FinTech property rights and banks
It’s an odd paradox: the financial services industry spends millions on title searches and title insurance each year, but has not been quite as diligent in exploring who actually owns the intellectual property behind its mission-critical technology. Granted, bank exposures are somewhat mitigated through contractual indemnification and warranties. However, as the industry continues to use more non-traditional vendors (no strangers to intellectual property litigation) will they need to do more?
Let’s start with some historical perspective. When financial institutions first became computerized almost six decades ago, the owners of the technology they used was clearly understood. First, there wasn’t that much of it and second, whatever existed was created and deployed by a select few in what was a mainframe-only business. For the most part, this was an industry controlled by IBM, Burroughs, Wang (the latter two later merging into Unisys) and National Cash Register (NCR). All of these companies utilized their own hardware and had software designed to operate exclusively on their particular hardware platforms.
Almost immediately things began to change. Very large banks purchased the mainframes and the software to run in-house. Many of them hired rooms full of programmers to develop software and reports using COBOL or NEAT, or some other machine-based language. These custom shops began to veer away from the original manufacturer’s version of the code, so much so that, in some cases, the software didn’t look or function the same.
A great example of this scenario would be NCR’s STARCOM system used by thrifts and credit unions. Designed to operate strictly on NCR mainframes, STARCOM (also referred to as AstroClass) was deployed by many data processing cooperatives and small, privately held data centers across the country. Soon, teller/platform front-end systems from the same mainframe vendors came along, as well as TRW, Bunker-Ramo, ISC and Olivetti. Forced to emulate the specific mainframe protocols, these systems added additional software and vendor management issues for financial institutions and their respective processors.
Even with the added layer, it was still a closed universe. With the exception of some urban legends of “who stole whose source code” to start some spin off or new competitor using the same platforms, financial institutions knew who owned the technology and the exposure to intellectual property litigation was relatively low.
Enter the personal computer and everything changes. Seemingly overnight, a plethora of ancillary systems (loan origination, general ledgers, etc.) became available to the industry, mostly programmed in Basic, Micro Pascal or some other easy-to-use and easy-to-distribute programming language. Soon to follow was Object Oriented Programming and other 4th Generation tools (4GL), which was the start of the user interfaces (UX) we enjoy today. Everything made the jump, including core systems, ancillary products and payment systems. Even the ATM machine became a device for new UXs and better customer experiences.
Underneath it all was a growing and much more thoughtful approach to database design. With the proprietary file structures now obsolete, the majority of products switched to databases driven by Oracle or SQL Server. These introduced yet another layer of intellectual property to the technology stack – a layer that doesn’t come free.
So, today we look at a technology landscape that once had a finite list of vendors and find a hodge-podge of retrofitted new players, legacy systems, contemporary UX, modern data structures and shareware. Companies have bought and sold source code, modified the code and in some cases completely departed from the original system architecture. Within the financial technology (FinTech) industry, the companies themselves have been bought and sold. Some had a straight forward chain of ownership which the buyer purchased; in other cases, figuring out the chain of ownership was been close to impossible.
There have been other scenarios where certain systems, distributed and operated by a licensed reseller for decades, suddenly had the reseller’s license discontinued, putting them out of business literally overnight. The potential for that same scenario still exists today. It all boils down to dollars and cents. When the actual owner finally decides that the reseller no longer has value, it’s over. The continued consolidation of the financial institutions will only hasten this reality.
Mixed into this complex tangle of intellectual property are a list of household names whose operating systems or database engines reside in the workflow of the transaction process. They want their value recognized as well. For example they’ll argue that a deposit transaction made at an ATM which may traverse several networks and may finally come to rest in a database somewhere in the chain is, in fact, touching their intellectual property and, as such, they have a licensing claim.
On top of all of this is a new generation of providers bringing financial institutions services via “The Cloud,” which may actually be Amazon or some other provider. We’ve yet to see what intellectual property (IP) issues may lurk along those lines, just as we’ve yet to see regulators pay a visit to Amazon as they do annually to the industry mainstays. That may be only a matter of time.
The first sixty years during which FinTech has existed has been interesting; the last thirty have been a whirlwind. What will transpire in the next five will be as amazing as the previous sixty put together. All that said, the variety and rate of change in FinTech will make ownership issues even more difficult to track and ascertain. Even the industry consultants who work closely with the vendors possess limited information.
In the end, as the number of financial institutions continues to decline, the value to the real owners of the FinTech will increase, as will their zeal to protect that value. With all the other challenges financial institutions face, the last place they want to find themselves is in the middle of an IP crossfire. Indemnifications as warranties are great, but maybe a title search can be better? Time will tell.
Mr. Nicastro is principal and CEO of Bristol, Conn.-based Coppermine Advisors, LLC. He can be reached at [email protected].