The Uninvited Guest: Patents on Wall Street

Abstract:     
The 1998 State Street Bank case opened the door to patents for "business methods." One important category of business method patents covers financial products: securities, derivatives, futures contracts, and the like. This paper describes how State Street Bank emerged, unbidden by the financial services industries, as a byproduct of the long legal wrangle over software patents. It then reviews the traditional innovation process in the financial services industries, and predicts how the affected industries will respond to the advent of patents. The analysis draws on two case studies of other industries forced to adjust to the rapid and unexpected introduction of patents: (1) the railroad industry in the nineteenth century, in which established firms that had eschewed patents were suddenly confronted with numerous patent headaches; and (2) the U.S. software industry in the 1980s and early 1990s, which confronted a similar influx of patents. The paper makes two general observations based on these case studies. First, patents were far less disruptive in the intermediate term than industry members initially feared. And second, savvy firms - including new entrants - learn quickly to make strategic use of patents. Thus whatever positive effects patents may play in the financial services industries are not likely to come in the form of significant increases in financial innovation, but rather in the facilitation of new firm entry (e.g., venture capital-backed startups) and novel firm strategies such as spinoffs.

Number of Pages in PDF File: 37

Keywords: Patents, Innovation, Financial Services

JEL Classification: O34, O31, K11, M13, N21

working papers series