What are FBO accounts and how do they work?  

FBO (For the Benefit Of) accounts enable fintechs and non-financial brands to offer sophisticated banking services without becoming banks themselves. These accounts allow the account holder to manage funds on behalf of clients, who retain legal ownership of the money.  FBO accounts are structured as master pooled accounts, each containing individual virtual sub-accounts for clients. Said differently, FBO accounts offer a “one to many” structure where the bank manages the account at the aggregate level, and the Fintech manages sub-accounts at the detailed, customer level.

What is the account structure and ownership model of FBO accounts?

FBO accounts operate under a unique legal framework that allows for efficient fund management while maintaining individual customer ownership:

• Master Account: Held by a sponsor bank, also known as a BIN sponsor,  which is a fiduciary for its customers.

• Customer Ownership: End users maintain legal ownership of their funds despite the pooling in the master account.

• Fintechs or Businesses: In most cases, acts as the program manager responsible for developing all marketing materials, the brand, choosing the payment network, reconciliation, compliance and fraud and developing the mobile application interface and UX.

How do pooled funds and virtual sub-accounts function in FBO banking?

The FBO model leverages pooled funds and virtual sub-accounts, combining the efficiency of pooled resources with the granularity  of individual account management:

• Customer funds are aggregated in a single master account, optimizing liquidity management.

• Each customer has a virtual sub-account, enabling precise tracking of individual balances and transactions.

What are some FBO account use cases? 

When it comes to FBO (For Benefit Of) accounts, companies can utilize these accounts for various specific use cases. Here are some specific use cases for companies using FBO accounts:

1. Marketplace Platforms

• Gig Economy Workers: Platforms like ride-sharing or delivery services can use FBO accounts to manage and distribute earnings to individual workers, ensuring that funds are held securely and can be easily accessed or transferred.

• Freelance Marketplaces: Freelance platforms can use FBO accounts to hold payments from clients and release them to freelancers upon completion of work, providing a secure and transparent transaction process.

2. Fintech and Neobanks

• Digital Wallets: Neobanks and fintech companies can use FBO accounts to hold user funds in digital wallets, enabling seamless transfers, payments, and account management.

• Saving Accounts: Offering interest-bearing saving accounts where user funds are pooled in FBO accounts, allowing for efficient interest distribution and fund management.

3. Crowdfunding Platforms

• Fund Management: Crowdfunding platforms can use FBO accounts to manage the funds raised from backers, ensuring that the funds are held securely until they are disbursed to project creators or returned to backers if goals are not met.

4. Subscription Services

• Recurring Payments: Subscription-based services can use FBO accounts to manage recurring payments from customers, holding funds until the service period begins or renews, and then disbursing them to the service providers.

5. Payment Service Providers

• Merchant Accounts: Payment service providers can use FBO accounts to hold and manage funds on behalf of merchants, allowing for efficient settlement of transactions and disbursement of funds.

• Escrow Services: Providing escrow services where funds are held in FBO accounts until specific conditions are met, offering a secure transaction process for buyers and sellers.

6. Lending and Investment Platforms

• Loan Disbursement: Lending platforms can use FBO accounts to manage loan disbursements and repayments, ensuring that funds are securely held and accurately tracked.

• Investment Management: Investment platforms can use FBO accounts to hold and manage investor funds, providing transparency and security in the investment process.

What are the roles of the program manager (fintech) vs. the bank in FBO accounts?

FBO accounts involve a strategic partnership between fintechs and banks:

Fintech Responsibilities (Program Manager)

• Managing client relationships and user interfaces

• Offering the sub-ledger, either directly or through the services of its issuer processor

• Handling day-to-day transactions and balance inquiries

• Ensuring compliance with regulatory, security and other requirements as directed by their sponsor bank

Sponsor Bank Responsibilities

• Providing the underlying banking infrastructure (e.g., main ledger, settlement with  card network and other payment rails)

• Ensuring overall account security and regulatory compliance

• Managing the FBO master account 

Related: Should You Become Your Own Card Program Manager?

How are transactions processed and ledgers managed in FBO accounts?

Transaction processing and ledger management in FBO accounts are typically managed in the following ways:

• Transactions are processed in real time through an issuer processor, leveraging the bank's infrastructure.

• Ledger systems (sometimes also referred to as sub-ledgers) maintain accurate records of all transactions and balances for each customer’s sub-account Typically, the sub-ledger system is provided by either the issuer processor or the fintech, depending on the fintech’s business model. 

• The processor shares transaction data on behalf of the fintech with the fintech’s bank.  This enables the bank to complete its own reconciliation processes for the FBO accounts.

Related: What is an Issuer Processor Platform and How to Work with One

How have FBO accounts evolved in the finance sector?

FBO accounts have evolved from early banking practices to become a cornerstone of modern financial innovation. Key developments include:

• Early Origins: Rooted in traditional safekeeping services and trust accounts of the 19th century.

• Expansion of Use: Grew with the introduction of employee benefit plans and escrow services.

• Technological Advancements: FBO accounts have enabled efficient management of funds while allowing fintechs and others to push the boundaries to innovate new applications in financial services such as:

  • Digital wallets and peer-to-peer payments: used to manage and segregate user funds securely. They ensure that each user's money is held separately from the company's operational funds, providing a layer of protection and transparency.

  • Cryptocurrency services: used to hold fiat currency for users who are trading or investing in cryptocurrencies. These accounts ensure that user funds are held separately and securely, which is crucial for building trust and ensuring compliance with regulatory requirements.

