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What is an FBO account?

Accounts with benefits
Keith R

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.”
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.

Tell me more. Why would my fintech or wallet app need a “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:
Companies that offer digital wallets 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 provides 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.

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.
Source please!
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.

31 C.F.R. §§ 1010.100(d) and 1020, respectively, for banks
⁠
Payment Processor Exception
⁠
⁠


On-core vs FBO account — What is the difference?

So how are these accounts structured?
⁠
oncore fbo.png
⁠
⁠

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.

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.
No money movement in or out of that account should take place unless it is instructed by or because of an end user’s actions.
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.

What are the benefits of opening an FBO account?

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.
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 timing consuming undertaking, unless they partner with banks.

FBO accounts can be extremely valuable

An FBO account offers a convenient alternative for 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.
Here’s how our bank partners help customers do it right:
A separate FBO account is opened or enabled by each fintech at a partner bank
Appropriate transaction monitoring tools are integrated top of funnel
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.

References

FIN-2019-G001, “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies,” (May 9, 2019) at
http://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf2019
⁠
⁠
https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf
⁠
.
FIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” (March 18, 2013) at
https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf
⁠
(2013 FinCEN Guidance).
FIN-2019-A003, “Advisory on Illicit Activity Involving Convertible Virtual Currency” (May 9, 2019) at
https://www.fincen.gov/sites/default/files/advisory/2019-05-10/FinCEN%20Advisory%20CVC%20FINAL%20508.pdf
⁠
⁠
31 C.F.R. § 1010.100(ff).
31 C.F.R. § 1022.380(a)(1).
31 C.F.R. § 1010.100(ff)(5)(i)(A)
31 C.F.R. § 1010.100(ff)(8). In the case of 1010.100(ff)(8)(ii), the exemption applies only if the person itself is registered with, and functionally regulated or examined by the SEC or CFTC; the exemption may not apply if it is, for example, the document instrumenting the offer or sale of an asset (and not the person offering or selling the asset) that which must be registered.
31 C.F.R. §§ 1010.100(d) and 1020, respectively, for banks; for brokers or dealers in securities, 31 C.F.R. §§ 1010.100(h) and 1023, respectively; for futures commission merchants, 31 C.F.R. §§ 1010.100(x) and 1026, respectively; for introducing brokers in commodities, 31 C.F.R. §§ 1010.100(bb) and 1026, respectively; and for mutual funds, 31 C.F.R. §§1010.100(gg) and 1024, respectively.
A person is not a money transmitter if that person only: (A) provides the delivery, communication, or network access services used by a money transmitter to support money transmission services; (B) acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller; (C) operates a clearance and settlement system or otherwise acts as an intermediary solely between BSA regulated institutions; (D) physically transports currency, other monetary instruments, other commercial paper, or other value that substitutes for currency as a person primarily engaged in such business, such as an armored car, from one person to the same person at another location or to an account belonging to the same person at a financial institution, provided that the person engaged in physical transportation has no more than a custodial interest in the currency, other monetary instruments, other commercial paper, or other value at any time during the transportation; (E) provides prepaid access, as defined in 31 C.F.R. § 1010.100(ff)(4); or (F) accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds. 31 C.F.R. § 1010.100(ff)(5)(ii)(A)-(F).
31 C.F.R. § 1022.210(a).
31 C.F.R. § 1022.210(b) and (c).
31 C.F.R. § 1022.210(d).
31 C.F.R. § 1022.380.
The 2019 FinCEN Guidance clarifies that, with respect to recordkeeping requirements, transmittal orders involving CVC qualify as transmittals of funds, and thus may fall within the “Funds Travel Rule.” Under the Funds Travel Rule, transmittals of funds of US$3,000 or more (or the equivalent in CVC) may trigger certain recording and recordkeeping requirements on a money transmitter acting as either the financial institution for the transmitter or recipient, or as an intermediary financial institution. 31 C.F.R. § 1010.410(f).
An “exchanger” is a person engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency. An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (i.e., withdraw from circulation) such virtual currency. A “user” is a person that obtains virtual currency to purchase goods or services on the user’s own behalf. 2013 FinCEN Guidance.

TL;DR
Tell me more. Why would my fintech or wallet app need a “FBO” account?
Money transmitter exceptions
On-core vs FBO account — What is the difference?
What are on-core accounts?
How are FBO accounts structured?
What are the benefits of opening an FBO account?
FBO accounts can be extremely valuable
References
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