Did Biometric Access Corp. (BAC) steal VeriStar Corp.'s plans for a paperless, cardless payment option for the point of sale?

To hear Oakland, CA-based VeriStar tell the story, BAC, of Round Rock, TX, "knowingly and willfully" infringed upon patents that had been granted VeriStar by the federal government. The patents cover processes for authenticating individuals by way of finger scans, or electronic fingerprints, at the retail check out. Ron Smith, who founded BAC in 1996, says it isn't so, and BAC has filed a counter- suit. Smith says BAC asked a technology law firm to investigate the possibility that the process it uses to support biometrics-based payments might infringe on patents held by VeriStar, which opened for business in 1995, and he claims that BAC got a clean bill of health. "The conclusion was that we do not infringe in any way on any of the VeriStar patents," Smith says.

Patent claims are a relatively new concept in banking and payments. Originally, patents were granted only for inventions, machines or devices; business practices did not qualify for patent protections. That all changed in 1998, however, when a federal court ruled software inventions that incorporate business processes (like account management or payments clearing), should not be excluded from the scope of patent law.

It was a ruling that led to a flood of new patent applications at an already overworked U.S. Patent Office. Complicating matters, patent attorneys had little understanding of the processes involved in banking and payments, say experts who have worked with the Patent Office. "They're dealing with a rapidly changing area of high growth," explains Cheryl Charles, a senior director at BITS, the technology arm of the Financial Services Roundtable.

The situation was serious enough for BITS to commission a group of bankers to look into it, and to work with the government's patent attorneys to help them gain a better understanding of banking and payments processes. "We've seen that there is a real need for education in the industry as well," says Charles.

In the meantime, individuals, technology companies and banks are slugging it out in the legal arena with a series of suits and counter- suits that suggest imitation is an expensive form of flattery.

"Filing a patent infringement suit is a serious undertaking," insists Michael Biber, in-house counsel for VeriStar. A patent attorney by training, Biber has built his career on managing patent portfolios for technology firms. "We have an obligation to protect our corporate assets. The patent portfolio is the basis of our company," he explains.

According to Biber, VeriStar holds patents covering the "expeditious processing of consumer payment transactions at the point of sale using a biometric." The VeriStar patented process-Biber refers to it as a platform-has been running at Visa's headquarters cafeteria for two and a half years, as well as in a fast-food restaurant in nearby Berkley. The attorney says the company is also readying five additional pilots of the process, which he describes as being "hardware independent."

BAC sells a package of proprietary hardware and software it calls the Retail Verification System, which includes a line of fingerprint authentication devices dubbed SecureTouch. It holds no patents, although Smith says the company has four patents pending that "increase the robustness and user friendliness" of the system.

The company started out by selling systems that supported time and attendance and payroll check cashing identification at supermarkets. Kroger Supermarkets has been using the system for the last two and a half years at four of its Texas stores, according to Smith. This year the company announced it was working with H.E. Butt Grocery Co., which operates a chain of supermarkets in the Southwest, and would install 700 SecureTouch units for employees to use in lieu of time cards.

The POS application (installed now at Kroger markets) relies on the automated clearinghouse (ACH) to batch-clear payments at the end of the day. A customer enrolls in the program by providing the grocer with a check, which is imaged and filed with other pertinent information, such as bank routing number, a signed authorization for Kroger to initiate debits to the designated checking account, the customer's telephone number, and a scanned image of one or more fingers. Customers initiate transactions by using what Smith calls a "pointer," typically a telephone number, that locates their file, and are prompted to place a finger on a finger scanner-a device about the size of a computer mouse. If the scan taken at the checkout matches the scan that's on file, the transaction is authorized, a transaction file is originated and an ACH debit is placed in queue for transmission to Kroger's bank later in the day.

Grocery stores cash a lot of checks, especially paychecks. That's why paychecks were the first category of transactions to be targeted by BAC. But as the company gained more experience, it expanded the functionality of the system to support all manner of POS purchases, explains Smith. That's when the company appears to have run afoul of VeriStar.

Earlier this year, BAC made a big splash at MarketTechnics, a large retailing trade show put on by the Food Marketing Institute (FMI), where VeriStar also exhibited. Smith told Bank Technology News that he had been advised that VeriStar was making claims that BAC products infringed on VeriStar patents and that while at the FMI trade show, he met with VeriStar executives to resolve the issue. That meeting, he said, ended with an agreement that VeriStar would stop leveling the charges of patent infringement against BAC, and an agreement that the two companies would explore a joint working relationship. "It just didn't work out," Smith says, and VeriStar filed suit.

Biber says there was no meeting between the two companies at MarketTechnics, which was held in New Orleans in February. He claims that the two companies had "talked about doing business together," under different circumstances, but that BAC blew its chance when it enhanced its service with POS payment initiation. "They became so enamored of our business that soon they began selling a similar service," says Biber. "We're rather mystified."

Biometrics is a nascent technology in financial services. Research suggests consumers are not averse to biometrics in financial services. A study by International Biometrics Group (IBG) of New York, for example, suggests most consumers will use finger scan technologies once they see how the technologies work. Yet, most banks that have installed these technologies have limited use only to enterprise access authorization. A report earlier this year by Meridien Research, Newton, MA, highlights just two financial institutions using these technologies to support customer identification: Perdue Federal Credit Union, West Lafeyette, IN, which uses finger scans to authenticate customers at its stand-alone banking kiosks, and ING Direct (Canada) which uses finger scans as an authorization option for its online banking customers.

Finger scans differ from fingerprints in that they are not full images. Rather, scanning technologies are used to extract minutiae from an individual's fingerprint; the minutiae then is stored in a template that takes up between 100 and 1,000 bytes of data. Some retail payments experts say the fact that the full fingerprint is not saved, and cannot be reconstructed, limits the feasibility of using finger scans to authenticate payments.

"It's not the perfect solution," says Jennifer Schmidt, an analyst at Meridien and co-author of the company's recent report on biometrics. "Your best bet is when it is used as an extra level of security."

While there are hurdles, Schmidt says it seems to be a "logical evolution" for financial institutions to use biometrics for customer authentication, especially as new mobile commerce applications take hold.

Data from IBG suggests finger scan technology has seized a sizeable share of the biometrics identification market-more than a third of all 1999 sales.

Smith hints, however, that suits such as the one brought against BAC by VeriStar could put a damper on business. "I believe the most important thing for our industry to be doing today is to figure ways to grow this business to support financial institutions, the merchants and the future of retail as it relates to payments," says Smith. "There's more potential activity here than any of us can handle."

Biber, though, is adamant about protecting VeriStar's patent rights, and he says the company has considered filing additional patent infringement suits against BAC. The first suit was filed in early May in U.S. District Court for Northern California; BAC's counter-suit was filed in Texas a few weeks later. And Biber warns that banks or other organizations that use BAC technologies could end up in court, too. "Those parties that enter into agreements with companies that are infringing upon our patents are themselves infringing upon our patents," says Biber.

Charles, of BITS, says it's a very real possibility that financial institutions may end up in court defending against patent infringement accusations. "A financial institution needs to take very seriously any claims of patent infringement and what those claims may lead to," she says.

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