  • Robo-advisory and automated investing: ensure that the funds being invested on behalf of users are kept separate from the robo-advisor’s operational accounts. This separation provides security and transparency, ensuring that the users' investments are handled responsibly.

  • Embedded finance in non-financial platforms: When non-financial platforms offer embedded finance services, they often use FBO accounts to manage user funds. For instance, an e-commerce platform offering loans or installment payments would use FBO accounts to securely hold and manage these funds, ensuring they are used solely for the intended purpose and protecting user interests.

• Enhanced Compliance: Regulatory requirements have evolved to meet the new uses of FBO accounts, including BSA/AML and KYB/KYC standards.

Today, FBO accounts offer segregated fund management, help uphold legal responsibilities, and provide versatility across various financial services, reflecting the sector's ongoing evolution and increasing complexity.

Key Regulatory Milestones in FBO Account Evolution

1999: Gramm-Leach-Bliley Act - Fostered collaboration between banks and non-bank entities.

2010: Dodd-Frank Act - Tightened financial oversight, indirectly affecting FBO operations.

2013: FinCEN's Crypto Guidance - Impacted FBO usage in cryptocurrency services.

2020: OCC's Crypto Custody Clarification - Opened new possibilities for FBO accounts in the crypto space.

2023-2024: Enhanced guidance from regulators to match the increased use of FBO accounts across a broad spectrum of use cases.

What advantages and challenges do FBO accounts offer for the financial services industry?

FBO accounts offer potential advantages for fintech companies, but these benefits come with risks that recent industry events have highlighted:

• Regulatory Efficiency: FBO accounts can potentially accelerate market reach by potentially reducing the need for state-by-state licensing, but this efficiency often comes with increased compliance obligations. These include enhanced BSA/AML procedures, more rigorous KYC/KYB requirements, and heightened vendor oversight. The use of FBO accounts may still require compliance with various state regulations and does not eliminate all licensing requirements.

• Rapid Service Deployment: While FBO accounts can facilitate the swift launch of financial services, this speed may come with increased operational and regulatory risks if proper due diligence and risk management practices are not rigorously implemented.

• Dependency Risks: Recent industry events have demonstrated that over-reliance on a single FBO account provider or banking partner can pose operational and continuity risks for fintech companies.

It's crucial for fintech companies to carefully weigh these potential benefits against the associated risks when considering FBO account strategies. Implementing robust risk management practices, diversifying partnerships, and maintaining vital compliance programs are essential to mitigate the potential downsides of FBO account usage.

What are fintechs looking to do next with FBO accounts? 

Looking ahead, fintechs will continue to leverage FBO accounts to drive financial innovation:   

• Expanding into New Markets and Services: The use of FBO accounts may enter new geographical and sectoral markets, thus fostering an environment ripe for financial diversification and inclusion.

• Integrating with Emerging Technologies: The convergence of FBO accounts with cutting-edge technologies like AI and IoT promises to enhance analytical capabilities, automate processes, and refine the responsiveness of financial services to user needs.

• Supporting Decentralized Finance (DeFi) Solutions: By facilitating the growth of DeFi, FBO accounts contribute to a more open and accessible financial system, decentralizing access to financial services and reducing the barriers associated with traditional banking.

• Enabling More Seamless and Personalized Financial Experiences: FBO accounts are a key enabler for innovators at the forefront of delivering tailored financial services that respond dynamically to individual customer preferences and situations, enhancing user engagement and satisfaction.

As we expand the financial frontier, FBO accounts remain crucial for fintechs and businesses aiming to create innovative, customer-focused financial solutions in an ever-evolving digital landscape.

To learn more about how FBO accounts work and to speak with our team, let’s talk. 

FAQs

What are the key benefits of using FBO accounts for fintechs?

• Enables fintechs to quickly offer banking-like services without needing money transmitter licenses in each state, as the sponsor bank that provides the FBO account handles the related regulatory requirements

• Allows fintechs to offer traditional benefits of bank accounts, while providing more customized and efficient user experiences (such as frictionless account opening and smoother KYB/KYC processes) than traditional banks tend to offer

What are the limitations and challenges of the FBO account model?

• Since not all banks offer FBO accounts, finding a bank that does typically takes time and effort.

• Fintechs need to carefully structure their relationship with the bank so that the roles and responsibilities of both parties regarding regulatory and compliance requirements are clear

• Requires the fintech to have robust ledger capabilities and the bank to have sophisticated reconciliation processes, as errors can significantly impact the entire FBO account

• Managing a third party like a fintech increases the bank’s risk profile since the bank must rely on the fintech to implement compliance controls in addition to its own controls. This means that Fintech may be subject to substantial bank fees and compliance requirements

What should fintechs consider when choosing a sponsor bank?

• Must identify a bank partner that offers FBO accounts and go through an extensive due diligence process which is performed by the bank

• Need to ensure the fintech's planned services align with the FBO account requirements offered by the bank

• Should have strong compliance measures in place, including transaction monitoring, KYC/KYB, and fraud prevention, in order to satisfy the bank's requirements

• Must maintain clear ledgers and reconciliation of the virtual sub-accounts within the FBO

• Consider potential backup plans if the bank suspends or terminates the FBO account

The FBO account structure offers a unique approach to managing client funds, but it's important to note that opinions in the financial industry vary on its overall efficiency and compliance implications. Fintechs must carefully weigh the benefits and challenges when considering FBO account implementations.