What is fintech?
The term financial technology or fintech refers to businesses that utilise technology to create financial services for both the consumer and the business. It includes companies that operate personal financial management, insurance, payment and asset management. Apple Pay, PayPal or even using a credit card to make an online purchase are examples of fintech. A broad definition of fintech is anywhere technology is applied in financial services or used to help companies manage the financial aspects of their business, including new software and applications, processes and business models.
Fintech has become a buzzword in recent years; everyone is working on it or wants to be a part of it. Businesses are realising that without it, they may risk losing their customer base as it creates a seamless experience customers expect in today’s fast-paced and evolving connected world. Traditional finance companies like banks are not immune to fintech as they, along with startups, are embracing this technology, changing the way they interact with customers. fintech forms part of everyday fund transfers, currency exchange, funding and personal finance through applications and businesses such as Venmo, NerdWallet, Transferwise and Kickstarter. In China, e-commerce giants like Alibaba, JD.com, Baidu Finance, Tencent and commercial banks all form part of the rapidly expanding fintech movement.
When it comes to patents, financial services companies are ruling the realm. Visa and Mastercard dominate, with more than 300 worldwide patented inventions each related to mobile payments. The same also applies for published patents — 1,784 for Visa and 1,046 for Mastercard. Other financial services contenders include Bank of America with 260 inventions and 422 published patents, PayPal with 145 inventions and 559 published patents and First Data Corp (a US-based financial services company) with 40 inventions and 136 published patents.
Mastercard’s CEO Ajay Banga has made it clear that the company is no longer a financial services provider but a technology company. Mastercard has several technologies, including in-Control, allowing users to carry just one Mastercard but set it to charge either a credit or debit account for purchases above or below a specified amount. It can also restrict the type of store where the card can be used. InControl is patent protected for the next 10 years and shows how mainstream companies are adapting to join the fintech race.
The fintech market in China
In 2017, China’s fintech revenue reached $101.6 billion, soaring by 55.2 percent compared with 2016 ($421.4 billion) and is expected to surge to $1.97 trillion in 2020, according to data from iResearch. Last year there were more than 914 million users in China in the digital payments segment with that number reaching close to 1.6 billion in 2022, according to data from Statista. Turning to transaction value, China comes in first place ahead of the US with a total transaction value of $1.5 billion expected in 2018, compared with $1.2 billion in the US. Mobile payments hit $5.5 trillion last year — that is 50 times the size of the US market.
A ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five positions in 2017. The largest Chinese fintech company, Ant Financial, has been valued at about $60bn, on a par with UBS, Switzerland’s biggest bank. An article from The Economist says: “[W]hen it comes to fintech, the rest of the world will be studying China’s experience”.
China’s fintech rise is most notable in three areas: mobile payments; online lending; and money market funds. According to data from China’s Ministry of Industry and Information Technology, for about 425 million Chinese or 65 percent of all mobile users, phones act as wallets.
China is the world’s leader when it comes to fintech and the biggest market for digital payments, accounting for nearly half of the global total. When it comes to online lending, China occupies three-quarters of the global market. From just 214 peer-to-peer (P2P) lenders in 2011, there were more than 3,000 by 2015. fintech has exploded in China over the past decade because of its rapidly growing economy and unsophisticated banking system. As people amassed wealth they had no outlets to invest and if they wanted to purchase, cash was king. Technology has offered new avenues to Chinese consumers, allowing them to bypass an outdated banking system. “Today, the promise of fintech in China is great,” according to the same abovementioned article from The Economist. “It is shaking up a stodgy banking system and helping to build a more efficient one, especially for consumers and small businesses.”
How does IP intersect with fintech?
As with all works or inventions, intellectual property is protected by law enabling people to earn recognition or financial benefit for their inventions or creations. IP rights can be used
to protect software, hardware and the branding associated with fintech inventions, which is essential for the competitive technology in this space. An IP strategy is particularly important for start-ups as they seek funding from investors who will want to know that the fintech they are buying is protected. In addition, there is nothing more attractive to potential buyers than a strong IP portfolio, should the time come when a founder decides to sell their business.
