Business Method Patents and U.S. Financial Services

Abstract

A decade after the State Street decision, more than 1,000 business method patents are granted each year. Yet only one in ten is obtained by a financial institution. Most business method patents are also software patents.

Have these patents increased innovation in financial services? To address this question we construct new indicators of R&D intensity based on the occupational composition of financial industries. The financial sector appears more research intensive than official statistics would suggest, but less than the private economy taken as a whole. There is considerable variation across industries but little apparent trend. There does not appear to be an obvious effect from business method patents on the sector's research intensity.

Looking ahead, three factors suggest the patent system may affect financial services as it has electronics: (1) the sector's heavy reliance on information technology; (2) the importance of standard setting; and (3) the strong network effects exhibited in many areas of finance. Even today litigation is not uncommon; we sketch a number of significant examples affecting financial exchanges and consumer payments.

The legal environment is changing quickly. We review a number of important federal court decisions that will affect how business method patents are obtained and enforced. We also review a number of proposals under consideration in the U.S. Congress.

Keywords: Business method patents, financial innovation, payment systems, financial exchanges, KSR International v. Teleflex, Ebay v. MercExchange, in re Seagate

JEL Classification: O31, O34, G20