Breaking the banks

From payment systems to insurance, financial services are being transformed by the convergence of banking and high-tech. In the process, many of the world’s largest financial institutions have radically shifted their approach to IP

Players in the financial sector would like it known that they are not tech parvenus. For decades, the giants of the financial world have been actively deploying technology to improve their operations and respond to customer demand. From ATM machines to credit and debit card payment systems to the vast IT platforms that support many back-office functions, operators from Wall Street to the high street are well versed in how new innovations can affect the sector.

Sean Reilly
General counsel, The Clearing House


Stronger patents are better for the sector

Calum Smyth
Head of intellectual property, Barclays


Sector has to stay at the cutting edge of how it interacts with clients

“People forget, when they look at banks, that they’re really big tech entities,” suggests Sean Reilly, general counsel of banking industry body The Clearing House. “They have always had a lot of technology under the hood; the difference now is that it’s in people’s faces.”

In recent years the pace of innovation has picked up as banks themselves have sought out new markets, start-ups have challenged the status quo and tech titans such as Apple and Google have begun developing new offerings such as payment systems. Like the incumbents in other industries such as the auto sector, major financial institutions are continuing to come to terms with the implications of convergence and the rise of what is popularly known as ‘fintech’.

According to Citigroup, investments in financial technology have exploded over the last few years, rising from $1.8 billion in 2010 to $19 billion in 2015. Fintech encompasses a broad range of areas, including traditional banking, payments, wealth management, capital markets and insurance – all parts of a market in which technology is causing rapid change. “Technology that before was just for internal purposes is now seen as a differentiator,” observes Doug Luftman, chief innovation officer and general counsel of Lecorpio.

“Financial services is changing like most other industries in that we’re increasingly digital, which means that software innovation and any related protection has become a real focus,” adds Barclays IP head Calum Smyth. “Financial service companies need to stay at the cutting edge of how they interact with customers and clients and there are two sides to that from a software perspective – first, offering client-facing services that are digitally based and second the infrastructure piece, which relates to how we run our business on the back end.”

Colm Dobbyn
Associate general counsel, MasterCard


Significant evolution in IP thinking has coincided with a major innovation drive

This has triggered a seismic shift in the IP functions of major financial players. According to analysis by Relecura, the number of fintech patent applications and grants more than doubled between 2005 and 2014 when it hit a peak of 11,485. The largest patent owners in the space – Visa, Hitachi, MasterCard and Bank of America – all boast fintech portfolios of more than 1,500 patents; small in comparison with those of their counterparts in the tech industry, but significant nonetheless. Over the last decade there is no doubt that Wall Street has woken up to patents.

All the way to the bank

Tracey Thomas
Chief IP strategist, American Express


On the hunt for tech that improves the company’s core capabilities

MasterCard’s Colm Dobbyn, associate general counsel with responsibility for intellectual property, has been at the credit card giant for over 20 years. In that time he has seen the business go through a number of evolutionary steps, including its $2.4 billion initial public offering (IPO) in 2006. But it is the last five years that for Dobbyn have been truly transformational in IP terms: “The company has changed more in the last five years than ever before in my time at MasterCard. As the company has focused to a growing extent on innovation, we have expanded our portfolio to protect MasterCard’s innovations and solutions.” That has led to a tenfold increase in the number of patents it files each year, hitting 500 new applications in 2015, and to Dobbyn growing his 15-strong IP team, including specialists in Europe and Asia as the company has heightened its international focus.

Although Dobbyn acknowledges that MasterCard has its roots in financial services, he regularly refers to it as a ‘tech company’ – a label which, he says, has really stuck since the IPO a decade ago. Underlining its tech credentials, in 2010 the company launched MasterCard Labs, a technology hub located among New York’s burgeoning start-up community which aims to foster new inventions. The initiative has brought it greater street cred among the denizens of Silicon Valley, as well as more patent filings for Dobbyn and his team to oversee.

