Banks and Silicon Valley are on a collision course, the future of finance may be at stake, and one side is brandishing its most dreaded weapon: the PowerPoint presentation.
In January dozens of government patent examiners gathered in a suburban Washington lecture hall to listen to Bank of America employees go through a slideshow. Hundreds more tuned in for a webcast. The presentation detailed 25 ways banks digitally authenticate such things as a customer depositing checks. It may sound agonizingly technical, but for banks, documenting every detail of what they do has become critical. As Silicon Valley entrepreneurs dream up ways to disrupt the financial-services business, bankers and Wall Street companies are taking patents very seriously.
“There is so much innovation in finance right now that if you want to stay ahead and maintain an edge, you have to patent it,” says Linda Coven, a banking and payments analyst at research firm Aite Group.
The biggest U.S. banks, including Bank of America, and payments networks such as MasterCard are applying for more patents than ever before on everything from mobile wallets to blockchain ledgers similar to those used for the digital currency bitcoin. Banks and payments companies were awarded 1,192 patents over the past three years, 36 percent more than the prior three-year period, according to researcher Envision IP.
They’re also hosting seminars for the U.S. patent office to head off what the industry sees as bad patents that cover age-old banking practices. By showing the examiners how the industry already operates, the banks hope the office won’t grant patents to applicants with similar ideas.
Tech companies from Apple to Google have for years fought patent wars over smartphone features, search technology, and computer chips. Banks largely ignored the patent office and gained a reputation for keeping their internal processes to themselves.
That secrecy has become a problem. In 2011 the nation’s banks and stock exchanges were sued by an independent patent owner over the way they encode and transmit data related to billions of transactions every day. Banks spent millions of dollars to successfully fight the claim.
After a few dozen suits like that, banks decided they needed to intervene before patents were issued. “There was this frustration of ‘Why is that patent out there?’ ” says Sean Reilly, general counsel of Askeladden, a group set up to address patent issues by the Clearing House, a payments company owned by the biggest U.S. banks. Bank of America and JPMorgan Chase are among the companies scouring old computer files and boxes of documents to create a database that shows the evolution of modern banking practices.
A 2014 U.S. Supreme Court ruling found that automating a concept or practice wasn’t enough to win a patent. But the focus on claiming intellectual property isn’t only about fighting lawsuits over existing processes. Banks also want to beat back competitors as they and tech-driven startups experiment with ways to lend, make trades, and conduct mobile banking.
“It’s all stemming from the fact that banks are no longer your standard brick-and-mortar company that holds your money,” says Binal Patel, a patent lawyer at Banner & Witcoff. “They’re touching pretty much anything that Silicon Valley seems to be touching.”
Banks often team up with tech companies—JPMorgan did a deal with online lender On Deck Capital to offer small-business loans—but they know today’s ally may be tomorrow’s rival. “There’s certainly the suggestion that, ‘If we don’t protect our innovations like the Silicon Valley innovations, we’re going to be left behind, and they’re going to take over our industry,’ ” says Jeff Berkowitz, a patent lawyer with the firm Finnegan.
The most important business stories of the day.
Get Bloomberg's daily newsletter.
Bank of America has won the most patents among U.S. banks in recent years, with an active portfolio of more than 3,000. These include patents covering blockchains, a wearable financial indicator such as a watch, and automated teller machines that can be operated by a smartphone. MasterCard applied for 500 last year, 10 times the number in 2010, according to Colm Dobbyn, head of the company’s patent program.
The patent office welcomes the attention. The Bank of America seminar was part of the agency’s effort to provide more technical training for examiners. Bristol-Myers Squibb, Google, and Tesla have also held sessions for patent office workers.
Until a 1998 court ruling opened the door to more business-method and software patents, most finance patents weren’t allowed. Once they were, the patent office still didn’t have access to information on how financial companies operated. Sometimes the companies themselves struggled to document the things they had already been doing before a patent applicant came along.
Michael Zoppo, a patent lawyer with Fish & Richardson, recalls a case over an automated version of something trading-pit workers had been doing for years. “Nobody writes that down,” he says. “They talk about it over drinks. It’s a cultural issue with the industry.”
The bottom line: Wall Street and Silicon Valley are increasingly in the same businesses, and that’s driven a big increase in bank patents.