institutions, one of the main advantages of virtual accounts is the ability to maintain separate balances under a single account, simplifying organization. For both users and neobanks (digital-first banks), virtual accounts can be set up faster than traditional accounts and facilitate services such as multi-currency cross-border transactions.
We will take a deeper dive into the benefits and limitations in further sections, as well as comparing and contrasting virtual and traditional bank accounts. For now, let’s understand in more depth how a virtual account works.
How Do Virtual Bank Accounts Work?
To understand how a virtual bank account works, we first need to understand how traditional bank accounts work and how adding a digital layer can solve some of their limitations. A bank account is essentially a record of how much money a bank owes you.
Additional account details are what differentiate virtual bank accounts and can include a vIBAN (virtual IBAN) or a unique reference code. An IBAN is a string of up to 34 letters and numbers used to identify bank accounts for international payments. A reference code is a unique identifier set by the bank or payment provider, with no universal length or format. An IBAN has several components: a two-letter country code, a two-digit check number, and country-specific bank, branch, and account identifiers used to determine where the funds should be credited.
Virtual accounts can accelerate the process of sending and receiving funds when paired with faster payment rails (SEPA, Pix, FedNow, to list a few). For example, in Europe, a virtual account might receive a payment through SEPA Credit Transfer or SEPA Instant Credit Transfer. SEPA Instant makes funds available in under 10 seconds. However, it’s important to understand that the virtual account simply facilitates access to this payment rail, rather than instant transfers being a built-in feature of the virtual account itself.
It is also worth remembering that a virtual account does not necessarily hold separate funds, but may simply sit on top of an underlying account as an organizational layer, also referred to as a sub-ledger.
Common Use Cases for Virtual Accounts
Virtual accounts can serve different purposes depending on whether they are being used by an individual, business, or financial institution. Some of the most common business use cases include:
- Receivables management: Assign separate virtual account details to customers or invoices for easier reconciliation.
- Pay/Receive on Behalf Of (POBO/ROBO): Centralize payments and collections for multiple entities through a treasury structure.
- In-house banking and intercompany settlements: Manage transfers between subsidiaries without maintaining as many separate external bank accounts.
- Departmental segregation: Give teams or business units separate payment identifiers while keeping funds centralized.
- Subsidiary or third-party access: Separate payment flows for different entities, sellers, or partners.
- Global expansion: Obtain account details for additional currencies or markets without necessarily establishing a full local banking relationship.
Common individual use cases include:
- Freelance and remote work: Receive payments from international clients using local or foreign-currency account details.
- Multi-currency money management: Hold or manage different currencies through one provider rather than opening separate bank accounts.
- International transfers: Send and receive money across borders using supported local payment rails and account details.
- Salary payments: Receive wages into virtual account details where the provider allows salary deposits.
- Travel and living abroad: Access local account details in another currency or market without necessarily opening a traditional bank account there.
- Separating money by purpose: Use different virtual accounts or account details for expenses, savings goals, subscriptions, or other categories when the provider supports this structure.
Benefits and Limitations of Virtual Bank Accounts
Now that we’ve established what a virtual account is, how it works, and some of its common use cases, let’s explore why someone might choose one over a traditional alternative. We’ll focus specifically on the benefits and limitations for users.
Benefits of Virtual Accounts
The advantages of a virtual account become easier to see in practice.
Imagine a freelance designer living in Spain who works with clients in Germany, the UK, and the U.S. Using only a local Spanish bank account, they may need clients to send international transfers, deal with currency conversion, and potentially pay additional transfer or intermediary-bank fees.
With a provider offering virtual accounts, the freelancer could instead receive dedicated EUR, GBP, and USD account details through the same platform. A German client could pay into a EUR IBAN, while a UK client could send pounds to local GBP account details. The freelancer could then manage those payments and currencies from one place rather than opening separate bank accounts in several countries.
For someone in this situation, virtual accounts can offer several advantages:
- Easy & fast online access: Accounts can usually be opened quickly and managed digitally without visiting a physical branch.
- International payments: Virtual accounts can make it easier to send and receive money across borders when supported by the provider and payment network.
- Multi-currency support: Some providers allow users to hold, receive, and exchange several currencies from one platform.
- Separate account details: Users may receive dedicated IBANs, local account numbers, or other payment details for different currencies or purposes.
- Faster payment processing: When connected to faster payment rails such as SEPA Instant, virtual accounts can support near-instant transfers.
- Improved privacy: Virtual account details can reduce how often the underlying bank account information needs to be shared.
- Simplified money management: Multiple balances, currencies, or payment details can often be managed from one app or platform.
- Lower account-management costs: Using one provider for several currencies or payment purposes can reduce the need to maintain multiple traditional bank accounts.
Limitations of Virtual Accounts
Virtual accounts can also come with restrictions compared with traditional bank accounts:
- Limited banking functionality: Some virtual accounts may not support cash deposits, cash withdrawals, cheques, or certain types of transfers.
- Limited access to credit: Loans, overdrafts, and credit lines are often unavailable directly through the virtual account.
- Provider-dependent features: Cards, ATM access, transfer methods, currencies, and payment speeds vary between providers.
- Jurisdictional restrictions: Availability can depend on where you live, where the provider is licensed, and which local payment systems it supports.
- Limited currency availability: A provider may support virtual account details for some currencies but not others.
- Dependence on underlying infrastructure: Transfer speed and availability still depend on the banks and payment rails supporting the account.
