Emerging Payments

The Legal Dark Side of Mobile Banking

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Heard of Maxim Inc.? If you’re a bank interested in developing mobile payments innovation, you should have, because the company claims it invented key technology that entitles it to a piece of the mobile payments pie.

Maxim, a Sunnyvale, Ca.-based semiconductor manufacturer, earlier this year sued some of the major early players in mobile payments, including Capital One, Bank of the West, Starbucks and Expedia. Maxim claimed these companies were infringing on patents it received for tech that enables the processes used to electronically communicate cash equivalents between portable modules. These patents were issued in 1999, long before mobile payments became mainstream.

As banks move deeper into mobile commerce, they may be in for a world of legal disputes, as companies contending to have invented different components of mobile technology seek legal means to tap the substantial revenues expected to result from mobile payments. Banks have always faced patent exposure, but intellectual property experts say the speed and diversity of mobile technology differs from anything banks have faced before—and can lead to blind spots that could result in larger licensing fees.

“Mobile is tough because it’s moving so fast, there’s a race to develop a standard or be a leader in the field,” says Mike Connor, a partner at Alston & Bird, a Charlotte, N.C.-based law firm.

Banks are mostly aware of the business pressures presented by mobile’s shorter cycles. Many executives and retail banking analysts point to employee training and new project management  techniques to accommodate faster turnaround times and flexibility as a top IT priority. And during interviews and conference presentations, it’s not uncommon to hear a banker say it took two or three years for mobile banking to progress as far as Internet banking progressed in a dozen years.

But Connor says that when it comes to winning patent disputes tied to mobile technology, banks are up against telecom companies, mobile tech developers, device manufacturers and payment startups that are accustomed to squabbling in court over small tech details.

“These companies are interested in mobile payments, and they are more sophisticated in patent issues than financial institutions,” Connor says.

The lack of standards in mobile payments is often mentioned as a hindrance to wider consumer and merchant adoption of mobile wallets. It also has legal ramifications since the industry or company that develops technology that’s closest to the mobile payments model that “wins” will be better positioned in patent disputes.

“At some point there will be standards for payment processing. And as is the case with many new technologies, there will be patents that build on top of that, and these patents will be subject to licensing obligations,” Connor says.

He adds that as banks develop or partner with third parties to build out mobile or other new technology, it’s helpful to perform a clearance search to identify what patents or published patent applications have been filed to address the same opportunity that the bank is targeting with the new technology. Connor also suggests that banks build a portfolio of patents that they own, and seek development partners with complimentary patents when developing a new product. “There may be a means for a ‘cross patent’ licensing,” he says.

Connor says that banks also have negotiation power even when they don’t own a particular patent. “Banks have entrenched account and transaction systems that a startup would have to build on top of. So that gives banks some level of control. Banks aren’t without leverage here.”

Aaron McPherson, a practice director for IDC Financial Insights, says that for smaller banks, it can be helpful to consult with a patent expert who can locate sources of potential disputes, as well as spot opportunities for cross-licensing.

McPherson also says there’s pressure on the vendors to ensure they have vetted patent ownership of their own tech, as well as that of third parties. “If you are selling technology to a bank…you have an obligation to defend your customer if you think the patent claim is invalid,” he says.

McPherson adds banks should vet vendors to determine if they have the scale to fight a patent dispute. “It’s a question you have to ask vendors: ‘What kind of patent protection do you have?’”

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