Born from business need
How business, innovation and intellectual property are evolving together at TD Bank
In 2010 TD Bank observed a worrying pattern emerging among leading US banks; they were ramping up the size of their patent portfolios at a speed which had never been seen before. Bank of America was leading the game with filing rates on par with some tech giants (eg, Adobe and NVIDIA) with many of the other key banking players following suit. The applications were largely directed towards the emerging utility of online and smartphone banking, coupled with a broad focus on digitalisation across the enterprise – all the areas that TD stated it was targeting for revenue growth and cost reductions. The advent of technology empowered innovation in financial services, or fintech, in the same markets a few years later galvanised TD’s resolve.
“The banking industry has largely avoided patents as business risk. However, as we increasingly leverage technology to deliver and distinguish our services, patents become relevant. Patents are a long game and they’re here to stay in the banking industry. We need to start mitigating our risk now,” Josh Death, TD’s associate vice president of intellectual property and patentable innovation told the company’s enterprise risk management committee.
TD is now the sixth largest bank in North America by assets and serves more than 25 million customers in three key businesses operating in financial centres around the globe. With more than 13 million active digital and mobile customers, it is focused on re-imagining the banking experience and growing customer engagement across all of its digital and physical platforms. As Rizwan Khalfan, TD’s chief digital and payments officer, says: “Our customers are at the heart of everything we do. It’s our job to make it easy for them to bank with us – when and how they want. To deliver on this promise, we’re focused on creating personalised experiences that empower our customers and give them more confidence in their financial future.” In addition to acquiring and partnering with fintech companies and building in-house capabilities, IP investment has now become an important pillar of TD’s overall innovation strategy.
Rapid digitalisation of financial services
Fintech is quickly disrupting the financial services sector. Initially automating and improving back-end processes, fintech has now shifted into more consumer-facing applications. Further boosted by changes in the regulatory environment and consumer trust in digital challengers and major tech firms, growth in the fintech sector has been substantial – with some forecasts suggesting a compound annual growth rate of 50% over the next five years.
Some of the most prominent use cases for fintech today include seamless payments, automated insurance claims, wealth management driven by AI and credit risk management, in relation to which substantial investments are being made. The four largest banks in the United States (Bank of America, JP Morgan Chase, CitiGroup and Wells Fargo) all expect to spend between $8 billion and $11.4 billion on technology this year. More importantly, the banks are expected to focus 20-30% of this budget on emerging technologies and the development of new services according to analyst reports. Meanwhile, investment activity in fintech capital markets has been gathering pace and amounted to more than $100 billion in 2018.
Figure 1. Bank patent portfolio growth, 2007 versus 2017 (all IPC classes)
Source: Analysis using PatentSight
Figure 2. Fintech patent portfolios of tech companies (fintech IPC classes)
Source: Analysis using PatentSight
From the side, the Silicon Valley technology companies are advancing their positions, with Apple and Google offering leading mobile payment solutions and Amazon expanding more into financial services to support its core business, blurring the line between a financial services player and a technology company. In another ambitious move from Silicon Valley, Facebook recently announced that its cryptocurrency Libra will be launching in the first half of 2020. With a blockchain built for speed, which is overseen by a third-party, not-for-profit association, Libra could be one of the many new technologies that disrupt the financial services industry in the coming years.
Although much of the discussion is centered around the US fintech ecosystem, China is also taking a leading role in innovation. From an adoption perspective, there are now close to 600 million people in China using mobile payment solutions through services such as Alipay and WeChat Pay, according to the China Internet Network Information Centre. This puts China well ahead of the development curve for mobile payments and is driving further innovation in the field. In addition, technologies such as AI have been given priority development status in China, boosting fintech innovation in applications such as AI-powered lending solutions for the currently underserved SME lending business.
Figure 3. Percentage of graduates entering the finance or tech sector
Source: The Economist, ‘Greener Grass’, 2017
Figure 4. Mastercard and Visa’s technology distribution
Source: Analysis using PatentSight
There are several factors driving the ongoing fintech patent arms race, including a growing dependency on technology firms, which are ramping up their portfolios in fintech and already hold strong positions in essential digital technology. For example, the fintech patent portfolios (as estimated by fintech-relevant International Patent Classification classes) of the largest 10 banks in the United States combined are still smaller than IBM’s portfolio alone. These same technology firms continue to attract ever larger proportions of top engineering and business talent at the expense of not least the financial sector, making it more difficult to attain capabilities in core areas such as AI.
Among payment solution providers, filing activity has increased significantly in areas such as blockchain, data security and machine learning. The two market leaders, Mastercard and Visa, have jointly increased their number of yearly filings by six times since 2010, representing a peak of about 650 filings in 2016. Players such as Mastercard are taking a leading role in fintech not only by innovating state-of-the-art transaction solutions but by driving strategic partnerships with an ambition to make payments fully digital. Mastercard’s success story has led to its stock price increasing ten-fold since 2010, showing that incumbents have an important role to play in the future of fintech.
