When should (or shouldn’t) your business be in the flow of funds?

The “flow of funds” refers to the movement of money between two or more bank accounts, often passing through several intermediary steps before reaching its destination. These accounts may belong to you, a third-party processor, a vendor, or a customer. 

If your business is “in the flow of funds,” at some point in the transaction process, money passes through an account you control – whether briefly or for extended periods. Activities might include receiving, holding, processing, or disbursing funds, such as managing escrow payments in real estate transactions.

Why does “the flow of funds" matter to you?

The flow of funds isn’t just about moving money – it also comes with responsibilities related to compliance, regulation, and operational risk. Companies that directly handle payments, settlements, or financial transactions are subject to greater scrutiny, facing heightened fraud risks, liability, and regulatory enforcement. Whether you’re a payment processor, marketplace, or financial intermediary, being in the flow of funds means taking on significant compliance responsibilities and may require you to get licensed.

And those responsibilities are only growing. Last year, businesses surveyed by Creditsafe reported more data privacy breaches (67%), more financial and tax compliance issues (64%), and more sanctions (53%). Despite this, 59% of companies report compromising on compliance due to business pressures, highlighting the challenge of balancing risk with operational efficiency.

So, how do you decide whether to be in the flow of funds or let a trusted partner handle it? Let’s break down the key considerations and explore the tools businesses use to strike the right balance.

When should your business be in the flow of funds?

Being in the flow of funds may be essential, depending on your business model and the types of transactions you’re processing. Here are a few scenarios where it makes sense for you to be directly involved in moving money.

• Your business model relies on direct money management.

You may need to handle funds directly if your platform is an eCommerce site, marketplace, or B2B payments provider. These businesses typically require managing transactions and money movement to ensure smooth, secure operations.

• Your business involves high-stakes transactions.

Certain transactions, such as cross-border payments, large-scale payouts, or recurring billing models, might require your business to be in the flow. Managing the flow of funds may be necessary if you’re facilitating complex or high-value transactions.

• You’re in a highly regulated industry.

Compliance is just par for the course if your business operates in a highly regulated industry, such as financial services or payments. You’ll need to understand the local and international laws governing the movement of funds and do your best to comply.

If your business fits into these categories, managing the flow of funds means more than just processing transactions. It requires building infrastructure for compliance, security, and regulatory oversight.

Still deciding whether to build these capabilities in-house or partner with a provider? Our build vs. buy guide helps you navigate the hidden costs, licensing hurdles, and time-to-market trade-offs to make the right decision. 

What it takes to handle funds legally: understanding licensing

Before you can move or hold money on behalf of customers, you may need to secure a Money Transmitter License (MTL) or prove that your business qualifies for an exemption. Requirements vary by country, and in the US, they’re handled at the state level.

There’s no shortcut:

• Licenses must be obtained one state at a time, with no passporting across borders.

• The process can take 12 to 24 months in states like California and New York.

• Costs can total hundreds of thousands of dollars for application fees, surety bonds, legal help, and annual compliance.

Because of the time and cost involved, many businesses opt to partner with a licensed third party instead of going it alone.

The risks of being in the flow of funds

The moment your business touches money, new risks emerge. From strict regulatory compliance requirements to the ever-present threat of fraud and financial liability, a misstep can carry serious consequences for your company. 

Here's a breakdown of what’s at stake.

Staying compliant is costly and complex.

When you move or hold money, you must comply with Anti-Money Laundering (AML) laws, Know Your Customer (KYC) requirements, and specific laws like the Bank Secrecy Act (BSA), USA PATRIOT Act, General Data Protection Regulation (GDPR), and Payment Card Industry Data Security Standard (PCI DSS), among others. 

Failure to comply can result in hefty fines, criminal liability, or even the loss of your operating license.

Bad actors are always looking for a way in.

Wherever money moves, fraudsters follow. The risks include:

• Account takeovers: Hackers may use phishing, malware, or credential stuffing to gain control of customer accounts and divert funds.

• Identity theft: Cybercriminals may steal personal information to access accounts and initiate unauthorized transactions, putting you and your customers at risk.

• Chargebacks and disputes: Customers can dispute transactions, forcing you to prove their legitimacy or absorb financial losses.

Missteps are expensive. 