What protection mechanisms are available?
When it comes to software-based innovations, copyright is one option for protecting the computer code. However, fintech inventors have to be cautious with copyright, as it does not prevent competitors from achieving the same effect using a code that has been developed independently. This is because copyright is in essence the protection of the expression of an idea, but not the idea itself. As such, software companies cannot always rely on copyright protection to prevent rivals from reverse engineering computer programs.
Any physical attributes of fintech like electronic cards, machines, interfaces and icons may be protected under design patents. This is a valuable asset, especially if one of these features promotes the distinctiveness of the brand, products and services, or increases the usability of the product. However, due to practice differences, elements or icons of application interfaces may be protected by design laws in some jurisdictions, for example in Europe, but not in countries that do not recognise partial designs, like China.
Trade secrets provide protection for secret business information and may protect material such as confidential backend server processes and codes. Trade secrets require no formal registration, but companies must take reasonable steps to keep it secret. The protected information may be protected for an unlimited period of time as long as it is kept secret and has commercial value. Unauthorised use of trade secrets is regarded as unfair business practice.
Branding and trade mark protection
Branding is essential to all fintech companies. Without a strong brand to differentiate their products and services from competitors, no matter how strong or valuable the invention, fintech companies can find it difficult to establish a trusted customer base. This is especially true as fintech companies deal with financial assets and documentation.
Brands may include a word mark, device or a combination thereof, and in the context of China, which is a first-to-file country, it is always recommended to file the same, along with the Chinese language equivalents. This can protect against competitors or squatters unlawfully riding on or diluting the goodwill of a brand. Trade mark registration and strong brand enforcement measures provide vital security and protection for a company’s name and branding and must form part of an overall IP strategy for the company.
Without physical goods, fintech companies rely heavily on branding. Branding is much more than the website and logo — it is the message businesses communicate to multiple stakeholders, defining the value proposition and why the brand is different.
As more fintech companies start popping up, becoming the preferred partner in your category is essential. This means cultivating a community and partnership strategy and how you are going to reward and engage users to keep them interested.
Branding is not only a tool to assist in acquiring customers though, it is also extremely vital for obtaining the right talent (most commonly referred to now as employee branding). Any fintech IP strategy would not be effective without a comprehensive brand management toolkit.
Patents, with a lifetime of 20 years, protect innovations based on new technology or processes, allowing companies to shield their inventions while they gain market share. Patenting the underlying technology of the invention provides a mechanism to exclude others from making, using or selling the patented technology. Patents offer the strongest protection for fintech businesses but can be hard to obtain since the core of fintech innovations very frequently comes down to so-called business methods or computer implemented inventions, the patentability of which can be problematic in many jurisdictions.
Challenges — different standards of patentability globally
In the US, business methods were previously thought to be patentable, but this has become increasingly difficult in recent years as evidenced through case law. In Alice v CLS Bank International, the US Supreme Court held that the patents regarding certain claims about a computer-implemented, electronic escrow service for facilitating financial transactions were invalid because the claims were drawn to an abstract idea and implementing those claims on a computer was not enough to transform that idea into patentable subject matter.
In Europe, patent law explicitly excludes computer programs and methods of doing business from patent protection unless the invention defines technical features which solve a technical problem in a non-obvious manner. China’s stance is similar to Europe, but examiners at the State Intellectual Property Office (SIPO) may take a more encouraging approach to determining the technical nature of fintech innovations in response to the thriving financial activity in China.
Opportunities in China — revised guidelines for patent examination
In February 2017, SIPO announced its decision to revise the Guidelines for Patent Examination, which became effective on April 1, 2017. The revised guidelines provide significant changes to business methods and software patents.
Previously in China, patent applications involving business innovations in e-commerce faced patent eligibility challenges. Examiners used to reject these applications straight away as not constituting a technical solution when they were considered to fall within the category of business methods.
The following has been added to Section 4.2, Chapter 1, Part II in the Revised Guidelines for Patent Examination: “For claims involving business models, if they contain both the content of business rules and methods and technical characteristics, the possibility of obtaining patent rights shall not be excluded under Article 25 of the Patent Law”.
