Federal Reserve Establishes Novel Activities Supervision Program for Bank-Fintech Partnerships

On August 29, 2023, the Federal Reserve Board issued letters formally establishing a Novel Activities Supervision Program aimed at supervising banks engaged in complex, technology-driven partnerships with nonbank entities, including fintechs. The program specifically targets arrangements involving application programming interfaces (APIs) and automated infrastructure access that characterize modern banking-as-a-service relationships. The initiative reflects growing regulatory concern over the risks posed by bank-fintech partnerships, where licensed banks provide regulated services to fintechs that interact directly with end consumers.

The program joins parallel efforts by the OCC, which had already increased oversight requirements for partner banks such as Blue Ridge Bank following compliance violations. The Fed's move is expected to impose new supervisory expectations on the more than 50 US partner banks that power fintech services. No specific financial penalties or fee structures were disclosed, but the program establishes a framework for ongoing examination of novel banking activities.

The initiative is widely seen as a defining moment for the BaaS industry's regulatory landscape.