Contents
Key Takeaways
A segregated account is a transparent and traceable bank account used by a financial service provider such as fintech companies to store a client’s money separately. This is a mandatory legal requirement to ensure a client’s funds are protected from company debts or bankruptcy, and any form of misuse.
Introduction
It is no longer the norm to just keep your money in your local bank account. As our society enters the digital age, financial technology has flourished, and with it, countless financial products and services have been introduced into the market, allowing us to better manage and leverage our assets. These include digital banks for quicker account openings and efficient cross-border funds transfers, different payment solutions for your business, and investment platforms like brokerage apps for personal investments.
But are they safe? How do you know you can trust them with your money? Where are your funds stored and secured?
In this article, we will explain the concept of a segregated account: what it is and how digital banks and fintech companies use it to shield their customers’ funds.
What is a segregated account?
Segregated accounts are separate bank accounts where a company stores its clients’ money. They are required by law, preventing the clients’ money from being mixed with the company’s own funds, and also prohibits the company from misusing the clients’ money. More importantly, in the event of the company going bankrupt or undergoing financial problems, your funds will remain protected.
Segregated accounts are often used by companies which handle third party funds such as digital banks, payment service providers or investment firms. They are heavily regulated and deemed mandatory by many financial authorities such as the Securities and Futures Commission of Hong Kong (SFC) and the United States Securities and Exchange Commission (SEC).
Although the client’s funds will be under the company’s name when stored in a segregated account, the company is only managing the money on behalf of the client. It is prohibited from reallocating those funds to pay for its own debts, liabilities or its daily business operations. Segregated accounts are specifically designed to keep a client’s funds from being exposed to various risks.
How does a segregated account work?
A segregated account is transparent and traceable. A client has the right to track their money and ensure it is being managed properly.
When the client makes a deposit, the money is transferred to the segregated account specifically opened for the client. This is an independent account, distinct from the company’s own corporate account. The funds stored inside that account will be separated from the company’s account and will not be relocated without consent.
It is important to note that if you are planning to deposit funds with a third party financial service provider, remember to ask them about their policies on segregated accounts. It is a key indicator that the company takes the safety of your funds seriously.
Who needs a segregated account ?
In most jurisdictions, a segregated account is a mandatory compliance practice for any company that manages a customer’s money on their behalf. This includes fintech companies like brokerage apps, third-party payment service providers, or digital banks, as well as traditional entities such as asset management or investment firms.
These companies are required to open a segregated account for each of their customers. But where do they actually store the money? This is where licensed banks (also known as traditional banks) come in.
Licensed financial institutions, such as banks, provide the segregated accounts as a safe destination for your funds. Fintech companies would partner up with a local bank (also known as a bank partner) to store their funds. This ensures enhanced security for their customers’ funds and satisfies legislative compliance with local authorities.
This partnership allows non-bank entities to offer banking features, such as accounts and payment processing, by leveraging their bank partner’s charter and infrastructure.
Pros and Cons of a segregated account
Segregated accounts offer significant benefits legally and financially, including:
- Legitimacy & Transparency : Companies that use segregated accounts prove that they take the safety of their clients’ funds seriously and are willing to be transparent in their operations. This builds a solid foundation to earn a client’s trust.
- Asset Protection: Segregated accounts provide enhanced security for your money. Even if the company faces a financial crisis and files for bankruptcy, your money remains protected. Having a segregated account also indicates a working relationship with a licensed bank. The compliance standards of a licensed financial institution can significantly reduce the risk of fraudulent activities by the company.
As promising as segregated accounts seem, there are a few potential pitfalls you might want to consider:
- Hidden charges: Some companies may charge you money for opening and maintaining a segregated account on your behalf. Remember to read the terms and conditions and their pricing details carefully before making a decision.
- Compliance challenges: Each country has its own laws and regulations. Requirements could vary for a company to be able to partner up with a local bank and provide segregated accounts in a particular region. Some companies might still offer services in a certain area without having the necessary qualifications to open segregated accounts; in this case, your assets will not be protected if something goes wrong. Make sure which region the company is allowed to operate in. If they are licensed, you should be able to find them in your local government database.
Final Note
In conclusion, segregated accounts serve as a legal guardian for your money. By placing your funds in a separate, transparent and traceable bank account, it is a great risk mitigation practice that keeps the funds away from the company’s own funds, preventing any form of exposure and misuse.
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Frequently Asked Questions
1. What is a segregated account?
A segregated account is a transparent and traceable bank account used by a financial service provider such as fin-tech companies to store a client’s money separately. This is a mandatory legal requirement to ensure a client’s funds are protected from company debts or bankruptcy, and any form of misuse.
2. What is the difference between segregated accounts and non-segregated accounts?
A non-segregated account is one in which a client’s money is not stored separately from the company’s own funds. The funds are mixed with the company’s assets and are not protected if something goes wrong, such as company bankruptcy or fraud.
3. What is an example of a segregated account?
An example of a segregated account is when an investment platform stores a client’s money in a transparent and traceable account that is distinct from the platform’s own corporate bank account.
4. How do segregated accounts protect my assets?
In the event that a company files for bankruptcy, your assets in a segregated account will not be counted as part of the company’s assets. Although the funds are held under the company’s name, they are stored in a separate account, making them unavailable to creditors and allowing you to recover your assets.
5. What is the best segregated accounts?
Many financial service providers are able to offer segregated accounts; it depends on what you are looking for. Just remember to always choose a fully licensed and compliant service provider before you deposit your money. Fintech companies are legally required to disclose the types of licenses they hold in their operating jurisdictions, which can be found on their websites and in local government databases.