This opens new doors for business methods and technical feature patentability as they will not be excluded. However, this does not guarantee patentability as the technical element test still remains. For such applications, technical means are adopted to solve a technical problem and achieve a technical effect. Applicants must be able to prove or argue technical contribution for a business method-related application in order for it to be eventually patented.
Previous requirements for drafting computer program related claims were much stricter in China compared to the US, Europe, Japan and Korea. For computer-implemented inventions, the guidelines emphasise in revisions to Section 2, Chapter 9, Part II that computer programs recorded on media are only strictly excluded from patentability if they relate to computer programs per se.
The effect is that certain claim formats that have been previously at risk of rejection as non-statutory matter without further examination must now be thoroughly examined and may be granted giving broader protection for software inventions. This will provide patentees with better enforcement opportunities.
The revised guidelines also clarify that a claim directed to an apparatus for computer-implemented inventions may include a computer program as a component part. The expression “function module” is replaced by “program module”, in order to better reflect the technical nature and distinguish clearly from the expression “functional definition” used when determining the scope of a patent claim. The amendments in this part reflect that SIPO is becoming increasingly open to protecting computer implemented inventions under the Patent Law.
China fintech patent strategy checklist
The revised guidelines make it easier for fintech inventions to pass the patentable subject matter hurdle, and thereafter the invention can be patented if it overcomes the novelty and inventiveness objections. Applicants have greater flexibility to draft patent claims for computer implemented inventions. As a result, once granted, the patent can be protected from various perspectives when infringement disputes arise in the future. fintech companies should consider the following when it comes to patenting their technology:
- • take advantage of the relaxed Revised Patent Examination Guidelines for business method-related applications, but bear in mind that business method per se is still not patentable;
- • file aggressively — the bar previously set for eligibility has been lifted under the Revised Guidelines and businesses should be forceful in their applications before SIPO. Look closely at the technical side of the innovation to find patentable claims. Focus on the technical improvements such as features that enhance the user experience or increasing accuracy, reliability, or efficiency of the system to extract the patentable subject matter;
- • prepare arguments for objections on novelty and inventiveness since the substantial bar is still there;
- • use any positive outcomes to influence the examination of corresponding applications in Europe and the US; and
- • graphical user interface (GUI) is protectable subject matter under Chinese Patent Law and these design patents should be used to protect applications.
Outlook and final reflections
China’s fintech giants are also expanding as WeChat’s mobile wallet is usable internationally. Ant Financial (part of the Alibaba Group) has invested in mobile-finance companies in India, South Korea and Thailand. Singapore and Hong Kong, the traditional banking hubs in the Asia Pacific region, are racing to catch-up with China’s fintech movement. One of the key differences is that China has been quite open on a regulatory level to fintech players. There is much stricter legislation in Singapore and Hong Kong, which creates hurdles. It will be interesting to see how these banking hubs respond to China’s fintech rise over the next few years.
There is no doubt that China is the place to be in terms of the flourishing fintech sector. Global fintech patents have grown by 49 percent in the past five years, reaching 9,545 in 2016, according to official global filings. While the US led the way in terms of numbers of fintech patents with 4,523, in second place is China. According to the report fintech: An IP Perspective by Relecura, China is the fourth preferred jurisdiction for fintech patent filings by top players like Visa, Bank of America and Mastercard, behind the US, Japan and Korea. China is also home to thriving online financial activities based on new internet technologies driven by e-commerce giants like Alibaba, JD.com, Tencent and commercial banks, who are rapidly responding to the hungry disruptors that catapulted China’s fintech movement.
Fintech companies need to file their IP, particularly their protectable patent matter aggressively in China, focusing on the technical inventiveness. Possible objections should be considered with counter-arguments ready. Patenting the technical inventions should form the backbone of an IP strategy, but protecting the brand is also essential. A robust and substantive IP portfolio will not only protect but also heighten the value of any fintech business.
This article was first published in the September issue of Managing IP Magazine and is reproduced here with the kind permission of the publishers.