FBO Accounts: What Banks And Fintechs Need To Know

One of the biggest challenges for fintechs is ensuring that their services comply with federal and state money transmission laws. For example, a fintech operating as a payment facilitator faces significant money transmission risk when settling funds to its sub-merchants through the payment facilitator's own bank account. Likewise, a fintech that facilitates bill payment services or loan disbursements may trigger money transmission risks if the fintech receives and transmits any funds as part of the service.

A common trend among fintechs for managing these risks is to partner with banks that offer custodial accounts opened for the benefit of (FBO) the fintech's customers. In these arrangements, funds flow through an account owned and controlled by the bank and not the fintech. Because banks are exempt from money transmission licensing requirements, fintechs use FBO accounts to provide banking-like services while avoiding money transmission regulation and licensing.