American Express chief IP counsel Tracey Thomas has witnessed a similar evolution, with more sophisticated IP thinking now supporting wider business priorities. “When we look at innovation, we have certain goals,” he says. “We are looking to connect buyers and sellers, and then we’re also looking for technologies to develop or acquire that improve our core capabilities in areas like data privacy.”

As payment services businesses, the likes of American Express and MasterCard are at the heart, in patent terms, of the busiest part of the sector. According to Relecura, 60% of the patents that it studied in its 2015 fintech report related to payment systems; Visa led the way, followed by Hitachi, MasterCard and eBay. It is also the part of the market where convergence is at its strongest, with new services Apple Pay and Google Wallet helping to reshape how consumers part with their cash.

Figure 1. Total number of fintech patents

But it is not just the credit card giants that have experienced a sea change in patent strategy. Speak to any IP expert in or around the financial sector and most will refer to a significant shift in thinking around patents at many of the largest banks. “If you go back a decade, banks hadn’t come up the learning curve on IP,” Reilly reflects. “There is now a savviness in the sector that we haven’t seen before and a realisation that you do need to invest in IP.”

That realisation, Reilly explains, has dawned on senior management teams as they have accepted that they need to innovate in business-critical areas such as cybersecurity. But he also stresses that there is a greater willingness on the part of banks to disclose more of their inventions, so that where they may previously have relied on trade secrets, they are now more willing to patent: “An emphasis on disclosure is driving the development of a lot of portfolios. Banks realise that now they are developing IP, they need to help cultivate it and get it out into the market, and the only way to that is for banks to file patents themselves.”

According to Luftman, other factors are also driving the shift in banks’ thinking around intellectual property. They include a greater threat from non-practising entities (NPEs) in the sector, as the likes of Intellectual Ventures have aggressively grown their portfolios and targeted banks in assertion campaigns; the emergence of senior figures such as Thomas at American Express and Keith Agisim, chief IP counsel at Bank of America, who have pushed the IP envelope in financial institutions; and finally, patent reform in the shape of the America Invents Act, which caused the interests of the banking and tech sectors to converge.

“Fintech is where the pure tech sector was five or 10 years ago,” adds Luftman. Innovations such as crowdfunding, peer-to-peer lending and cryptocurrencies have all taken hold and, depending on your viewpoint, present either serious competitive threats to the incumbents or an opportunity for them to revolutionise their offerings.

Table 1Number of filings in different fintech areas

Filing year

Payment

Banking

Wealth management

Capital market

Insurance

Lending

1995

790

373

53

48

23

28

1996

1,402

569

88

98

45

49

1997

1,597

764

152

128

60

90

1998

1,830

891

188

151

80

95

1999

2,275

1,123

288

266

131

135

2000

4,952

3,049

959

1,113

556

491

2001

6,188

4,192

1,322

1,415

798

593

2002

4,289

2,964

1,040

896

619

484

2003

4,025

2,727

911

777

548

423

2004

3,894

2,267

913

733

462

443

2005

4,124

2,135

990

813

512

584

2006

4,266

1,943

1,107

795

463

543

2007

4,973

2,179

1,143

868

589

667

2008

4,682

2,000

1,240

828

545

669

2009

4,628

2,047

1,011

685

525

547

2010

4,373

1,947

1,047

721

568

490

2011

5,065

2,053

1,105

738

494

479

2012

6,209

2,316

1,215

723

728

541

2013

6,471

2,336

1,045

727

675

557

2014

5,960

2,077

898

540

557

446

2015

3,536

1,237

449

277

254

263

Friend or foe?

As with other sectors experiencing a rapid patent evolution, one of the questions hanging over fintech concerns the extent to which the same kind of internecine IP warfare may break out as has been seen in other high-tech spaces, particularly mobile. The smartphone wars proved extremely costly, pitting operating company against operating company as the likes of Apple, Google, Microsoft and Samsung deployed their patents for competitive leverage; but ultimately they achieved very little in terms of changing the landscape of the industry.

