What is an FBO account, and does it replace the need for money transmitter licensing?

FBO means “for benefit of.” In a typical fintech arrangement, money is held at a bank for customers, with records identifying who owns what. The arrangement may involve a pooled account rather than a separate bank account for every customer.

I separate two questions here. First, how are the funds held and accounted for? Second, what authority allows the business to provide the payment service? An FBO arrangement addresses the first question. Its label does not, by itself, answer the second.

If someone offers you an FBO account, ask who the account holder is, who the beneficial owners are, who maintains the customer ledger and how that ledger is reconciled with the bank. Then ask what activities the provider has approved and whether your role requires licensing, an authorized agency arrangement or a relevant exemption.

Deposit insurance is another distinct issue. Eligible customer deposits may receive pass-through FDIC insurance when the ownership, disclosure and recordkeeping requirements are satisfied. Simply putting “FBO” in an account name is insufficient. FDIC pass-through guidance.

Also, FDIC insurance protects eligible deposits against the insured bank’s failure; it does not insure the fintech against its own insolvency. FDIC guidance on third-party apps.

So my question to the provider is straightforward: What exactly does this account arrangement solve, and what legal and operational responsibilities are still ours?