How can Fintechs make the most of FBO accounts?

Co-authored with ComplyAdvantage, a transaction screening and monitoring solution based on real-time anti-money laundering data.

The financial industry is big business and as the sector grows, more pressure is put on young and upcoming Fintechs to innovate and solve traditional banking problems. On top of launching and maintaining an innovative product offering, you need to compete with rival businesses and offer For Benefit Of (FBO) accounts.

In this article, we will explain what FBO accounts are, their benefits, and the risks and opportunities that you should be aware of.

What are FBO accounts?

For Benefit Of, or FBO, is a type of custodial account where funds can be managed on behalf of a user (or users) by another entity. A common example of an FBO account would be a trust fund – a child is named the beneficiary, but it is legally controlled by their parents or guardians. This provides a legal way to hold money for the child until they are old enough to claim or take control of it.

What does FBO mean in banking? Well, for Fintechs, it is used to set up multiple virtual accounts quickly and easily for end users, whilst the banks maintain control over the financial operations. This allows Fintechs to take advantage of the chartered banks’ exemption from money transmission licence, eliminating the need to go through the complicated and lengthy process of acquiring licences for each region they wish to operate in.

FBO in practice - How does it work?

Once an FBO account has been obtained, a Fintech can issue virtual ledger accounts that will sit within it. This gives the end user of that account a specific reference to include in each transaction, registering them to the end user’s ledger account and updating their balance accordingly.

When the end user requests to make a transaction on the Fintech’s platform, the order is forwarded to the bank that owns the FBO account. The bank will then move the funds from the FBO account as is appropriate by the request.

To keep track of all the ongoing and outgoing transactions from hundreds of virtual accounts into a single pooled account, a Fintech must then have comprehensive ledger tools and transaction monitoring capabilities to ensure that all balances are accurate. Otherwise, the funds will be lost in the pooled account as there can be many transactions happening at once, and require rectifying the accounts manually.


FBO accounts: risk considerations and controls

While FBO accounts offer Fintechs the benefits of efficiency, agility, and cost-effectiveness, these can be lost if a Fintech company does not have an effective risk management framework. To accomplish this, firms must conduct a risk assessment and prioritise understanding the risks FBO accounts face so the necessary steps can be taken to protect the business and its assets.

Risk considerations for FBO accounts include potential gaps in identity verification data and partner banks’ limited visibility of transaction flows, both of which can increase the likelihood of undetected financial crime. To mitigate these risks, Fintechs should implement a comprehensive internal controls program built around their unique risk profiles.

These controls include enforcing risk-based customer due diligence (CDD) policies to help identify vulnerable accounts. When verifying or authenticating a potential customer during the know-your-customer (KYC) checks stage, Fintechs may consider classifying the type of customer and the risk category they fall into. This ensures that adequate KYC measures are in place for the FBO account’s end user as well as the Fintech.

Automated transaction monitoring solutions should also be implemented to detect deviations from expected activity in real-time. By tailoring scenarios to customer or transaction risk and focusing on regulatory priorities, Fintechs can minimise unnecessary alerts and identify risk before it materialises. Furthermore, the benefit of real-time transaction monitoring for FBO accounts means transactions are reconciled without delay, and banks are provided with the necessary visibility for bookkeeping and audit trails if required.

To keep up with emerging threats and new regulations, partner banks and Fintechs should update their risk management frameworks with insight from one another. This will ensure sufficient depth and detail in their understanding of emerging compliance issues.

Regulatory obligations to secure FBO

The elevated criminal risks associated with FBO accounts mean that Fintechs must think carefully about their regulatory environments and ensure that their anti-money laundering (AML) and counter-financing of terrorism (CFT) measures meet their compliance obligations.

Five core Fintech compliance responsibilities include:

  • Appointing a senior figure responsible in law, known as the Money Laundering Reporting Officer (MLRO)
  • Undertaking an appropriate range of CDD and KYC measures to assure the identity and behaviour of the end-users throughout the client life cycle
  • Reporting concerns related to unusual or suspicious patterns of behaviour to the authorities through authorised channels
  • Maintaining records on AML/CFT operations
  • Registering with responsible regulatory bodies

To secure an FBO, Fintechs must also comply with regulatory requirements in the jurisdictions in which they operate. In the UK, regulatory compliance for Fintechs means complying with the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), and the Proceeds of Crime Act 2002. In the EU, the Anti-Money Laundering Directive (AMLD) regulations, currently implemented up to 6AMLD, are supervised by national regulators. And in the US, the most important AML regulations are the Bank Secrecy Act and the USA PATRIOT Act.

While Fintechs must fulfil the criteria of each relevant regulatory body and/or legislation, their compliance programs must be tailored to the firm’s unique needs, vulnerabilities, and clients' risk profiles.

What are the benefits of FBO accounts for Fintechs?

Using FBO accounts prevent Fintechs from being limited by the partner bank. Accounts can be opened faster and Fintechs could tailor their KYC protocols to suit their specific user base so they can be more flexible in their account approvals. The customer experience will also have more room for innovation and allow more customisation to specialise their offerings further.

This is also a useful tool to empower a Fintech to focus on their unique features rather than on trying to catch up with their competitors’ standard functionality. Getting a financial licence requires a lot of time and man-power, which uses up a Fintech’s much needed capital on trivial features. A FBO account quickly sweeps past this obstacle as Fintechs rely on their partner bank to execute the transmission of funds so they are excluded from needing these expensive licences.

Why finding the right infrastructure partner is just as important as your Fintech product?

You don't have to own the financial infrastructure technology to power up your digital banking solution. The vast majority of Fintechs use BaaS providers to help build and go to market with their digital banking product more quickly and cost effectively. Our BaaS orchestration platform helps you build the solution that fits your needs, and our pre-built BaaS integrations provide the underlying infrastructure on which you can build on your financial products.

You will quickly be able to:

  • Issue FBO accounts to your customers through our native integrations into key BaaS providers
  • Create optimal flow-of-funds with customisable workflows at your fingertips
  • Segregate customer funds and business operation fees while remaining compliant with the latest regulatory requirements

You can build a Fintech in weeks, not months. Speak to one of our digital banking experts today to find out more.

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