What are virtual accounts and how do they work?

From understanding their inception to deciphering their inner workings, come with us as we explore the ins and outs of virtual accounts, particularly in Nigeria. 

Where did virtual accounts come from?

Accounts in banking serve as numerical representations linked to ledger entries within the banking system. Essentially, a bank account corresponds to a set of bank system balances, indicating the funds you possess. This balance could be positive, signifying a favorable financial situation, or negative, indicating potential financial obligations to the bank.

As banking institutions expanded, they transitioned to electronic systems to manage these account numbers in their ledgers. With advancements in technology, banks sought to facilitate funds transfer between themselves. Consequently, account numbers became pivotal identifiers for both senders and recipients in financial transactions.

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As customers’ financial requirements diversified, a demand for multiple account numbers surfaced, particularly among merchants and entrepreneurs seeking to segregate personal and business finances. However, managing numerous accounts posed a challenge, especially for occasional or infrequent use.

This dilemma prompted the development of virtual accounts, originating in Europe, to offer more flexible account management solutions.

Virtual accounts in Nigeria

Simply put, what exactly are virtual accounts? They’re essentially aliases or proxy account numbers that stand for a physical account number. So, if your actual account number is 1234 and you’re assigned a virtual account number (VAN) like 5678, any funds sent to VAN 5678 will also be mirrored in your actual account — 1234.

In Nigeria, Monnify invented virtual accounts. In 2018/2019, others like Providus Bank and TeamApt keyed into virtual accounts. This successful product was instrumental in lifting both fintechs to become household names.

Nigeria today, through the Central Bank of Nigeria (CBN), has a standardized system of organization across all banks, through NUBAN — Nigerian Uniform Bank Account Number. It’s a 10-digit Bank account numbering system that was first created in 2010 by CBN and later revised in 2020 to include Other Financial Institutions (OFIs).

Just like physical accounts, virtual accounts are also valid NUBAN accounts, but they don’t exist in the core banking system. They’re just like a system and reference for an underlying bank account. They’re usually a system and reference for a licensed payment provider or a payment provider in partnership with the bank. 

How do virtual accounts work?

Here’s a more straightforward explanation of how virtual accounts work in Nigeria: When you transfer money from Bank A to Bank B, Bank A sends the transaction details to the Nigeria Inter-bank Settlement System (NIBSS). NIBSS then notifies Bank B about the transfer. If Bank B doesn’t have the recipient’s account in their system, they check if it belongs to one of their fintech partners. If it does, they send the details to the fintech partner for validation. Once validated, the fintech partner updates their system, transferring the money within 24 hours.

How Lendsqr virtual accounts work

For Lendsqr users, virtual accounts are digital identifiers created automatically upon signup to manage money flow without needing a physical branch.

For lenders (Disbursement account)

Lenders are assigned a disbursement account to manage loans.

• Funding: Lenders fund their disbursement account by transferring money from an external bank to their linked virtual account. Funds usually reflect within 5 minutes.
• Service accounts: Used to pay for Lendsqr services via bank transfer to a specific virtual account.

For borrowers

• Loan disbursement: Once a loan is approved, funds are sent directly to the borrower’s virtual account. Borrowers can then move this to their external bank.
• Repayment: Borrowers simply transfer the repayment amount to their designated virtual account. Lendsqr automatically detects the inflow and marks the loan as paid.

Why did virtual accounts succeed in Nigeria?

In the early days of Nigeria’s financial scene, debit cards were the primary payment method. However, this posed challenges as not everyone had access to debit cards. Physical POS systems were also not universally feasible or accessible. In contrast, digital transfers, whether through mobile apps, USSD, or internet banking, were widely used by all. This accessibility paved the way for virtual accounts to gain popularity rapidly, becoming the dominant online payment method in Nigeria. As a result, virtual accounts surpassed both card payments and traditional transfer methods in a relatively short period.

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Apart from the ease for which virtual account is known, some other benefits of virtual accounts that contributed to its success include: 

• Low fraud risk: Virtual accounts often have enhanced security features compared to traditional bank accounts. These features can consist of multi-factor authentication and transaction limits, making them less susceptible to unauthorized access and fraudulent activity.
• No chargebacks: Since they are typically linked to specific transactions, the risk of fraudulent chargebacks is significantly reduced. This is because the source of funds and the intended purpose are linked, minimizing the ability for someone to dispute a legitimate transaction.
• Instant receipt of payment: Payments made to virtual accounts are typically reflected instantly, eliminating the waiting times associated with traditional transfers. This is especially beneficial for lenders who rely on quick loan disbursement to borrowers to maintain a good market reputation.
• Low maintenance: They require minimal maintenance compared to physical bank accounts. There are no physical cards or checks to manage, and transactions are handled electronically.

Some of the big players in the industry for virtual accounts include Monnify, Paystack, Fincra, etc. Learn more about these payment providers.

Choose ease and safety with virtual accounts

So, there you have it; with virtual accounts, simplicity and security go hand in hand, offering lenders and borrowers a hassle-free solution for managing transactions. Compared to traditional accounts, they come with more robust security features, minimize the risk of fraud and chargebacks, and enable instant receipt of loan repayment. Lendsqr lenders count themselves lucky to have a virtual account created for them when they sign up. What are you waiting for? Send us a message at growth@lendsqr.com, and let’s get you started immediately.