Are you an early-stage Money Service Business? If so, you’re probably aware that the US licensing system is insane and it could take several years and millions of dollars just to get regulatory coverage for your service. Unless…
TL;DR: An FBO account, or a For Benefit Of account, is a type of custodial account that allows a company to manage funds on behalf of, or “for the benefit of,” one or more of their users without assuming legal ownership of that account. Two key potential benefits of an FBO are sub-accounts with FDIC insurance and regulatory cover. If the FBO is in the bank’s EIN, this structure can be helpful for businesses seeking to avoid certain kinds of regulatory categories, for instance, the possibility of the business being directly regulated as a “money transmitter.”

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What is an FBO account?

Ownership of an FBO can either be attributed to the bank’s EIN (tax ID) or the name of the company. If the FBO is in the bank’s EIN, this structure can be helpful for businesses seeking to avoid certain kinds of regulatory categories, for instance, the possibility of the business being directly regulated as a “money transmitter.” Because chartered banks are exempt from money transmission licensing requirements, many fintechs leverage the FBO account structure where the banks technically have custody of the assets; allowing the fintech to legally provide services across the United States.

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Why would my fintech need an FBO account?

Well, that depends! Could your business be considered a money transmitter? Under federal law, a money transmitter is defined as someone who receives money from one person and transmits it to another. The definition is purposely circular to give regulators wide latitude to label something money transmission. Typical.
Money transmission can be hard to determine based on a definition alone, so let’s look at examples to better understand the requirements.

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Money transmitter examples

Digital wallet companies are generally money transmitters. They accept customer funds and move those funds to recipients, allowing customers the ability to hold funds in their wallets. Examples of registered money transmitters include PayPal and Block (formerly known as Square). Cross-border remittance companies like Western Union and MoneyGram also hold money transmitter licenses. They accept funds from one party and handle sending them to another, often in a different country. Money transmitters must register with federal regulators (the Financial Crimes Enforcement Network, or FinCEN) and then obtain Money Transmitter Licenses (MTLs) for each state in which they operate. This registration and licensure process is costly and time-consuming.
Regulatory statutes provide many resources to help a business figure out if it is a money transmitter, but we recommend consulting legal counsel to review the applicable facts and circumstances.

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Money transmitter exceptions

There are some potential paths fintechs should be aware of if they are interested in steering away from money transmission requirements. First, the definition of “money transmitter” has a few exceptions that have developed over the years, including:
  • Companies that only provide technology layers that money transmitters use
  • Payment processors that facilitate payments for goods and services through a clearance and settlement system
  • Companies that only accept and send funds that are integral to the sale of goods or services (for example, a P2P micro-lending platform)
To steer into the technology layer path, fintechs can work with bank partners to set up “for the benefit of” (FBO) accounts. These are custodial accounts that let a company manage funds on behalf of others without technically having legal ownership of the account.
By using a properly constructed FBO account arrangement with a regulated bank, a business can avoid the need to individually register and obtain licenses as a money transmitter. That is because the bank already has the necessary regulatory compliance structure; banks are exempt from the need to separately register and obtain MTLs.
A properly constructed FBO under a bank’s EIN removes the business from having dominion or control over the user’s funds. Thus, the business would not be subject to separate regulation as a money transmitter in its own right and would be able to rely on the bank’s regulatory exemption.

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On-core vs FBO accounts

So how are these accounts structured?
FeatureOn-Core AccountsFBO Accounts
Account openingOpened directly in the end-user’s name at the bankUmbrella account that pools funds “for the benefit of” end-users
KYC requirementsBank may ask for more robust KYC informationFintech opens FBO to issue virtual accounts
Account structureAccount sits directly on the bank coreCustomer has a ledger account that sits within the FBO

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What are on-core accounts?

An on-core account is an account that is opened directly in the end user’s name at the bank and works just like a traditional bank account. This can be a great option for your fintech because it allows you to leverage the bank’s expertise, policies and procedures. When the customer applies for an account on the fintech platform, the bank will ask the customer for pre-defined know your customer (KYC) information to verify identity, and the account will sit directly on the bank’s core banking infrastructure.