In essence, the banks are late to the game and need to up their patent strategy to deal with the challenges of an increasingly tech-driven finance sector.
Figure 5. Accountable and aligned IP organisation
Source: IAM, “The organisational keys to unlocking your IP value potential”, www.iam-media.com/copyright/organisational-keys-unlocking-your-ip-value…
Figure 6. Lack of strategic direction leads to a scattered portfolio
Figure 7. Underlying business need and IP strategic response
Unique basis for inception
The disruption caused by digitalisation is affecting almost every industry and is pushing executives and IP heads to adapt and upgrade their approach to IP management. This has involved managing the massive inertia in transforming IP organisations that have evolved over decades as reactive support organisations with the main purpose of creating patents and providing advice in individual, ad hoc cases. These organisations – which are typically arranged into silos based on IP types and processes and built to provide case-by-case support by individual experts – must now change to proactively work in teams in close partnership with the rest of the company.
At TD it was different. There was no legacy organisation to wrestle with – only a business need and a mandate to address it. As the data showing the growing risk of competitor bank patent portfolios mounted, TD’s enterprise risk management committee authorised Death to develop a pilot programme to build the bank’s patent portfolio.
The result was the foundation of the Office of Patentable Innovation (OPI) – a small team dedicated to work across the enterprise identifying and harvesting patentable innovations. This effort was kicked off before TD had even developed its enterprise innovation strategy. In addition, many of the organisational interfaces, processes and governance models that would be found in most large technology companies and to which companies should link and align their patent operations were also missing.
Banks are highly regulated institutions with historically low customer attrition rates, and TD was no different. The business had been built over decades, gradually improving its offerings under a large risk and control umbrella, without a strong need for a top-down innovation strategy. With rare exception, innovation initiatives were focused on gradual improvements and the adoption of market-proven technologies.
Initially, the main interface for patent portfolio creation was to identify enhancement-focused projects within the different lines of business and drive invention creation based on whiteboarding innovation sessions. However, these projects were largely independent initiatives without coordinated strategic direction. Although this generated patent filings, the patents were a byproduct of the different innovation projects, rather than driven by business use and therefore made the portfolio fragmented.
This was not the portfolio that TD needed to address its business needs. It needed a portfolio and a capability to mitigate potential exclusion from critical markets and growth opportunities, limit costs from third-party offensive actions and generally keep future business options open. In addition, the bank wanted a portfolio which would strengthen productivity advantages, profit margins and market shares, and – where possible – reduce vendor-related costs.
Figure 8. Improvement areas grouped into implementation work packages
Figure 9. Senior and cross-functional steering committee
Move towards a world-class patent operation
The next challenge was to find a path to address the expectations and burning platform underlying the creation of OPI before the attention from top management was lost and the attempt was shelved or locked in where it did not have the preconditions to succeed and deliver.
As TD had limited experience of building a patent function, the company concluded that the fastest and most constructive approach was to learn from others – more specifically, to learn from best-in-class large-cap technology companies, which represented the kinds of companies that TD was attempting to emulate. “As the north star for our development we needed to understand what capabilities the bank would need five to 10 years from now, rather than looking at current best practice in the banking sector. We therefore decided to look outside our usual sphere of benchmarks and advisers,” Death explained. To initiate this process, he sought out experts with a track record of serving the needs of technology companies which had to innovate to survive and profit.
An IP business review was conducted in relation to digital channels, with the cross-group business unit driving TD’s digital journey and thus much of its relevant technology and innovation efforts. It looked at the more specific business drivers for patents and how the patent operating model should look in order to address those drivers in select areas. Based on a gap analysis in relation to TD’s current state, it then produced the basis for a decision and an action plan for the steps to take.
After the summer of 2017 the action plan, which included several improvement areas grouped into work packages, was presented to and endorsed by the steering committee. It set the direction for TD’s patent operations with the long-term targets of capability characterised by:
- integrated strategic planning between intellectual property, innovation and business with maximum foresight for all functions and strategic allocation of resources to the most critical areas;
- a single – not siloed – business-focused patent portfolio with a long-term perspective;
- proactive and cross-functional stakeholder engagement to systematically minimise patent risk exposure, reduce costs and keep key business options open, while leveraging TD’s innovation output; and
- business accountability for the efficient use of internal and external resources, able to quickly adapt to change, while shielding the critical long-term patent perspective from short-term business cycles.
Figure 10. Systematic innovation model focused on target areas of high business strategic importance
Figure 11. Strategic choices of where to focus innovation and IP strategy
Figure 12. Context-specific innovation and IP strategy per selected domain
Integrated innovation and patent strategy
The main conclusion as a result of the action plan was the need for a clearer strategic direction for innovation and a closer integration between intellectual property, innovation and business strategy. To achieve this there was also a need to build a common technological framework for strategic planning, communication and decision making between the different functions.
