Why Every Fintech Needs Its Own Dedicated FBO Account
When a fintech or embedded banking enterprise is integrating with a bank, the BaaS provider will typically set up an account for the company’s end customers through which all customer funds flow to and from the bank. Some enterprises opt to create an umbrella FBO account for the benefit of its customers — which houses all of their customers’ accounts.
FBO accounts have a faster account opening process than on-core accounts, in which each customer opens an individual account directly on the bank’s core. FBO accounts also allow you more control over the user experience instead of going through pre-defined bank on-boarding processes.
However, most companies utilizing BaaS services are not aware that different BaaS providers set up FBO accounts differently. These variations in FBO account structure can affect your ability to manage risk.
Fintech FBO Accounts
Not all FBO accounts are created equal — some are riskier than others. Here are some key takeaways:
- Dedicated FBO accounts are where your company gets your own FBO account — in your company name for the benefit of your customers — on the bank’s core.
- Intermingled FBOs are where your company accounts are grouped in with other companies into a large pooled account. Under this paradigm, the FBO account is generally titled in the BaaS provider’s name for the benefit of its customers.
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What is an FBO account?
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 take possession of funds at any point.
But certain FBO account structures may expose fintechs to unnecessary risk, potentially putting them in danger of being exposed to other fintechs’ risky behavior.
BaaS providers that offer FBO accounts are generally split into two categories:
- Intermingled FBO account: BaaS provider pools all their fintech clients into one giant FBO account at the bank — a single account owned by the BaaS provider that intermingles all of their fintech clients accounts.
- Dedicated FBO account: BaaS provider sets up each company with its own exclusive FBO account on the bank’s core. The dedicated FBO approach is safer because you’re not grouped in the same account as other companies and are shielded from potentially affected by their actions.
Treasury Prime takes this approach. It’s less risky and gives fintechs the benefits of an exclusive FBO account model: flexibility and customizability especially as it relates to risk management.
“With a dedicated fintech to bank connection with every program, our clients have 100% assurance that their program’s funds and customer accounts are never intermingled with another company," says Chris Dean, CEO of Treasury Prime.
What does it mean to have a dedicated FBO account?
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. Indeed, it is the need for this discipline of establishing appropriate controls through an effective compliance program that regulators highlighted to Blue Ridge Bank in a recent consent order.
Why do some BaaS providers only have an intermingled FBO account?
Some BaaS providers tend to group all of their enterprise and fintech customer accounts into an intermingled FBO account titled in the name of the BaaS company because it’s easier to maintain. Under this arrangement, you share an account and risk with the other companies, and you lack the autonomy to control account settings.
BaaS companies that use the intermingled FBO model generally apply a standard compliance and Know Your Customer (KYC) risk assessment to every fintech and enterprise, so there’s much less upfront work. In the short run this can be attractive, but you should consider the long-term cost as it relates to your own fraud management as well as regulatory implications it can create for your bank partner.
With intermingled FBOs, transaction monitoring and financial crime rules tend to be established globally instead of being calibrated to a specific use case or customer type. So if your company is embedding a payment rail like ACH into its application, it will be subject to the same risk rules as a crypto platform or a neobank. Because the intermingled FBO account structure generally does not account for each company’s specific risk profile, it can undermine the effectiveness of your overarching compliance program.
Essentially, when a fintech account gets pooled into a larger fiduciary account alongside accounts of other companies, that fintech is taking on the risk of other fintechs. If just one fintech partner or any single end-user presents a high risk, it can subject the entire portfolio to that same risk. This could jeopardize the entire line of business.
Many other BaaS providers also work with just one or a handful of banks. The unfortunate risk of this is that if the bank partner is subject to regulatory action or if a fintech outgrows the bank’s capabilities, those fintechs have little to no room to change banks.
Treasury Prime has a multi-bank network of 16 bank partners and growing, ensuring fintechs can find one that meets their specific needs and can switch with less hassle if necessary. We also partner with dozens of vendors across compliance, KYC, payments, card issuance, and more.
How does a dedicated FBO account mitigate risk?
Here are the key advantages of having a dedicated FBO account:
- Every fintech attracts a different pool of users and has a unique risk profile. A gaming app has very different KYC and compliance needs than one that enables landlords to collect rent from tenants. Having a dedicated FBO account lets fintechs tailor their KYC approach: When fintechs are the holder of a dedicated FBO account, they get to tailor their KYC and account opening approach. That means working with the bank and third-party providers to determine the best way to accept new customers. After all, fintechs know their customers, its use case and their business operations the best. A dedicated FBO empowers fintechs to fully control their KYC measures by addressing specific risks and implementing corresponding controls.
- Ledgering is generally more robust with a dedicated FBO account model: Maintaining the ledger and ensuring all funds are properly reconciled is extremely important. When customer sub-accounts are pooled with those of other companies, all it takes is one sub-account to have a reconciliation issue that spurs additional rippling challenges. “At the heart of effective risk management is the ability to assess risk commensurate to an enterprise’s size, complexity and operations," says Sheetal Parikh, Associate General Counsel and VP of Compliance. "Indeed, this is especially the focus of the OCC’s guidance on third party risk management and is the theme we are seeing with recent regulatory actions. A dedicated FBO account paradigm allows the bank and the enterprise to create a compliance monitoring system that is specifically designed for each company.”
- A dedicated FBO account allows for easier transaction monitoring: Suspicious activity looks different from one company to another. A peer-to-peer payments platform might see a higher volume of smaller transactions among a wider group of users. A platform for business transactions might see fewer but larger transactions among a smaller group of users.
When fintechs have a dedicated FBO account, they can work with their bank partner and third-party vendors to monitor transactions for activity that is considered suspicious for that fintech’s pool of users and business operations. When accounts are pooled together, transactions are intermixed, making it harder to identify potential bad actors at high risk of committing financial crimes.
Treasury Prime partners with leaders in the RegTech space for KYC and transaction monitoring. Learn more about our compliance partners.
Benefits of a dedicated FBO account
Lower risk is one of the biggest reasons to opt for a dedicated FBO account over a setup where fintech accounts are held in the same FBO as other fintechs. But there are also more direct business benefits to having a dedicated FBO account.
- Better account opening experience: When a fintech controls the FBO account, the fintech controls the account opening process for end users, which means account opening can be more rapid and consistent.
- Room to innovate: Rather than relying on one-size-fits-all features and offerings, a fintech can work with their BaaS provider to build out the features that will appeal most to their user base.
Treasury Prime offers dedicated FBO accounts. To learn more about how you can get your own dedicated FBO account to protect your company, get in touch with our team.
Questions? Watch our FBO webinar with Treasury Prime VP of Banking Jeff Nowicki on demand now.