As if banks lacked enough to worry about, up comes the issue of intellectual property. Thanks to a two-year-old change in policy at the U.S. Patent and Trademark Office, people outside the banking industry now can patent business practices that banks have always taken for granted - everything from the way credit cards are processed to how checks are handled.
Both the banking industry and the patent office are waking up to this problem, and both seem to be taking steps to correct it. BITS, the technology arm of the Financial Services Roundtable, has set up a working group to study the issue and make recommendations. Officials of the U.S. Patent Office have acknowledged that some patents it has granted may be problematic in their breadth.
Congress has taken some corrective action in the form of the American Inventors Protection Act, which was signed into law late last year. It protects companies that have used computerized processes for at least a year from being sued for infringement by a latecomer who patents the existing process.
But it is still an issue to which bankers should pay attention because it could potentially cost them a lot. Entrepreneurs who are seeking patents on business methods - or have already won them - are doing so largely to get licensing fees from the banks and other institutions that already use unpatented versions of the method.
Though no egregious example has arisen of what might amount to intellectual extortion, the potential is alarming enough that the industry should be acting in concert to protect itself.
Until 1998 the general rule was that a method of doing business was not patentable. A patent-seeker had to prove that his or her submission was an invention, machine, or device. But the advent of patents on software began eroding this rule, and the landscape changed that year when the U.S. Court of Appeals for the Federal Circuit ruled in State Street Bank & Trust Co. v. Signature Financial Group Inc. that software inventions embodying business models - such as a mutual fund management model - should not be excluded from the scope of patentable subject matter.
This ruling broke the dam, leading to a string of successful patent applications that previously would have been rejected summarily.
One example - and a case study in why the industry should sit up and take notice - is a patent granted to Steven I. Weissman, a 47-year-old corporate attorney in Florida, for a credit card scheme that sounds suspiciously similar to a purchasing card system.
As Mr. Weissman explains it, early in his practice as a lawyer it occurred to him that it would be useful to have a credit card that would keep track separately of expenses incurred for each client. If all the travel and other business-related expenses for Client A were stored on the card separately from expenses for Client B, he said, it would make billing much simpler.
As Mr. Weissman envisioned it, the credit card itself would have a keypad, display, and microprocessor chip so that the lawyer could enter a client code at the point of sale and the device could store all the information. All the lawyers working on a single case would use the same client code so that charges would be gathered in one place.
The system would be useful for people other than lawyers, Mr. Weissman said. An example he cited was property managers, who could go to a home supply store, buy lighting fixtures or toilets for various rental buildings, and charge the items to different cost centers.
Ten years ago Mr. Weissman consulted a patent lawyer about this idea and was told there was no way he could patent it. But in 1998 after Mr. Weissman read of the State Street Bank case, he went back to the patent lawyer and filed a successful application.
The patent granted Mr. Weissman, he said, covers a "system of making an allocation at the point of purchase, without really specifying how to do it." A second patent application, which Mr. Weissman said is pending, would cover the devices used to enter the billing code.
The system, which still exists only in theory, would seem to accomplish the same ends as a purchasing card system - something banks, and American Express Co., have been offering for many years. Modern purchasing cards, which do not require the use of chips, can sort and aggregate employees' business-related expenses. Some travel-and-entertainment card systems can do the same.
Nonetheless Mr. Weissman - armed with his patent - has been trying to get Visa U.S.A. and American Express, among others, to pay for his system. "The goal is to sell it or license it," he said. "I'm positive that over the next several years, as all of the systems and point-of-sale terminals are converted to smart card technology, this system is going to be in demand without my having to do anything. If one of the credit card companies obtained exclusive rights to this system, it would have a big impact in the overall marketplace."
"A company like American Express would seem to be at the most jeopardy" from his system, Mr. Weissman said. With the growing adoption of smart cards, "even if I did nothing, in five to 10 years, all the credit card companies are going to want to use it."
Mr. Weissman, who put out a homemade press release about his patent and its potential reach, said American Express, Visa, and several smart card companies that he declined to name are studying his proposal. "I've had feedback that says they've got people looking at it," he said. "I haven't found anybody who has a reason or explanation of why the system wouldn't work or isn't feasible."
The industry should be wary. Technologists say many newly granted patents seem to coincide with products or processes already established at banks. No one wants to incur a patent infringement suit for doing something that has been done unobjectionably for years, and no one wants to be coerced into paying fees to opportunists.