Given the breadth of possible innovation and the diverse needs in different areas, TD decided to let the new approach target areas of high strategic importance where a systematic innovation model would be most valuable. Other areas were left to continue with business as usual. Among the areas of highest business strategic importance, TD selected two areas as pilots to try and refine the new approach. The framework that was used was largely based on technology and innovation strategy best practice from large-cap tech companies but adapted to TD’s context.
At the top level the approach was simple. From the large set of technical functionalities that TD could invest in, it had to identify the ones that ultimately were of highest importance for driving customer and business outcomes. To do this, TD developed a set of business-strategic priorities that defined how it intended to build future competitive advantage, including drivers for both customer value and revenue, and enablers for profitability. The different technical functionalities were then compared against these to select the ones of highest importance for which to develop detailed innovation and patent plans.
In the second stage TD then developed context-specific strategies for each of the selected areas, where innovation strategy and patent strategy were built in symbiosis. The teams had a shared understanding of the strategic priorities and the technology scope. The complexity of the technology landscape had been understood and everyone was speaking the same language. It became clear where to innovate for maximum impact for future competitiveness, as well as where to create and use patents for increased revenue and lower risk. Finally, everything was condensed into a ‘strategy on a page’, whereby the innovation team had one slide with its strategy regarding technical functionality and the patent team had a corresponding patent strategy slide clarifying business rationale, intent and actions.
Figure 13. TD’s patent portfolio development
Where TD is now and where it is going
As is often the case when a new strategy is to be adopted, TD identified several areas in both its innovation and IP capabilities that required improvements for the effective execution of the new strategies. On the path towards improved innovation capabilities, TD’s innovation centre of excellence was given the main mandate to look over the bank’s different innovation models and work with Konsert to develop a model for alignment with the new strategy framework. Within patent management the immediate change was in the way of working and the interfaces and communication with the innovation teams and their leadership. Khalfan says: “As we strive to capture the next big opportunities of the digital era, we need to accelerate innovation while always maintaining the trust that our customers place in us. TD will continue to develop our innovation ecosystem and evolve our talent strategies – a forward-looking approach to intellectual property plays a key role in how we will continue to lead.”
Since establishing the OPI, TD’s portfolio has grown from single digits to more than 500 and continues to grow rapidly. More importantly, the quality of the portfolio is continuously improving along with higher clarity around the bank’s strategic business priorities and how these are translated into IP objectives. With clearer knowledge of the IP business rationale, within both the patent and innovation teams, Death’s team can more easily prioritise where to allocate its resources and set up patent ideation sessions in order to proactively build the portfolio that TD needs.
The OPI has also been more broadly recognised as a strategic asset within TD and has a place at the table in several key forums, including the innovation council – TD’s top body for innovation strategy and decision making. It is engaged early in M&A activities and is expected by executive management to proactively recommend new opportunities to create and support value based on patents. As technology-related standardisation is growing in importance for the financial services industry, the OPI is a key player in negotiating the terms.
In addition to securing the right patents for leveraging the bank’s technology investments and mitigating risks, TD has also started to use Death’s department to nurture the fintech ecosystem in Canada. In December 2018 it launched the invitation-only Patents for Start-Ups programme to help early-stage fintech start-ups secure their patent rights, which has helped to support the long-term health of the industry and the economy as a whole. The Patents for Start-Ups initiative is a first of its kind collaboration designed to support start-ups and help them navigate the patent process with funding.
After having had its patent function for about six years, TD moved quickly to claim a strong position in the fintech patent space. Although it is only at the beginning of its journey, it is now an established part of TD’s operating model and is gradually taking steps to improve its contribution to the bank’s business. The clear business rationale for its inception and the consequential accountability for Death and his team provide an invaluable north star for its continued development.
As Death says: “We’ve spent recent years building a capability that enables TD to better navigate the patent landscape, make informed decisions, hedge against risks and better see where to play and how to win. We are however early in our journey, and our most important achievement is probably that we’ve become an integrated piece of TD’s operating model, ready to proactively adapt to wherever the future brings us.”
Banks and financial service players looking to address the IP business risks and levers that arise in an increasingly technology-driven sector should consider the following steps:
- Conduct a cross-functional IP business review to identify your key business drivers for intellectual property covering both risks and leverage opportunities. Define the main capability gaps and formulate improvement actions.
- Use the results of the IP business review to inform and create buy-in from key internal stakeholders and executives and build a senior-level cross-functional steering committee to drive action.
- Score your improvement actions based on business impact and urgency, particularly addressing potential risks that may negatively affect attractive future business options and therefore need immediate attention.
- Select innovation areas of top strategic importance as pilot areas to test and refine new frameworks and ways of working and to build communicative success cases in a gradual and agile implementation process.
- Recognise that effective business-driven IP management requires close integration of business, innovation and intellectual property, where improvements in IP management require and drive parallel advancement in business and innovation management, as well as in risk and control practices.
- Never lose sight of the business rationale for each step in the process and only let IP management evolve under clear business accountability, while recognising the nature of the long-term patent game, which must be shielded from short-term business cycles.
The author would like to thank Josh Death for his contribution to this article.