Your business may be held responsible for covering lost funds due to fraud, operational errors, or compliance violations. Enforcement actions doubled from 2023 to 2024, with US regulators charging financial institutions over $4.3 billion in fines for AML and transaction monitoring violations. 

Errors in handling funds can lead to chargebacks, customer reimbursements, and even lawsuits from regulators or third parties. Penalties for non-compliance or negligence can be severe, ranging from significant fines to criminal charges if authorities decide that willful misconduct or gross negligence has occurred.

Lost trust is hard to win back.

Your company's credibility is on the line once financial mishaps or regulatory failures become public. Legal battles, negative media coverage, and lost customer trust can erode your brand’s reputation, making it challenging to regain confidence or attract new business. Even if you rectify the issue financially, the perception of insecurity may linger.

When should you NOT be in the flow of funds?

While being in the flow of funds might be a requirement for some businesses, with all these potential liabilities, it’s worth asking: Does your business need to handle customer funds directly? For many, outsourcing some (or all) responsibility to a regulated third-party payment processor can reduce risk, ensure compliance, and provide greater peace of mind. 

Consider these scenarios where you might not need to handle customer funds directly:

• You’re not licensed or regulated for financial transactions.

If your business isn't authorized or licensed to handle money transmission, escrow services, or financial data processing, handling funds may unnecessarily expose you to risk. For example, businesses in industries such as online marketplaces or freelance platforms often require specific licenses to handle payments.

• Your business is small or has limited transaction volume.

Outsourcing might be more efficient if your business only handles a small number of transactions and doesn’t need in-house payment processing. For example, a local artisan selling through an eCommerce platform may not need to manage funds directly.

• You face a high risk of financial disputes and chargebacks.

Outsourcing fund handling reduces exposure if your business deals with high-risk transactions, like digital goods, subscriptions, or international payments, where chargebacks are common. For instance, online services offering trial periods can face chargebacks that third-party processors could offset.

• You lack the necessary security infrastructure.

If your business doesn’t have encryption technology or PCI compliance expertise to secure payment data, you might be better off outsourcing. For instance, if you’re a small retailer and can’t invest in secure payment gateways, using a third-party provider would help protect your business and your customers.

• Escrow or trust fund management isn't in your wheelhouse.

If you’re not experienced with managing complex financial processes like escrow accounts or trust funds, it’s best to leave it to the experts. This is especially true for industries like real estate or legal services, where funds may need to be held in trust for extended periods.

• Outsourcing is more cost-effective and efficient.

If managing payments in-house is costly, requiring payment systems, compliance checks, fraud prevention, and more, it can make sense to use a third-party service provider that assumes the liability. 

How Airwallex supports both models

Whether you decide to take on the responsibility of being in the flow of funds or prefer to stay out of it, Airwallex offers solutions for both scenarios.

For businesses that need to be in the flow of funds 

When you need to be directly involved in the flow of funds, Airwallex provides compliance-friendly infrastructure to support treasury operations and payouts. 

Global Treasury helps you:

• Overcome regulatory complexity using Airwallex’s 60 licenses and registrations so you don't need to obtain licenses independently, market by market.

• Collect funds globally through local clearing systems, SWIFT, or Direct Debits – all into your Global Accounts, which function like local bank accounts. You can also link to verified external accounts where they are supported.

• Safely share account information via open banking, enabling customers to automatically accept requests from third-party providers via our API and securely share account information.

• Simplify deployment with pre-built components that offer a conversion-optimized, frictionless onboarding experience without the hassle of building your own native flow.

• Offload global KYC requirements to Airwallex, allowing you to focus on running your core business.

For businesses that don’t want to manage funds directly

If your business prefers not to manage funds directly, Airwallex’s embedded finance solutions can help offload the responsibility, so you can focus on what you do best. 

Here’s how we help you manage money movement without getting involved in the flow of funds.

• Transactional FX: Offer competitive currency conversion rates to your customers without holding or managing funds directly.

• Payouts: Process payments to suppliers, contractors, or employees across borders without being involved in the flow of customer funds.

• Issuing: Distribute virtual or physical cards to your customers, employees, or vendors, streamlining your payments experience without managing the underlying transactions.

• Banking as a Service: offer banking-like features, such as payments, balances, and cards, on your platform without having to manage funds or worry about compliance. 

With Airwallex, you can provide financial services to your customers, manage money movement efficiently, and stay compliant – all without touching the funds yourself. Book a demo with our team to get started today.