A Canadian company has been granted a patent that broadly protects various ways of authorizing a little-used payment method: Checking account purchases made over the Internet.
LML Payment Systems Inc., a Vancouver financial payment processor specializing in end-to-end check processing, received the patent last week through its subsidiary, CheckMark Patent Inc.
Though most Internet purchases today are made with credit cards, Patrick Gaines, LMLs president and chief executive officer, said Web purchases from checking accounts offer vast potential.
Fifteen to 18 billion check transactions occurred at U.S. retail stores last year, 3% more than a year earlier, Mr. Gaines said. Retail check transactions now outnumber debit and credit transactions combined, he said.
Clearly, checks are the preferred method of payment, Mr. Gaines said. I think the important thing on the Internet is that consumers will show the same preference for using checks online as they do for their brick-and-mortar transactions at the retail point of sale.
No financial institutions currently use the technology covered under LMLs patent, nor are any banks signed up to license it, Mr. Gaines said. But he said the company has had discussions with a number of institutions and will approach others about purchasing licenses.
LMLs patent covers various methods of authorizing checks for Internet purchases, including encryption, biometrics, micro-scanners that read numbers from checks, and verification through real-time communication with financial institutions or against databases identifying bad or good check writers.
Debiting typically occurs through an automated clearing house network, but the patent covers the use of any other competing system, such as an automated teller machine network, Mr. Gaines said.
David C. Stewart, vice president of Global Concepts Inc., an Atlanta consulting firm, said the types of transactions the patent covers are not likely to take off.
I never use my check card when I shop online, he said. I only use a credit card, because my risk exposure is so much less. And the perception out there, I believe, is that the risk is significantly greater when the funds are being debited directly from a checking account.
Before consumers become convinced to directly debit their bank accounts for online purchases, they will need to see the same level of security used by retailers in the physical world, Mr. Stewart said.
He pointed to SafeDebit, a system introduced in December 1999 by NYCE Corp., as an example of the type of security consumers will demand. The system requires consumers to insert a debit card into the compact-disc slot of a personal computer and input a PIN to make a purchase.
If consumers are going to shop online out of their primary checking accounts, I believe theyre going to want the PIN protection or other security measures, Mr. Stewart said.
Mr. Gaines said he was not familiar with SafeDebit and so did not know if LMLs patent covered its method of payment authorization.
LML received another patent in 1996 that covers the conversion of checking transactions into electronic transactions at the retail point of sale. Licensees would pay a transaction fee of about 25 cents for the use of each of the patented technologies, Mr. Gaines said. No institutions have yet licensed this patent, he said.
Patents have been a growing concern for financial institutions since 1998, when the U.S. Court of Appeals for the Federal Circuit upheld a patent obtained by Signature Financial Group for a mutual fund administration system. The effects of the ruling, which paved the way for the patenting of any new business practice, were felt throughout the financial services industry as firms realized the potential for widespread patent infringement and possible lawsuits.
BITS, the technology arm of the Financial Services Roundtable, formed a working group in October to address the issue. The group, made up of representatives from financial institutions, has been meeting with the U.S. Patent and Trademark Office to discuss patent-related issues.
Its an emerging issue in the economy, said Cheryl Charles, senior director of BITS. Were seeing a growth in patent requests tied to the Internet, tied to e-commerce, and certainly tied to financial services. Given that growth, theres a need to make sure that people throughout the industry and those making the determination about the validity of the patent requests have access to good information.
Mr. Gaines said that the CheckMark patent covers the check authorization process, not the business methodology behind it. He said that patents covering business methodology are a difficult sell, but that he is confident financial institutions will be more willing to license newly patented technology.
Its an uphill battle for anyone to disprove the validity or the enforceability of a patent, he said. Its far cheaper to license the technology.
