Real accounts vs virtual accounts: how to choose the best option for your business

When examining the bank account options for your business, you may have come across the phrases ‘virtual accounts’ and ‘real accounts’. It can be confusing and likely prompted an obvious question – what's the difference, and which type will work best for my business?

Put simply, a real account ​holds​ ​​money. A virtual account, on the other hand, is a ledger to see the transactions​ against​ a real account.

In this post, I’ll outline the critical defining features of real and virtual accounts, their differences and how they work together. I’ll also examine the benefits of each and whether an all real accounts structure or a structure with both real and virtual accounts is best for your business.

As the name suggests, a real account is an actual account that ​​holds money. Real accounts have balances that are credited or debited. This type of account ​structure ​will have its own account number and sort code.

One type of real account structure is to have one real account for multiple customers. For example, a credit union using this account structure could include all its members on one account. The members’ money would be co-mingled, which means the credit union must manually track incomings and outgoings, draw and manage balances for each member.

Another kind of real account structure is to have several designated real accounts. For instance, a small wealth management firm with 10 customers might have a designated account for each. Because each customer has their own account number and sort code, the firm doesn’t have to track balances manually.

Real accounts make sense in these examples because the credit union and wealth management firm have a ​manageable​ number of customers. But what about financial institutions that manage money for ​tens of ​thousands or even millions of customers? That’s where virtual accounts come in.

Unlike real accounts, virtual accounts don’t hold any money.

A virtual account is simply a mechanism to allocate money to a pot within a real account. That means funds don’t actually move and the account number works like a reference number. You might think of them as redirecting money to and from a real account in real-time, but they don’t settle any transactions or carry their own balances.

With a virtual account structure, financial institutions can support many customers with​ one or just​ a ​small number of​ real account​s​. Each customer has their own virtual account, which, on the surface, behaves exactly like a real account. The underlying virtual account structure means that the organisation can notionally segregate their customers’ money while keeping the funds centralised in one or more real accounts. ​​

​​​​​If you think of a real account as a centralised location where all customer money is held, virtual accounts are the filters that help financial institutions keep track of it. And that filtering system can have as many layers of logic as the organisation needs.

There’s no one-size-fits-all solution.

When we talk about real vs virtual accounts, we’re not so much talking about types of accounts as we’re describing different account structures. There’s a wide variety of accounts a financial institution might use depending on the products and services they offer. The question of real vs virtual then becomes a decision about the best way for a financial institution to structure those accounts.

At ClearBank, we believe in helping financial institutions choose the right type of accounts for their business and for their customers. These could be operating accounts, ​​​​customer segregated accounts, client money accounts or multi-currency accounts. Then we work closely with them to see which account structure fits best for their ambitions.

Do they opt for a real account structure where the financial institution and their customers all have physical bank accounts? Or do they choose a virtual account structure comprising at least one real account and any number of publicly addressable virtual accounts that scale with their customer base?

There’s no doubt that a real account structure is an easy-to-manage solution for smaller financial institutions with a more modest customer base. It’s a great option for those looking for a solution that’s less complex from a technology perspective or, in the case of ClearBank clients, if they’d prefer not to use our API (Application Programming Interface).

ClearBank real accounts can be opened for our clients on the same day – and we generate a unique IBAN (International Bank Account Number) for each one. There’s no limit on the balance that can be held in ClearBank real accounts and we don’t set a daily transaction limit. All GBP is securely held at the Bank of England and customers can get an extra layer of confidence knowing their money is going to the right place through Confirmation of Payee.

A virtual account structure is a logical choice for financial institutions that are growing quickly or anticipating a period of rapid growth. At this point in their journey, making the switch from real to virtual accounts unlocks greater efficiency and is more cost-effective.

This scalable structure is built to support exponential future growth and will ultimately help these ambitious businesses manage their customers’ funds more effectively.

ClearBank virtual accounts are built for flexibility with the freedom to open up to 10 million accounts each with its own addressable vIBAN (virtual International Bank Account Number), with no limit on the number of layers of logic a financial institution can create within their ledger.

Our API enables financial institutions to open virtual accounts any time, day or night, 365 days of the year – each with its own vIBAN. Our strong foundation of cloud-native technology and unique API means that ClearBank clients can be confident that every virtual account is opened in real-time, every time.

If you’re looking for an account service and would like to discuss the structure that will work best for your business, get in touch: [email protected]

Jonathan Boon is Head of Mid-Market, Business Development Lead at ClearBank. His deep understanding of accounts and clearing enables him and the team to meet the needs of our start up and scale up client base effectively, across all stages of their relationship with ClearBank. Prior to joining ClearBank in 2019, Jonathan worked in J.P. Morgan's Transaction Services business, supporting global Broker-Dealers and started his career in the Bank of England's Markets Division.