Sprinting Ahead: How the Fed’s Novel Activities Program Legitimizes Bank Business Models that Capitalize on their Land Rights

  • Blog
  • August 11, 2023
  • Sarah Howell, Head of Partnerships

In the 1800’s disparate railroads were built and eventually interlinked, establishing the transcontinental railroad system. As part of this massive project, railroads acquired land rights to lay their tracks across private land.

In the 1900s, when other forms of transportation became more prevalent and the railroads’ existing business model was threatened, they pivoted to an additional business model. In this model, they began to capitalize on their land rights by leasing them to telegraph, telephone and telecom providers.

With this revolutionary pivot, the railroads essentially established the internet infrastructure providers of the 21st century. One such example is how Southern Pacific Railroad became the catalyst for the SPRINT telecom network in the 1970s, that merged with T-Mobile in 2020.

The railroads of the 19th century, unknowingly shaped internet history because they capitalized on their land rights.

Just like railroads, financial institutions have land rights. Land rights that enable non-banks to access the financial system. These land rights have been capitalized on by savvy banks and credit unions that have recognized the value of BaaS and embedded finance and have committed the organizational change efforts needed to pivot into this additional business model.

The Federal Reserve’s recent creation of the Novel Activities Supervision Program is both an acknowledgement of this innovative model and a move to standardize the oversight of financial institutions (FI) who capitalize on their land rights.

At Infinant, we believe this program is a watershed moment for the financial services industry because it legitimizes and installs this business model into the financial fabric of our society. Additionally, it reinforces the FI’s critical role in the value chain. Banks are not a supplier to a fintech or a brand. They are gatekeepers and trust anchors of our economy, and they alone possess the land rights that protect our financial system.

There is speculation around the outcomes of this new Fed program, such as:

  • The standardization of regs and establishment of measurable standards.
  • Higher Tier 1 capital requirements for FIs included in the program, thereby pushing BaaS further up market.
  • The emergence of FI led inter-bank marketplaces that emulate the BaaS middleware providers’ model of distributing deposits, loans and financial products across a network of banks.

At this point, it’s too soon to tell what the outcomes will be, but one thing is certain, we are at a critical point in our industry. And those FIs who are included in this program are in a full sprint ahead toward shaping the future.