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Companies that partner with a sponsor bank to offer FinTech and embedded banking products need a way to utilize an account structure that allows them to maintain data visibility and product flexibility, while still being compatible with their sponsor bank’s core.

Many sponsor banks began adopting an FBO account structure to solve this problem. While FBO accounts are not a new concept in banking, they’ve become the preferred account structure for sponsor banks to enable their non-bank partners to offer banking products. However, since this account structure comes with its own intricacies, getting the right data architecture and reconciliation infrastructure in place is key to operating efficiently and compliantly. 

So what are FBO accounts and how are they used? 

An FBO account is a type of trust account that is held at a bank “for the benefit of” multiple end users. In a typical bank account the account holder has sole ownership and control over the account. With FBO accounts, while a single entity may have ownership over the account, there are multiple “beneficiaries” or users who have control over moving money into and out of the account. 

While some people associate FBO accounts only with sponsor banking, trust-like account structures are used for a wide range of purposes such as, estate planning, inheritances, charitable spending, or IOLTA accounts for lawyers to hold funds on behalf of their clients. In all of these instances there is a single owner of the account, such as the lawyer in the IOLTA account example, and then there are multiple users or beneficiaries of the account, such as all of those lawyer’s clients. 

FBO accounts provide entities such as estate planners, law firms, nonprofits, and FinTech businesses with the ability to open a single account at a bank that can be used by multiple end users.

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How FBO accounts are used for sponsor banking programs

When a company partners with a sponsor bank to launch a FinTech or embedded banking product there needs to be alignment between all parties on how end user accounts are going to be structured in the bank’s core. There are two primary ways this is done today:

1. Utilize an FBO account structure, where a primary FBO account is created with end user sub-accounts leveling up to the primary account.
2. Have the partner integrate directly with the bank’s core, where each end user account is opened separately from each other. This does not require the usage of FBO accounts. 

The FBO account structure has become more and more popular as these types of partnerships have evolved. Utilizing FBO accounts provides unique benefits to the non-bank partner, such as:

• Better access to their end users’ data
• Ability to perform specific operations tasks
• Reduced technical integration
• Greater product flexibility by eliminating any technical restrictions from the sponsor bank’s core

FBO accounts open up the possibility for even more interesting and innovative financial products, while also reducing integration and configuration work by both the sponsor bank and their non-bank partner. 

However, this type of account structure also requires careful execution to ensure that accounts are set up properly and the bank has a clear idea of how money is moving throughout the entire program. 

To get a more granular view of money movement, typically multiple FBO accounts are created for each program. All of these program accounts serve a unique purpose, and can be broken into the following categories:

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End user accounts: this is the primary FBO account that stores all of the deposits for the end users’ checking or savings accounts. These accounts hold the funds for the end user and allow them to have control over the money movement of the funds.

Reserve accounts: in the case of an end user overdrafting their account, reserve accounts are set up and funded by the non-bank partner. This ensures the sponsor bank can always be made whole in the case of end users overdrafting their accounts. 

Suspense accounts: for incoming payments that cannot be automatically processed and assigned to an end user account, they are temporarily held in suspense. These transactions will be investigated by the payment operations team and the funds will be directed to the correct end user account or, if necessary, returned to the sender.

‍Settlement accounts: the settlement account tracks all the money entering and exiting the program from external sources, such as debit cards, ACH, or wires. The money from this account is then moved to the end user accounts.

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Mapping out this account structure, and the relationship between each account, sets a program up for success from the beginning. But as a bank’s program grows, a whole new host of considerations need to be taken into account in order to scale compliantly.

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4 Keys to Achieving FBO Account Success‍

1. Have a clear and well-defined data architecture

Banking data can be broken into three pillars: customers, accounts, and transactions. Each of these pillars needs to be structured correctly and seamlessly integrated with each other. This way each new end user that is onboarded is able to be attributed to a specific account. 

Having well structured banking data helps make it clear in the bank’s back-end who is utilizing each FBO account and what money movement actions they are taking. Maintaining this data structure throughout the lifecycle of the program makes you more effective at risk management and ensures you have the infrastructure in place to keep track of all money movement into, out of, and within the program.

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2. Understand the types of funds held in each FBO account

Some funds and types of financial products are inherently stickier than others. For banks to properly conduct their liquidity and capital allocation planning, it is important for them to know the types of funds that are held in each FBO account. 

When a bank clearly understands the type of end user accounts that are being created and the nature of those funds they are able to better mitigate risk and optimize liquidity and treasury management. 

There are two important questions that need to be answered:

1. What is the purpose of the product the FinTech or embedded banking provider is launching? For example, a FinTech product focused on saving will have users hold funds longer than a FinTech product that allows users to easily move money to international accounts. 
2. What is the purpose of each account? As we described above, different FBO accounts are set up for different purposes. Understanding the purpose of each account and the types of funds held in each will allow you to better anticipate how they will move.

This is also one of the many reasons why it’s important to never share FBO accounts between multiple programs. Since each program will act differently, having multiple programs in a single FBO account makes it much more difficult for banks to conduct their financial planning.

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3. Consistently reconcile the FBO funds against the sub-ledger 

In FinTech and embedded banking partnerships the non-bank company is required to keep an accurate and detailed ledger of all of their end user money movement and account balances. 

This sub-ledger needs to be continuously reconciled against the bank’s core to ensure that they are in agreement with each other. It can be common for there to be a slight difference between the two ledgers due to a timing difference on when the money movement is recorded, but both the bank and their partner should be aware of this timing difference and be able to account for any discrepancy between the two ledgers. 

Without a continuous and effective reconciliation process, discrepancies between ledgers can begin to quickly compound. At its worst this can result in missing customer funds or confusion around how much money is owed to each person. Inability to have this clarity of fund ownership will lead to consent orders for the banks and possibly the freezing of program funds until clear fund ownership is re-established, with severe consequences also for the end users and owners of these funds.

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4. Ensure the balance of the FBO covers the total amount of deposits

This one may sound self-explanatory, but as is the case in banking, there are always the edge cases. 

The FBO account that contains all of the end user funds needs to be enough to cover the total deposit amount, excluding overdrawn accounts.

For example, let’s say a FinTech has 1,000 customers and 10 of those customers have overdrawn accounts, totalling a negative $10,000 balance. Then the other 990 customers have a total of $1,000,000 in deposits. Using simple accounting the total positive balance of those end users is $990,000. 

However, banks need to ensure they keep a total of $1,000,000 in the FBO account so that the positive balance held by end users is available at all times. This way everyone with a positive balance can be made whole, regardless of the amount of negative balance accounts. 

The sum of all positive balances should always be your proof point as a bank.  

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Utilizing FBO accounts can provide sponsor banks and their partners launching banking products with an infrastructure that maximizes flexibility, data accessibility, and collaboration. When the partners work together in coordination with each other they’re able to form stronger partnerships and, ultimately, more resilient lines of defense against bad actors. 

However, the right infrastructure and processes need to be in place to ensure end user funds can be properly accounted for and their data is accurate. The Synctera Platform was built using an FBO account structure, with the proper controls and data architecture needed to operate an effective sponsor banking program. Get in touch with our team to learn more.

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