Understanding FBO Account Requirements

JUL 20 24

This is Part 1 of a 3-part series on neobank infrastructure for healthcare. Part 2 covers the partnership decision. Part 3 analyzes unit economics.

When I started building CLIN as a neobank for dental practices, I thought holding healthcare money would be similar to consumer fintech. Send some APIs, get banking infrastructure, launch quickly. I was wrong on every assumption.

Healthcare practices handle money differently than consumers. Regulatory requirements are stricter. Settlement patterns follow treatment cycles, not paycheck schedules. And the compliance burden makes consumer banking infrastructure inadequate for professional practice needs.

Here's what it actually takes to hold healthcare money—from SFTP settlement file mechanics to BTR reconciliation processes—and why most fintech infrastructure isn't built for the operational complexity healthcare practices require.

FBO Accounts: More Complex Than Consumer Banking

For Benefit Of (FBO) accounts form the foundation of neobank infrastructure. Your startup doesn't get a banking license—instead, you partner with a chartered bank that holds customer funds "for your benefit." Simple in theory, complex in healthcare practice.

Consumer FBO Setup

Consumer fintech FBO accounts are straightforward:

  • Single master account at partner bank
  • Customer funds pooled with simple ledger tracking
  • Daily or real-time settlement to customer accounts
  • KYC requirements focus on individual identity verification

Healthcare Practice FBO Requirements

Healthcare practices need segregated account structures:

  • Professional liability separation: Practice funds must be separated from personal funds for liability protection
  • Trust accounting: Many practices handle patient payments in trust until services are rendered
  • Insurance receivables: Separate tracking for insurance company payments vs patient payments
  • Regulatory compliance: State professional license requirements may mandate specific account structures

The complexity multiplies when practices operate across state lines. Each state has different requirements for professional fund handling.

Real Implementation Costs

Setting up healthcare-compliant FBO accounts cost us significantly more than consumer alternatives:

Initial setup costs:

  • Partner bank compliance review: $15,000-25,000
  • Legal review of healthcare-specific terms: $8,000-12,000
  • Technical integration for segregated ledgers: 4-6 months developer time
  • State-by-state regulatory review: $3,000-5,000 per state

Ongoing monthly costs:

  • Enhanced KYC/KYB verification: $8-12 per practice vs $2-3 per consumer
  • Account maintenance fees: $25-40 per practice vs $3-5 per consumer
  • Compliance monitoring: $150-300 per practice monthly
  • Professional liability insurance: Additional $50k annually

Daily Settlement Mechanics for Healthcare

Consumer fintech assumes predictable money movement patterns. Healthcare practices follow treatment and billing cycles that create unique settlement requirements. Understanding these patterns requires deep knowledge of banking settlement rails—from ACH batch processing to RTP instant settlement to the SFTP + PGP encrypted file transfers that make it all work.

Healthcare-Specific Settlement Patterns

Treatment-based cash flow: Dental practices receive payments tied to patient visit schedules, not regular payroll deposits. Monday mornings see higher volumes as weekend emergency treatments get billed.

Insurance reimbursement timing: Insurance companies pay practices on different schedules—some weekly, some monthly, some quarterly. Settlement systems must handle irregular large deposits without triggering fraud alerts.

Patient payment methods: Healthcare practices accept cash, cards, checks, and payment plans. Each requires different settlement timing and compliance tracking.

Seasonal variations: Practice revenue fluctuates seasonally—low in December/January due to patient deferrals, high in September as patients use remaining insurance benefits.

Technical Implementation

Healthcare settlement systems need different architecture than consumer systems. At the rails level, this means handling multiple settlement methods within the same practice account structure:

// Consumer settlement logic
const settlement = {
  frequency: 'daily',
  amount: calculateDailyBalance(),
  destination: userAccount,
  timing: 'automatic'
}

// Healthcare settlement logic  
const settlement = {
  frequency: 'configurable', // practices set own timing
  amount: calculateByPaymentType(), // separate insurance vs patient
  destination: getSegregatedAccounts(), // professional vs personal
  timing: 'practice-controlled', // practices control timing
  compliance: validateStateRequirements(), // state-specific rules
  insurance: trackReceivablesByPayer(), // insurance company tracking
  railsMethod: determineOptimalRails(), // ACH vs RTP vs wire
  reconciliation: {
    btr: processBankTransferReceipts(),
    imad: trackInternationalTransfers(),
    omad: handleOriginalMessages()
  }
}

The reconciliation reality: Each settlement method generates different reconciliation files. ACH creates BTR (Bank Transfer Receipt) files for tracking. Wire transfers generate IMAD/OMAD files for international monitoring. RTP creates ISO 20022 receipts. A healthcare neobank must process all these file formats, often receiving them via SFTP with PGP encryption from partner banks.

This complexity requires custom development that adds months to implementation timelines and ongoing operational overhead most consumer fintechs never encounter.

KYC/KYB for Healthcare Practices

Know Your Customer (KYC) for healthcare practices involves verification requirements that consumer fintech doesn't encounter.