Some elements of the finance sector mean that the risk of major patent wars is rather lower than that in other industries. For one thing, the incumbents have a long tradition of collaboration in areas such as payment systems and trade settlements, further promoted by organisations such as The Clearing House. In recent years that collaboration has spilled over into intellectual property; in 2014, for instance, The Clearing House launched the Patent Quality Initiative, a project designed to challenge weak patents in the financial sector through inter partes reviews.

Banks also have the benefit of learning from the experiences of the tech sector and can take advantage of the various bodies that have emerged in recent years to provide some protection from the threat of infringement lawsuits. Many, for instance, have joined patent aggregator RPX. Unified Patents, which provides members with information on patents in specific sectors and files inter partes reviews against those which it deems particularly weak or threatening, has included electronic payments as one of its focus areas. Then there is the License on Transfer Network, which aims to mitigate the risk associated with operating companies selling their patents to NPEs. That has grown to more than 60 members in a little over two years, although thus far JP Morgan Chase is the only major bank to sign up.

In addition, despite the threat of disruption from newcomers in the fintech space, there is no doubt that many of the incumbents enjoy some very significant advantages. Their sheer size and deep pockets mean that if they feel threatened by a start-up or see a business with a game-changing patent portfolio, they can simply buy the company or the intellectual property.

Plus, for all the reputational damage done by the financial crisis, many consumers still prefer to put their faith and their cash with traditional players. “Consumers feel more comfortable with their banks being involved in the transactions that they do on a regular basis,” Reilly claims. “Yes, they want things to be more streamlined, but they also want safety.”

Figure 2. Largest fintech patent portfolios

But the banking sector is still facing the kinds of challenges that, for the tech sector, have led to far more patent assertion activity and more disputes. Since the financial crisis, many banks have seen their profit margins depressed as the commercial and regulatory environments have become much tougher. And with the advent of new start-ups and new entrants to the sector adding another disruptive layer, it is not out of the question that, as in the mobile space, as incumbents find their business models under increasing pressure, they will look to assert their intellectual property much more aggressively.

Gary Bender
CEO, Carneros Bay


Disputes in the sector are on the horizon

“I don’t see a lot of company-to-company IP disputes in the short term, due to continued collaborative structures and recent cross-licensing in the industry,” insists Gary Bender, former head of IP strategy at Visa and now the CEO of Carneros Bay. “In the medium to longer term, I would expect to see fundamental IP disputes between companies in areas such as mobile payments, security and authentication. These will be the front lines for gaining consumer adoption through applications that are secure and easy to use.”

“If you talk to the banks, they’re not worried about each other,” adds Unified Patents’ senior vice president David Potts. It is the tech community led by the likes of Google, claims Potts, that is causing the most concern – which in part explains why banks have opted to grow their patent portfolios as a defensive measure. Most financial players have chosen not to go on the attack, but that balance could change.

If, for instance, a company that has built a patent portfolio around, say, payment systems shifts its focus to another area, might it then look to monetise its IP stockpile through an aggressive licensing campaign or through selling its patents? Thus far, the fintech sector has seen relatively little significant patent deal activity; although one of the highest-profile exceptions to that was American Express’s disposal of a big chunk of its portfolio – according to Envision IP, more than 600 patents – to Intellectual Ventures. That limited activity might be down to the fact that most portfolios are still fairly small; but privately, some in the fintech community claim that the AmEx sale has led to a certain stigma around transactions, as a group of financial services giants have found themselves on the receiving end of infringement suits from Intellectual Ventures. That doesn’t mean that deals can’t get done, but it does mean that a bank might think twice before selling to an NPE.

John Squires, formerly at Goldman Sachs and now a partner at Perkins Coie, thinks that banks are taking a longer-term view of their patent holdings. “For the most part, [major financial institutions] hold patents for defensive purposes or to provide foundational IP to market structure ventures or consortia,” he says. “In addition, there are many inter-relationships in the market by and between financial institutions – this defensive strategy achieves a relative balance. Finally, with the fintech dynamic in the marketplace and the rise of blockchain technologies, it may be in the financial services firms’ best interest to be long on their IP – that is hold – to achieve their competitive aims vis-à-vis the technology side of fintech.”

