What is an FBO account?

What does that mean for business owners? At a high level, FBO accounts enable businesses to manage their clients’ money without the costly regulations that can come with certain types of money transmission. 

While FBOs now include the digital transfer of funds, the concept dates back to fiduciary agreements around feudal land ownership in the twelfth century. Since then, managing an asset of value on someone else’s behalf has evolved into many modern legal arrangements, including bank accounts for children on behalf of their parents, wills, trust funds, and more. 

Before a company decides to open an FBO account, it’s important that they do their due diligence. This includes clarifying their needs with legal counsel first and more.

How do FBO accounts work?

Imagine your FBO account as a hotel building. From the outside, there are many windows that represent your different clients with their own sub-accounts, also known as virtual accounts.

For example, say you want to send money to Olivia in the penthouse suite by attaching a check to a paper airplane and sending it through Olivia’s window. Think of her floor and room number as her account and routing number—in other words, they’re unique to her virtual account under the FBO.

Now imagine that all the money that comes through these separate windows exists in a large pile on the lobby floor, in what’s known as a pooled account. Olivia is only concerned with the money she receives in her virtual account. From the bank’s perspective, however, all the money from these different virtual accounts is available in one place. In other words, all the money in the FBO account is fungible.

That said, it’s the bank’s responsibility to track money that comes and goes from this pooled account. This tracking system is like a doorman, who functions as a ledger, by organizing funds and providing visibility. If funds are distributed to any one room, or virtual account, the doorman makes a deduction. He knows how much money is coming and going from the entire hotel, or the account at large.

What does an FBO account look like in practice?

Let’s say a neobank, Peanut Butter, opens an FBO account at a bank called Jelly. Jelly is holding the money on behalf of Peanut Butter. Think of it as Peanut Butter managing the hotel, while Jelly technically owns the hotel, or the FBO account. 

Now, Peanut Butter can provide individual virtual accounts to all of their clients. Each client has their own unique room and floor number, or virtual accounts complete with individual account and routing numbers. Peanut Butter is able to stay organized and keep track of their clients’ payment operations with a ledger software.

What are the benefits of opening an FBO account?

An FBO account offers regulatory coverage, helping companies avoid the cumbersome process of becoming money transmitters. Instead, they can attribute ownership of the account to the bank’s EIN, or their tax ID, to avoid these regulations. Banks are de facto money transmitters, so they don’t have to worry about registering for a Money Transmitter License (MTL).

This saves businesses the trouble of getting a Money Services Business (MSB) license, a time-consuming process that varies from state to state. For startups in particular, an FBO account is a helpful tool for managing payment operations without worrying about compliance overhang. That said, banks evaluate these arrangements based on your unique use case, so it’s up to you (the business owner) to figure out the appropriate setup with your partner bank.

Aside from regulatory coverage, businesses may also open an FBO account for insurance purposes. In some cases, you can have up to $250,000 in FDIC insurance on each virtual account under an FBO account. For neobanks, this gives clients a personalized experience with insurance benefits.