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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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May 12, 2009

Patenting the payments system: Navigating confusing and congested waters

Anybody looking to innovate in the payments space may need to tiptoe carefully to avoid stumbling upon patent infringement. What's more, the complex patent landscape may raise interesting questions about the ability of the payments industry to collaborate.

Some years ago I ran a thought experiment to consider whether U.S. "payments patents" could be assessed easily using the U.S. Patent and Trademark Office (USPTO) classification system. Unfortunately, the classification system does not label patents as "payments-related" per se, so there is no scientific manner to search for related patents without studying claims on thousands of patents individually. However, one can derive an impression of the landscape by using a simplified approach of counting patents across a limited set of USPTO patent classifications that most strongly exemplify "payments-related patents" (drawing particularly on subclassifications 705/39-45 and 705/64-79). In these subclassifications, 3,659 patents were issued from 1998–2008, with 653 (17.8 percent) issued in 2008 alone. If one considers these back-of-the-envelope calculations and even controls for the "noise" between the USPTO classification system and what is considered "payments-related," there is nevertheless a revealing picture of the complexity and potential for patent infringement for any firm trying to innovate in the payments space.

What's more, an understanding of the payments patents landscape is also useful when considering the possible impact of patents on a highly segmented market like payments, which is characterized by network effects, first-mover advantages, large sunk costs, and lock-in effects. Some existing research examines the impact of patents on financial services innovation generally.

In the payments market, on balance, will patent holders hinder market entry, or will they enable new market entry for new innovations? How do patent rights affect payments industry efforts to set standards, develop and implement innovative risk management tools, or create new products that improve the integrity of the payments system overall? Does a concern about patent rights further hinder industry efforts to share information necessary to address risk issues collectively?

By Clifford S. Stanford, assistant vice president and director of the Retail Payments Risk Forum at the Atlanta Fed

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