Will Patents Destroy Banking?

Wouldn’t it be great if you could walk up to an ATM and cash a check immediately? What about using your mobile phone to make a payment? Or how about not needing a bank card to access your bank’s ATM?

They sound like great ideas, correct — except that they are among the many financial services innovations and ideas that are bound up in patents (in the above examples, by Bank of America, Cmoney Inc., and Wells Fargo & Co., respectively).

Patents threaten to undermine all the innovation and creativity that has revitalized banking over the last five years. You might look at, say, Square as an innovative new venture. I look at Square as a patent lawsuit waiting to happen.

CMoney is a good example of how patents are a ticking timebomb in banking. Just last week, cMoney, a startup based in Houston, released a beta of its new mobile payments service. CMoney has customers use their mobile phone numbers to initiate transactions. There are more than a few startups like it. With one important difference: cMoney filed for three crucial patents way back in 2008. They are, according to cMoney:

Ghosting Payment Account Data in a Mobile Telephone Payment Transaction System (see here) — This operation includes generating a ghosted account name for each of the payment accounts and transmitting each ghosted account name to a payment application executing on the mobile phone. The payment application, when executed on the mobile telephone, allows the individual to initiate a payment transaction using the mobile telephone as the payment device in order to incur a charge to a selected payment account without revealing the account number associated with the selected payment account.

Transaction Server Configured to Authorize Payment Transactions Using Mobile Telephone Devices (see here) — This operation includes receiving a request to enroll a mobile telephone in a payment transaction system. The request may include an indication of an identity of an individual enrolling the mobile telephone and the telephone number of the mobile telephone. The operation may also include establishing a bank account for the mobile telephone. The bank account is tied to both the individual and the telephone number of the mobile telephone received with the request. The operation may also include providing a payment application for installation on the mobile telephone. The payment application may be configured to allow the individual to initiate payment transactions using the mobile telephone as the payment device when installed and executed on the mobile telephone.

Mobile Telephone Transaction Systems and Methods (see here) — This operation includes receiving a request to initiate a payment transaction using the mobile telephone as the payment device, prompting a user of the mobile telephone to specify a payment source for the payment transaction, and transmitting the request to initiate the payment transaction and the specified payment source to a transaction server. The operation may further include receiving a payment code from the transaction server and displaying, on a display screen of the mobile telephone, a representation of the payment code. The representation of the payment code is presented to a point-of-sale system of a merchant participating in the payment transaction. The point-of-sale system may generally be configured to transmit an indication of the payment code and a transaction amount to the transaction server. Further, the transaction server itself may be configured to perform the payment transaction using the specified payment source for the payment amount.

I’m no lawyer, but just these three patents seem to cover all of mobile payments.

But there is more. CMoney is by no means the only company brandishing patents. Just last Thursday, Bank of America Corp. filed applications for 24 patents. This includes a patent application for an “online financial institution profile exectronic checkout,” which allows for “a financial institution check-out system for processing online transactions using a customer’s pre-existing online financial institution profile.” Bank of America, which got heavy into patents last year, appears as though it has gone patent wild. So far this year, BofA has filed for 144 patents, up from 127 in all of 2010. Last month alone BofA filed for 38 patents.

Wells Fargo and JP Morgan Chase are also filing patents with regularity. JPM, for example, files patents under at least five brand names. In June, JPM filed a patent for a “system and method for granting promotional rewards to both customers and non-customers.” This patent would cover “systems and methods of attracting and retaining customers of a banking institution through an incentive program” that dispenses “an indicia redeemable for a prize, and wherein the dispensing of the indicia is accomplished through the use of an automated teller machine (ATM),” among other features.

I’ve reached out to all the players here, and their public relations officers either decline to comment or decline to decline to comment. But this is a problem. I don’t see how these broad-based patent applications, and possible patents, will not lead to a legal bloodbath for banks, startups, IT vendors, and anyone else caught in the crossfire. While I’ve written about this before, it seems that the problem has only intensified over the past several months, and not just in banking (see also here). In the face of these patent wars, I would expect more than a few potential startups to reconsider launching products or services. And here I thought there would soon be a string of ventures offering “payment transactions using mobile telephone devices.”