Professional License Verification

Every healthcare practice must provide:

  • DEA registration numbers: For practices prescribing medications
  • State professional licenses: Different requirements by state
  • NPI (National Provider Identifier): Required for insurance billing
  • State board standing: Verification of license status and disciplinary history

Business Entity Verification (KYB)

Healthcare practices operate under complex business structures:

  • Professional corporations: Different rules than standard corporations
  • Partnership structures: Multiple practitioners with different liability arrangements
  • Practice ownership: Verification of who actually owns the practice vs who manages it

Ongoing Compliance Monitoring

Consumer KYC is typically a one-time verification. Healthcare practices require ongoing monitoring:

  • License renewal tracking: Professional licenses expire and must be renewed
  • Disciplinary action monitoring: State boards can suspend or revoke licenses
  • Insurance network changes: Practice participation in insurance networks affects compliance requirements
  • Ownership change verification: Practice sales or partnership changes require re-verification

Real Compliance Costs

Healthcare KYC/KYB verification costs more than consumer alternatives:

Initial verification per practice:

  • Professional license verification: $15-25 per license checked
  • DEA registration verification: $8-12 per registration
  • Business entity verification: $25-40 per practice
  • Insurance network verification: $5-10 per network checked
  • CTA BOI (Corporate Transparency Act Beneficial Ownership Information) filing: $35-50 per practice

Ongoing monitoring per practice:

  • Monthly license status checks: $3-5 per practice
  • Quarterly compliance review: $15-25 per practice
  • Annual full re-verification: $50-75 per practice
  • CTA BOI annual updates: $25-35 per practice

The new CTA reality: Since January 2024, the Corporate Transparency Act requires healthcare practices to file Beneficial Ownership Information with FinCEN. Most practices don't know about this requirement, but neobanks serving them must verify compliance. This adds another layer of KYB complexity and cost that consumer fintechs don't face.

These costs add up quickly when serving hundreds of practices.

Healthcare-Specific Compliance Requirements

Healthcare money movement involves regulations that consumer fintech never encounters.

HIPAA Considerations

While practice financial data isn't technically PHI (Protected Health Information), practices often commingle financial and patient data. Banking platforms serving healthcare must:

  • Implement HIPAA-compliant data handling procedures
  • Provide Business Associate Agreements (BAAs)
  • Maintain audit trails that satisfy healthcare compliance requirements
  • Segregate systems handling financial vs patient data

State Professional Regulations

Each state regulates how healthcare professionals handle money:

  • Trust account requirements: Some states require patient payments to be held in trust until services are rendered
  • Professional liability implications: How practice funds are held affects professional liability coverage
  • State board reporting: Some states require reporting of banking relationships for licensed professionals

Federal Healthcare Regulations

Healthcare practices operate under federal oversight that affects banking:

  • Stark Law compliance: Referral relationship regulations affect how practices can receive and distribute payments
  • Anti-kickback statutes: How practices receive payments from other healthcare entities is regulated
  • Medicare/Medicaid compliance: Practices billing government programs face additional financial oversight

Why Consumer Banking Infrastructure Fails

Most fintech banking infrastructure is built for consumer use cases. Healthcare practices need different capabilities:

Account Structure Limitations

Consumer banking assumes single-purpose accounts. Healthcare practices need:

  • Multiple segregated account types within one practice
  • Trust account capabilities for patient payments
  • Separate tracking for different payment sources
  • Professional liability-compliant fund separation

Settlement Timing Mismatches

Consumer fintech optimizes for quick, predictable settlements. Healthcare practices need:

  • Configurable settlement timing based on practice cash flow needs
  • Separate settlement streams for insurance vs patient payments
  • Integration with practice management systems for automatic reconciliation
  • Seasonal adjustment capabilities for healthcare business cycles

Compliance Gap

Consumer KYC focuses on fraud prevention. Healthcare KYB requires:

  • Professional license verification and monitoring
  • Business entity compliance tracking
  • Ongoing regulatory status monitoring
  • State-specific healthcare regulation compliance

The Partnership Reality

After six months of trying to build healthcare-specific FBO infrastructure, we realized the complexity exceeded our technical and compliance capabilities. Healthcare banking is fundamentally different architecture requiring different rails knowledge, settlement file processing, and compliance monitoring.

The technical infrastructure gap: Consumer fintech platforms couldn't handle the complexity of BTR/IMAD/OMAD reconciliation files that come with healthcare practice banking. They couldn't process SFTP + PGP encrypted settlement files from multiple bank partners. And they couldn't maintain the ongoing compliance monitoring that healthcare KYB requires.

We needed partners who understood both the banking rails complexity and the healthcare regulatory environment—a rare combination that took months to find and evaluate.

This realization led us to evaluate partnership options with existing healthcare-focused banking infrastructure providers. The decision between building vs partnering became the critical choice that determined our entire product timeline.

Next: Part 2 covers the partnership evaluation process and why building healthcare banking infrastructure as a startup is nearly impossible.

-AM
arvindmurthy at gmail

Data sources: CLIN neobank development documentation, banking partnership analysis (2024-2025), Federal Reserve FBO account guidelines, state professional licensing requirements