In today’s evolving financial services landscape, where fintech, payments, and compliance increasingly overlap, FBO accounts have become a recurring focal point. For banks, fintech startups, and licensed money transmitters, understanding how these accounts operate and how they connect to licensing requirements is essential.

The following will break down what FBO accounts are, who uses them, when they’re needed and how they relate to money transmitter licensing (MTL) obligations.

What is an FBO Account?

An FBO (for benefit of) account is a bank account where funds are held by one party on behalf of another party or multiple underlying customers.

• The account is opened in the name of a business (e.g., a fintech or money transmitter)
• The beneficial owners of the funds are the end users or customers
• The bank typically does not have a direct relationship with the underlying customers

Example:

A fintech app allows users to store funds and send payments. The fintech does not hold the funds itself. Instead, the funds are held at a partner bank. The account could be titled something like: “ABC Fintech, Inc. FBO Customers.”

Who Uses FBO Accounts?

FBO accounts are commonly used by:

1. Fintech Companies

• Digital wallets
• Payment apps
• Neobanks
• Crypto platforms

These companies rely on partner banks to custody customer funds.

2. Money Transmitters

• Licensed money services businesses (MSBs) facilitating payments, wires or stored value use FBO structures to hold pooled customer funds

3. Payment Processors and Program Managers

• Businesses managing prepaid programs, debit cards or embedded finance solutions

4. Banks (as Custodians)

• Banks themselves don’t “use” FBO accounts in the same way; instead, they host them for third parties

When & Why are FBO Accounts Needed?

FBO accounts are typically used when a company:

Does NOT Want to Custody Funds Directly

Non-bank entities cannot legally hold customer deposits as a bank can. FBO accounts allow them to operate while a regulated bank safeguards funds.

Operates a Pooled Funds Model

Instead of opening individual bank accounts for each customer, funds are:

• Pooled into one account
• Tracked internally via ledgering systems

Enables Scalable Payment Operations

FBO structures allow:

• Faster onboarding
• Simplified bank relationships
• Scalable transaction processing

Supports Regulatory Compliance

An FBO account ensures:

• Customer funds are segregated
• Funds are protected in case of insolvency 

When are Banks Exempt from Money Transmitter Licensing?

Banks are generally exempt from state money transmitter licensing requirements.

Why?

Banks are already regulated under:

• Federal banking laws
• Prudential regulators (e.g., OCC, FDIC, Federal Reserve)

Key Takeaway:

If an entity is a federally or state-chartered bank, it typically does not need a money transmitter license to:

• Accept deposits
• Transfer funds
• Facilitate payments

This exemption often extends to:

• Bank subsidiaries 
• Activities conducted directly by the bank

When are Money Transmitters Exempt from Licensing Requirements?

This is where things get nuanced. Money transmitter licensing is primarily governed at the state level, and exemptions vary, but there are some common themes.

1. Agent of a Payee Exemption

A business may be exempt if it is acting as an agent of the payee, meaning:

• It receives funds on behalf of a merchant (payee)
• Payment is considered complete once funds are received

Example:

A payment processor collecting funds for a retailer may qualify depending on state law.

2. Bank Partnership / Program Structure (Limited Scenarios)

Some fintechs rely on a bank-partner model in which the bank is the licensed entity. However, this does NOT automatically exempt the fintech. Most states still require licensing unless a clear exemption applies.

3. Closed Loop Systems

Exemption may apply if:

• Funds are only used within a closed ecosystem
• No third-party transfers occur

Example:

Store gift cards are usable only with a single merchant.

4. Certain B2B Payment Activities

Some states exempt purely commercial transactions between businesses, particularly where no consumer funds are involved.

5. Limited Transaction Types

In some jurisdictions, activities like payment processing tied to a sale or incidental fund transfers may fall outside licensing requirements.

When is a Money Transmitter License Required?

A license is generally required when a business:

• Accepts funds from one person
• Transmits those funds to another person or location
• Holds funds for later transmission

This includes:

• Wallets
• Peer-to-peer payments
• International remittances
• Crypto on/off ramps (in many cases)

Key Risks & Compliance Considerations

Using FBO accounts and navigating MTL requirements introduces several risks:

1. Misclassification Risk

Improperly relying on an exemption can lead to:

• Regulatory enforcement
• Fines and penalties
• Forced shutdown of operations

2. BSA and AML/CFT Obligations

Even if exempt from licensing:

• You may still be considered an MSB under FinCEN
• AML/CFT program, SAR filing, and monitoring may still apply

3. Bank Relationship Scrutiny

Banks providing FBO accounts will require:

• Strong compliance programs
• Transaction monitoring
• Clear legal analysis of licensing position

Final Thoughts

FBO accounts are foundational to modern fintech and payment ecosystems, but they do not eliminate regulatory responsibility.

Understanding the following is essential to determining whether licensing is required:

• Who holds the funds?
• Who controls the movement of funds?
• Who bears regulatory responsibility?

If you’re operating in this space, a state-by-state licensing analysis and a well-documented compliance framework are not optional; they’re critical.

If you would like to explore if an FBO account is right for you or need licensing support, contact us. 

Tags: AML/CFT Program, Bank Account, FBO Account, FDIC, Federal Reserve System, FinCEN, Money Services Business, Money Transmitter License, MSB, MTL, OCC