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How are FBO accounts structured?

An FBO account is an umbrella account that holds the aggregate deposit balances for multiple client accounts. Those funds are held at the bank for the benefit of a company’s clients.
No money movement in or out of that account should occur unless it is instructed by or because of an end customer’s actions. These accounts are owned and controlled by the customer; the enterprise does not have any access to its customers’ funds and does not technically take possession of funds at any point.
An FBO account is a fiduciary account opened on a bank’s core. A dedicated FBO account means the BaaS provider has opened a discrete FBO account just for that fintech at the bank. The dedicated FBO account is only for a single fintech’s end customers and is not shared among multiple fintechs in a bank’s portfolio.
Why is this important? The ability to have a dedicated FBO account allows an enterprise or fintech in collaboration with its partner bank to establish risk management systems and transaction monitoring rules specifically for the risks posed by the use case of its customers. This is especially important for a regulated financial institution like your bank partner to demonstrate to its auditors that its BSA/AML program is tailored to the specific risk and use case presented by an enterprise.

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Benefits of opening an FBO account

FDIC Insurance: Deposits held by the customer as a beneficiary to the FBO account are FDIC-insured on a pass-through basis to the same extent as if the deposits were made directly, assuming specific requirements are met.
No ownership interest: The fintech has no ownership interest in the FBO account and has no control over the funds. The bank maintains control over the funds at all times.
This is how fintechs or wallet providers can make the case that they’re not engaging in money transmission activity. It’s important because money transmission is regulated in all states (except Montana) and the laws require fintechs to obtain licensure to take custody of funds and transmit funds to third parties; a complex and time consuming undertaking, unless they partner with banks.

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FBO accounts can be extremely valuable

An FBO account offers a convenient alternative for companies seeking to comply with regulatory requirements in a more streamlined and efficient manner. Instead of undergoing the lengthy process of becoming a money transmitter and obtaining a Money Transmitter License, FBO account ownership is attributed to the bank’s EIN (Employer Identification Number) or tax ID, which can help them custody and disperse funds in a compliant manner.

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How our bank partners help customers do it right

Here’s how our bank partners help customers implement FBO accounts properly:
  1. Separate FBO account is opened or enabled by each fintech at a partner bank
  2. Transaction monitoring tools are integrated at the top of the funnel
  3. Adequate KYC is established for end-users and the fintech itself
With these features, an FBO model is often just as valuable as on-core accounts. The nuanced feature set and framework are incredibly important for both fintechs and banks as they seek to empower innovation while mitigating risks.
The following legal references provide the regulatory foundation for FBO account structures and money transmitter requirements:
  • FIN-2019-G001: “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies,” (May 9, 2019)
  • FIN-2013-G001: “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” (March 18, 2013)
  • FIN-2019-A003: “Advisory on Illicit Activity Involving Convertible Virtual Currency” (May 9, 2019)
  • 31 C.F.R. § 1010.100(ff): Money transmitter definitions and exceptions
  • 31 C.F.R. § 1022.380(a)(1): Registration requirements
  • 31 C.F.R. §§ 1010.100(d) and 1020: Bank exemptions and regulations

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Key regulatory exemptions

Banks and persons registered with and functionally regulated or examined by the SEC or the CFTC that engage in transactions denominated in value that substitutes for currency are exempt from MSB status but are subject to BSA regulations according to the applicable section of 31 CFR Chapter X. A person is not a money transmitter if that person only:
  • Provides delivery, communication, or network access services used by a money transmitter
  • Acts as a payment processor to facilitate purchase of goods or services through a clearance and settlement system
  • Operates a clearance and settlement system between BSA regulated institutions
  • Physically transports currency with only custodial interest
  • Provides prepaid access as defined in regulations
  • Accepts and transmits funds only integral to the sale of goods or provision of services
For complete regulatory guidance and specific legal requirements, consult with qualified legal counsel familiar with FinCEN regulations and money transmitter licensing requirements.