Flow of Funds for US-Based MSBs

Executive Summary

MSBs (Money Services Businesses) in the US are heavily regulated under federal and state frameworks.
Understanding the flow of funds helps ensure compliance, traceability, and financial efficiency.
The flow typically includes customer onboarding, transaction initiation, holding accounts, settlement processes, and reporting.
Key stakeholders include banks, payment processors, regulators, and the MSBs themselves.
Challenges include banking access, AML compliance, and maintaining transparent record-keeping systems.

Definition of Flow of Funds for US-Based MSBs

The “flow of funds” for US-based Money Services Businesses refers to the end-to-end process through which customer money is accepted, held, moved, settled, and recorded. It tracks how funds enter an MSB’s ecosystem, transit through intermediaries like banks and payment processors, and eventually reach their destination, whether domestically or cross-border.

Background / Backstory on Flow of Funds for US-Based MSBs

Money Services Businesses in the US offer services like money transmission, currency exchange, and payment processing. They play a crucial role in domestic and international remittances, especially for underbanked populations. However, due to their exposure to financial crime risks like money laundering and fraud, they face intense scrutiny from regulators such as FinCEN (Financial Crimes Enforcement Network) and state financial authorities.

Historically, MSBs have struggled with “de-risking” from traditional banks, which has made understanding and documenting the flow of funds even more critical for retaining banking partnerships and meeting compliance expectations.

How Flow of Funds for US-Based MSBs is Used in the Industry Today

The Flow of Funds for US-Based MSB operations, and includes:

Customer Onboarding: KYC/AML procedures before accepting funds.
Transaction Execution: Capturing transaction details, routing payments through banking/payment channels.
Holding and Settlement Accounts: Use of pooled accounts, FBO (For Benefit Of) structures, or trust accounts.
Clearing and Settlement: Coordination with banks, card networks, or blockchain protocols.
Reporting: Filing SARs (Suspicious Activity Reports), CTRs (Currency Transaction Reports), and state-level compliance documents.

How Flow of Funds for US-Based MSBs Works:

Step-by-Step with Examples

Customer Sends Funds A customer walks into a money transmitter branch or uses an app to send $500 to a recipient in Mexico.
Funds Collected in MSB Holding Account The MSB collects the funds into a pooled or operating account. These are often held at a partner bank under the MSB’s name or as an FBO account.
Transaction Routed via Payment Network The MSB routes the transaction through a SWIFT wire, ACH transfer, or crypto rails (if approved), using a third-party partner or correspondent banking system.
Settlement and Disbursement Funds arrive in Mexico, where a local payout partner or bank disburses the equivalent amount to the recipient in pesos.

Example 1:

A New York-based MSB collects remittance payments from clients via mobile app and routes them through a partner bank to disburse cash in the Philippines via a local payout partner.

Example 2:

A Texas-based MSB uses a trust account structure. All customer funds are separated from operating funds and routed through payment processors to settle payments with overseas merchants.

Simple Analogy

Think of the flow of funds like a water system:

Customers are the faucets pouring in money.
The MSB’s holding accounts are water tanks collecting it.
Banks and processors are the pipes that carry water to different destinations.
Regulators are like inspectors ensuring that the pipes are clean, well-labeled, and not leaking.

ELI5 (Explain Like I’m 5)

Imagine your friend wants to send you candy from far away. They give the candy to a delivery service (MSB), which then uses a truck (bank) and airplane (payment processor) to get the candy to your house. The service must keep track of every step so no candy gets lost and so grown-ups (regulators) can make sure it’s done safely.

Stakeholders and Implementation

Key Stakeholders:

MSBs: Managing KYC, compliance, and operations.
Banks: Holding accounts and executing transfers.
Payment Networks: Routing and settlement infrastructure (ACH, SWIFT, card networks).
Regulators: FinCEN, OFAC, state banking departments.

Implementation Considerations:

Setting up FBO or trust accounts to separate customer and operational funds.
Partnering with reliable banks and PSPs.
Automating compliance workflows (e.g., transaction monitoring).
Handling real-time FX conversion or crypto-to-fiat processing (if applicable).

Pros & Cons of Flow of Funds for US-Based MSBs

Pros:

Transparent fund tracking enhances compliance.
Efficient fund flow boosts customer satisfaction.
Helps MSBs secure and retain bank relationships.

Cons:

Complex infrastructure and high setup costs.
Risk of losing banking access without sufficient oversight.
Constant regulatory updates require flexible systems.

Future Outlook

Banking-as-a-Service (BaaS) models may ease access to financial infrastructure.
Crypto-integrated flows could become more common, especially in high-volume corridors.
AI-driven compliance tools will help automate real-time monitoring.
RegTech partnerships may emerge as vital components of MSB operations.