Innovation raises fintech patent investment challenges for traditional firms
Financial services businesses reveal the challenges behind how they allocate their patent budgets and choose between bread-and-butter legacy tech and revolutionary solutions they could monetise to generate high returns
Financial services in-house counsel face a new challenge: how to decide whether to invest more of their patent budgets on protection for incremental advances on legacy technologies or for new and potentially revolutionary innovations that will later generate considerable returns.
Sources at banks, stock exchanges and credit companies say that the investment financial services companies have made in fintech over the past five years has turned them into two-pronged businesses; financial services providers on the one side and software manufacturers on the other.
They point out that in this increasingly tech-focused business structure, patent departments can choose to build up protection for computer-implemented inventions that support and drive efficiencies in those traditional services that represent most of their firms’ incomes now.
Those departments can also choose to spend more money on patents for potentially transformative technologies that may not generate an immediate return on investment, but that their businesses can use later to gain a competitive advantage or monetise through IP licensing to create large revenue streams.
“There are two ways of looking at this issue,” says Ziad Katul, senior counsel at the Bank of Montreal in Toronto. “Your starting point is the legacy business – how it must be transformed and how fast it needs to adopt the technology it needs to transform.
“Then you engage with these transformational technologies, where you start imagining the future and how you might bring that to life through technology.”
The head of IP at a UK-based bank agrees that budget allocation is now largely a toss-up between shorter-term investments and longer, high-risk investment on broader patents for revolutionary technologies.
“The whole point of patents is for you to be the first to file for a new invention: so when a new technology emerges, that’s when you should be thinking about filing for the broadest patent protection,” he says. “That’s where the big money lies.”
“That said, there is also value in filing something that’s shorter term right now. Those innovations are likely to be more incremental because they will be based on known tech – so it will be a case of we have this bit over here and that bit over there and we want to connect them in an interesting way.”
He adds that such a project may not have the same wide commercial applicability as a new quantum computing application, for example, where everyone will be paying a licence to use the technology in 10 years; but there is still value there.
Choosing between legacy and transformative patents is a challenge for patent attorneys in almost every innovative industry. One in-house lawyer points out that telecoms companies have been investing huge sums into 5G technologies, while trying to make sure that there is adequate investment in their existing networks and the portfolios surrounding them.
The difference is that this challenge has only just arisen in the financial services sector because of traditional institutions’ recent investment in fintech in response to the emergence of fintech companies.
A well-publicised example of a technology that financial companies have heavily patented but that is not expected to generate returns for some time is blockchain.
Sources point out that software and financial services companies have been quick to protect their developments for this distributed-ledger technology because of its foreseen benefits, but that it has yet to be used for any viable product except perhaps bitcoin.
“Everyone hopes that their blockchain patent application will cover global development,” says the chief IP counsel of a stock exchange company. “But technologies based on this system are not a viable option right now.
“We could develop a blockchain-based exchange platform now that would increase transparency and cut out the middle man. It would be slower than our current platform, however, and would cost a lot to develop,” he adds.
The UK bank head of IP adds that blockchain filing started in 2013 and now businesses can mostly only file for incremental developments on the tech. The Bank of America and Mastercard are two of the biggest financial services filers.
The trick to having a better idea where to invest the patent budget in a two-pronged business, according to senior in-house sources, is developing a solid understanding of what the business is doing and where it is making money.
The stock exchange chief IP counsel says it is important to know where high margins are currently being created, and thus the extent to which extended patent support in a legacy technology will benefit the company.
“The same logic used by the pharmaceutical industry can also be applied to fintech,” he says. “If you have a drug and know that extending its protection for a week will be worth millions for your bottom line instantly, that knowledge will help you make better decisions. New drugs, on the other hand, might or might not be an economic success 10 years down the line.”
He adds that his biggest gripe with external counsel is that they do not spend enough time learning the ins and outs of the company and often don’t consider the financial benefits of any sort of protection extension before they recommend one.
The senior IP counsel at a US-based bank agrees that it is important for patent departments to understand the value proposition of any technology before they apply for a patent.
“Every new patent asset you develop must have a value proposition, and if it has one then I do not have a problem paying for that,” he says.
Working out the value proposition for an untried an untested but potentially revolutionary piece of fintech, however, is a much trickier prospect.
The senior patent counsel for another US-based bank says predicting which technologies will take off, and thus which to spend more time and money protecting, is very challenging.
“There is a recognition among our tech leaders and within the business as a whole that IP is very important, and we have made a big push to make sure we are identifying and protecting new innovation,” he says.
“A good example of the challenge involved in this process is blockchain. It remains unclear whether it will become a new core tech or simply be a flash in the pan.”
The US bank senior IP counsel adds that it is always a good idea to have some of a business’s portfolio budget dedicated to ‘blue-sky’ projects that are high risk and high return – but says that it is important to keep in mind that most of them will not pan out.
“They are swing-and-miss investments – but if you do make a hit, that patent will be enormously valuable in the next decade.” He adds that the key to success is to rely on the business’s tech leaders and use their knowledge of the market to help make more accurate predictions of its future, which will aid the firm’s patent strategy.
Some in-house attorneys may also face the challenge of having to navigate the internal politics between the traditional legacy business and its relatively new software arm.
The stock exchange chief IP counsel says he spends much of his time bouncing back and forth the demands of a legacy business that tries not to rock the boat and the software business that is more agile and wants to move into new areas and develop new products and services.
“My cross corporate functions gives me a good view of the company, which helps me to be a good mediator between these two factions,” he says.
“It is important for me to spend time making sure that one’s actions does not negatively impact on the other. For example, the software teams might want to develop on something that Apple has made, which carries a risk of infringement. But the legacy guys will not be happy about that because Apple is listed with us.”
Working out where to spend the patent budget was never really an issue for traditional financial services companies; but it is now.
Businesses now need to juggle the need for short-term and potentially low-return investments – but that often buttress high return legacy services – next to long-term, money-making technologies