Why Are Bank Accounts a Must For Any Fintech Startup?
To build a lasting fintech product offering competitive features and security, you need to center your product around bank accounts. Accounts support a full range of payment rails, like ACH (Automated Clearing House network), wire transfers, and access to credit and debit card networks. Accounts also serve as a necessary foundation for other services, like lending and investing. Partnering with chartered, FDIC-insured banks to open real bank accounts for customers also enables fintechs to ensure that their customers’ money is protected. Banking as a Service (BaaS) providers like Treasury Prime builds APIs that make partnerships between banks and fintechs possible.
A standalone card gives access to only one payment rail: the card’s network. Cards also cannot — on their own — be federally insured the way accounts can. So while some fintechs view cards as a helpful shortcut, launching your company from a standalone card that is not backed by an account will ultimately limit your ability to grow your business by adding other banking products. If you want security and flexibility, you need to build from an account-centric foundation.
So how do bank accounts work? The answer is that it depends. There are many different bank accounts, with different features. Accounts generally fall into either consumer or business categories. Within those categories, there are account types including basics like checking and savings, and more specialized options like escrow, brokerage, FBO (for benefit of), and settlement accounts. This post will explain everything you need to know to start to navigate your options.
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How do bank accounts work?
At their core, accounts store money. This service is so essential to banking, it gets taken for granted, but fintechs generally can’t do it unless they have bank partners. Only banks, thrifts, and credit unions can hold deposits under federal law. Fintechs can only act as an intermediary for sending money from one account to another.
One of the most important features of accounts at chartered banks in the U.S. is that they are insured by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance covers up to $250,000 in deposits per customer, per bank. Money held only on a card is not eligible for FDIC insurance.
The importance of various types of bank accounts comes down to their specific features. Some accounts give you immediate and constant access to your money for withdrawal; others restrict or prohibit withdrawals. Some accounts earn interest. Some accounts charge fees.
So for example, while the best type of bank account for small businesses depends on what a particular business needs, in many cases, it will be a business checking account. And which type of account is best for everyday personal transactions? Probably a personal checking account. But those are just a couple of options among many.
Consumer vs. business accounts
Accounts fall into two broad categories:
- Consumer accounts, which are also called retail and personal accounts. These are the accounts that an individual uses for personal banking. For the most part, this refers to personal checking and savings accounts.
- Commercial, or business, accounts. These include checking and savings accounts belonging to businesses but can also refer to more specialized accounts such as escrow accounts, brokerage accounts, and FBO (for benefit of) accounts.
Checking accounts, which can also be called demand deposit accounts (DDAs), exist to enable spending. They often allow for relatively high daily withdrawal limits, and an unlimited or high limit to the number of transactions from the account that one can carry out per day.
Which type of bank account typically offers the least interest? The answer is checking accounts. They are not normally the top option for customers looking to store money in one place in hopes of increasing its value. There are some exceptions — some checking accounts offer interest, and some even advertise higher interest than many savings options.
One important difference between offering a checking account and offering only a debit card that stores money is that checking accounts allow for a broader range of payment rails.
Checking accounts support automated clearing house (ACH) transfers, wire transfers, checks, and bill pay. Checking accounts at chartered banks are also eligible for FDIC insurance. When you offer cards as standalone services, as opposed to issuing cards as features of accounts, you get none of these features or benefits.
If you are looking at types of bank accounts and their rate of interest, you will notice that savings accounts are much more likely than checking to advertise interest. Average interest rates are low these days, but you can still find some “high-interest” savings accounts that offer up to 0.6% or as high as around 1% interest on savings.
Savings accounts often limit the number of withdrawals owners can make in a month and may limit the amount they can withdraw at once. The idea is that the money stays in one place for a long time. This is important for banks because they issue loans against the amount they have stored in savings.
Banks pay interest on savings as a way of paying people to leave their money alone, so that banks can make loans on which they charge interest and make a profit. Often banks will offer higher interest rates to customers who store more money in savings — a higher reward for providing the banks with more stability for lending.
There is no way to allow customers to earn interest if your fintech is centered on a standalone card offering. You need to offer real bank accounts to offer interest as a benefit.
FBO accounts — meaning “for benefit of” — are larger, umbrella accounts that contain within them smaller subaccounts. By definition, FBO accounts are held by business entities. When a fintech opens an FBO account with a bank, it uses it to issue virtual accounts to customers and tracks these virtual accounts on a ledger.
A common misconception surrounding FBO accounts is that individual accounts within the FBO cannot be insured; this is not true. With the right level of core integration and reporting requirements, FDIC insurance can be passed through to the underlying bank accounts (commonly called “subaccounts”). These accounts are still subject to fraud risk, but that’s no different than other account types.
Sometimes banks require a business with an FBO account to also open a reserve account to cover costs if the FBO account overdraws, or if some kind of fraud impacts the FBO account.
Given the risks associated with FBO accounts, many fintechs choose to open on-core accounts directly for their users. That’s why Treasury Prime enables FDIC-insured individual accounts directly on our partner bank’s core for customers of our partner fintechs.
On the other hand, Many fintechs choose the FBO account structure because it allows them to better control the user experience instead of the bank's predefined processes associated with on-core accounts. While the FBO account can present additional risks than on-core accounts, an experienced BaaS provider like Treasury Prime that leverages reputable risk and compliance vendors can appropriately mitigate this level of risk.
Other types of bank accounts and their features
There are many types of bank accounts, especially in the commercial category. Some other common types of accounts are escrow accounts, brokerage accounts, and settlement accounts.
- Escrow: An escrow account is an account held by a third party, into which a buyer places money that will be released to a seller upon fulfillment of an agreement. Escrow agreements are typically used for large transactions, such as the purchase of a house.
- Brokerage: A brokerage account is an account from which one can buy or sell investments.
- Settlement: A settlement account is an account where funds land either from other banks, or to be pushed out to other banks. These accounts can be transitory, meaning money just passes through them, or they can hold a balance to help speed up transactions for users. For example, a fintech might set up a settlement account so that a seller can get paid for a service before the buyer’s money completes its transfer.
Types of bank account fees
There are many kinds of fees that banks may charge on accounts. These include:
- Overdraft or ODP fee: When a customer with overdraft protection or overdraft privilege (ODP) makes a purchase but their account does not have the funds to cover it.
- Nonsufficient Funds (NSF) fee: When a customer does not have overdraft protection or has already overdrawn their account and attempts a purchase, which fails.
- Service fee: Banks may charge customers a service fee on an account if it falls below a certain threshold balance.
- Closing fee: Some banks charge customers closing fees for closing accounts.
- Statement fee: When a bank charges a customer for receiving a paper bank statement in the mail.
- Checks: Banks may charge for issuing checks to customers
These are the main fees that most people encounter but other fees exist as well. If there’s a way to charge a fee for it, some institution probably does. And this is not unique to bank accounts; cards charge similar fees.
Overall, this post provides a foundation for understanding bank accounts in all their variety. More types of accounts with different combinations of features exist than we have described here, as well as more types of bank fees.
To learn more about the fundamentals of compliance, watch our webinar, “The 5 Critical Elements of Compliance for Fintechs,” on demand.
Want more guidance? Treasury Prime can help. We foster direct relationships between fintechs and banks. To learn more about how Treasury Prime can help your bank or fintech grow through collaboration, get in touch with our team.