Rising to the top

While those in fintech are waiting to see whether the sector will follow tech’s lead and become more litigious, what is clear is that IP specialists in both industries face many of the same kinds of issues. For example, the uncertainty around Section 101 of the US patent statute concerning patent-eligible subject matter strikes at the heart of the kinds of business method and software patents that many banks have been filing over the last decade.

The most recent decision that has fuelled some of that uncertainty – the US Supreme Court’s 2014 ruling in Alice Corporation v CLS Bank International – specifically concerned a fintech patent used to settle complex financial trades.

The impact of Alice might help to explain why, according to Relecura, the total number of patent applications and grants in fintech dropped by more than 500 between 2014 and 2015. That said, anecdotally at least, the case has not caused the same existential threat for fintech players as it has for parts of big tech, which have been sweating over just which software-implemented inventions are patentable.

Changes to the case law around Section 101 might be putting a brake on some banks’ patenting, but according to Sean Reilly, there could be advantages in the future. “Banks like to take a long-term view that stronger patents are better for the sector,” he comments. The message is that if decisions such as Alice mean that some fintech patents are ultimately invalidated, the sector will become stronger.

While greater certainty over patent-eligible subject matter is obviously needed, the quality angle is something that MasterCard’s Dobbyn also highlights. “We try to make sure that our filings are the highest quality that they can be,” he says. “Pure business method patents have been facing growing challenges, so we have been focusing even more on technological inventions. On balance, Alice has had a positive impact because it does help to weed out lower-quality patents used by NPEs to attack financial services companies,” he concludes.

From Wall Street to the Valley

The growing overlap between tech and finance means that it can be hard, when speaking to IP experts in either industry, to identify who is sitting on Wall Street and who in Silicon Valley. “Talk to employees of a bank today and a large number of people there will say that they work for a tech company,” remarks Bob Rutherford of Carneros Bay. At JP Morgan Chase alone, he points out, there are around 30,000 “technologists”, which is more than at many of the largest tech companies.

Just as in the tech industry, where there has long been a debate over where patent protection is appropriate, some major banks are now also grappling with the issue. This is how Barclays’ Smyth describes it: “Like every business we want to make an informed decision on what is the most appropriate IP protection on a case-by-case basis. That could mean more patents but, today, there is also more focus on open platforms. Gone are the days when the best strategy is based solely on a proprietary approach. What’s critical for any service company is to provide the best service to its customers and clients. Whilst there will always be a case for considering patent protection, we should remember there are other ways to leverage and share innovation for the benefit of customers and the broader market.” Such has been the pace of new filings that for many in fintech, patents – at least for the time being – are still the preferred choice.

According to Relecura, the top 200 patent holders own just 39% of fintech patents, suggesting that the market is spread among a broad array of players. Yes, the major banks, financial services companies and tech players are emerging as significant IP owners; but fintech – in patent terms at least – appears ripe for consolidation.

It is also worth stressing that, for all the progress that the financial services sector has been making, it remains a relative patent minnow compared with tech and pharmaceuticals. The few thousand patents that Visa has in its arsenal is dwarfed by the tens of thousands owned by Samsung, IBM, Microsoft et al. “In 10 years, will those portfolios be bigger? Possibly,” muses Luftman. “But I think people in the finance sector are learning from tech and are lining up their patent assets with the strategic direction of the business.”

Tech’s litigation playbook may not yet have found its way to Wall Street, but the rest of its IP strategy most certainly has.

Action plan

Major financial institutions have ramped up their patenting in the last five years and have developed their IP strategy to keep up with the growing pace of innovation:

  • Convergence means that the competitive landscape features traditional players such as banks and credit card companies, but also new tech start-ups and the giants of Silicon Valley.
  • While fintech portfolios remain relatively small, patent assertion is limited – but that could change with further disruption.

Richard Lloyd is North America editor of IAM, based in Washington DC

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