- Variable deposit protection: Protection depends on how the underlying funds are held and the regulatory status of the provider, rather than the virtual account itself.
- Restricted incoming payments: Some virtual accounts may only accept payments from certain types of senders, such as businesses, and may not support transfers from other individuals or personal bank accounts.
Virtual Bank Accounts vs. Traditional Bank Accounts
After we've established various benefits and limitations of virtual accounts, let's compare and contrast virtual accounts to traditional bank accounts to get a more holistic understanding of their use cases. Here's a table illustrating these differences:
| Feature | Virtual Bank Accounts | Traditional Bank Accounts |
|---|---|---|
| Setup/Account Opening | Online and can be generated quickly (KYC usually takes less than a week) under an existing parent account. | Usually requires opening a separate banking relationship and completing the bank’s full account-opening process, which can take up to 4 weeks. |
| Cost | Can reduce the cost of maintaining numerous separate physical bank accounts, although providers may charge account, transaction, or platform fees. | May involve account-maintenance, transaction, payment, and other banking fees for each separate account. |
| Regulatory Requirements | Still subject to KYC, AML, sanctions, and other regulatory requirements through the provider and underlying banking relationship. | Subject directly to the bank’s KYC, AML, sanctions, and other regulatory requirements. |
| Branch Visits | Usually managed entirely online, via app or website and generally do not require branch visits. | Increasingly available digitally, although some banks or account types may still require or support in-person banking. |
| Multi-currency Support | Often designed to support multiple currencies. Depends on the provider. | Multi-currency support varies by bank; often one currency per account. |
| FX Fees | Depending on the provider, may improve FX management through centralized liquidity and multi-currency structures. Often 0.1% to 1.5% over mid-market rates. | FX fees and exchange rates depend on the bank and account type, with traditional banks sometimes charging between 2% and 4% over mid-market rates on international transfers. |
| Loan & Credit Products | Credit products are rarely attached directly to individual virtual accounts and are usually provided at the parent-account or customer level. | Can commonly support overdrafts, credit lines, loans, and other lending products where the customer qualifies. |
Now that we've explored the benefits and limitations of virtual accounts and contrasted them with traditional bank accounts, let's look into the practical step-by-step setup with various providers.
How to Open a Virtual Bank Account
Before opening a virtual account, first we must distinguish between types of virtual account providers:
| Provider type | What it means | Examples |
|---|---|---|
| Licensed digital bank | The company providing the account is itself a licensed bank/credit institution. | Revolut in the EEA |
| Licensed non-bank payment provider | A regulated payment institution or electronic-money institution provides accounts/payment services without being a bank. | Wise in the EEA |
| Fintech/crypto platform using regulated partners | The customer-facing crypto company provides the interface, while account or card infrastructure comes from a separate regulated banking/payment partner. | Plasma One, many crypto-card platforms |
Licensed Digital Bank – Revolut
Revolut Bank UAB is licensed in Lithuania and regulated as a credit institution by the Bank of Lithuania and European Central Bank. In the EEA, Revolut Bank UAB provides current accounts and other banking services. Some of their offerings include:
- Multi-currency accounts
- Local and international transfers
- IBAN and account details
- Currency exchange
- Virtual and physical cards
- ATM withdrawals
- Deposit protection
- Crypto services
Revolut being a bank doesn't mean every Revolut product in their offering is legally provided by the bank. Its crypto services, for instance, use separate entities.
Licensed Non-Bank Payment Provider – Wise
Wise is an example of a regulated payment provider that offers many bank-like services without legally being a bank. In the EEA, Wise operates through Wise Europe SA, an authorised payment institution supervised by the National Bank of Belgium.
Wise allows users to hold and convert more than 40 currencies and provides account details for receiving payments in supported currencies. Depending on the currency and the user’s location, these can include an individual EUR IBAN, UK account number and sort code, or other local account details. Wise is sometimes referred to as a neobank because it offers many similar digital-first services, including accounts, cards, transfers, multi-currency management, and everyday spending.
Because Wise Europe SA is a payment institution rather than a bank, customer funds are safeguarded separately from Wise’s own operating funds instead of being treated as traditional bank deposits. As a result, its payment services are not covered by the Belgian Deposit Guarantee Scheme.
Fintech/Crypto Platform Using Regulated Partners – Plasma One
Plasma One explicitly states that it is not a bank or regulated financial institution. Most crypto card platforms fall under this model. Plasma One provides the customer-facing product, while its global account services are powered by Bridge and its card is issued through Rain.
Now that we've clarified types of providers, let's go through the step-by-step setup of a virtual account.
1. Create an Account With the Provider
Start by downloading the provider's app or visiting its website and creating an account. You will usually provide basic information, such as:
- Name
- Email address
- Phone number
- Country of residence
- Date of birth
2. Complete Identity Verification
The provider will normally require Know Your Customer (KYC) checks before activating financial services. This can include uploading a passport, national ID, or driver's licence and completing a facial verification check. Some providers may also request proof of address or additional documents.
3. Receive Your Account Details
Once approved, the provider can make the relevant payment details available to you. Depending on the service and country, these could include a virtual IBAN, local account number, routing details, or another virtual account identifier.
4. Add Money or Receive a Payment
You can then fund the account using one of the supported payment methods. For example, a user might transfer local currency using bank details provided through the platform. The provider then records and routes that payment through the virtual account structure.
5. Start Using the Account
Once funded, the virtual account can be used for whatever functions the provider supports. These may include receiving transfers, sending money, converting currencies, or connecting the balance to a debit card.