OVERVIEW
Similar to other traditional industries, a digital revolution for financial services is underway. Financial technology, or ‘‘FinTech,” is an accelerating technical sector gaining in popularity with both traditional financial institutions and new market entrants. Competitors are forming constructive partnerships to collaborate, efficiently develop, and deploy new FinTech products and services. Patents for core technology provide a mechanism to exclude others from making, using or selling patented technology. A company may also permit use of patented technology by third parties or contribute to a patent pool using various licensing arrangements while still maintaining control of its intellectual property rights. However, recent case law and patent office guidelines make obtaining global patent protection for FinTech an increasingly complex matter.
FINTECH PRIMER
FinTech is transforming the financial sector by supplementing or replacing traditional services, business models and providers. FinTech may create brand new market opportunities or give a competitive edge in relation to traditional offerings. This may have broad ranging implications for diverse stakeholders, including major financial institutions, insurance companies, hedge funds, institutional investors, ratings agencies, audit and accounting firms, regulators, technology companies, consortiums, not-for-profits and start-ups. Indeed, large institutions may be making significant investments upgrading or replacing legacy technology systems with new FinTech products.
PAYMENTS
Digital wallet technology is currently already in public use and will likely be employed on a widespread scale in the future. Digital cards include credit cards, debit cards, public transportation cards and other value cards offered by different companies. Mobile technology companies and retailers are entering the payment space with smartphone payment tokens, networks and applications. Digital payment accounts like PayPal™ are also widely accepted on e-commerce platforms and by the public at large, with intramember payment exchanges often not involving traditional financial institutions. Shopify™, for example, is an online and brick-and-mortar transaction platform provider based in Ottawa, and raised $131 million in its initial public offering. Another payment company, Adyen™, is now valued at $2.3 billion that enables Web companies such as Facebook™ and Yelp™ to accept and process payments, and provides mobile-payment tools for clients such as Uber™ and Airbnb™. Finally, Nanopay™, a Toronto-based provider of a payment and loyalty mobile application that combines identity, loyalty and payment into a single-use transaction token for contactless payment, recently acquired the Mintchip™ digital payment platform from Royal Canadian Mint.[1]
BLOCK CHAIN
A block chain is a decentralized peer-to-peer network of nodes recording authenticated, encrypted transactions as a distributed public ledger, thereby providing a trust and verification system [2] by using programmed rules to govern the replication of the ledger across the computing nodes of the networks. Initially invented as a solution to the weaknesses of a trust-based model,[3] the increased use and development of block chain infrastructure is changing payment and secure transaction ledgering services by providing increased security, integrity and verifiability of transactions. Currently, public block chain technology may be used under open license with transparency to help third parties understand the technology offering and associated security levels to build interoperable, trusted solutions. Private and hybrid block chain networks are also being developed by companies individually and working together through consortiums.
While block chains are well known as the technology underlying the transaction database for digital currency,[4] block chains can also be utilized in other types of applications. These include verifying proof-of-existence, smart contracts that automatically execute when certain conditions are met, verifying origin and delivery of products, and peer-to-peer exchanges. For example, Slock™ develops technology that combines block chain and the Internet for peers to rent, share or sell ‘‘things” such as parking spots and apartments.
LENDING
New lending, investing, and fundraising models are emerging. Indeed, crowdfunding platforms like Kickstarter™ enable an organization or individual to reach out directly to a community to raise capital for a business, product or creative endeavour. SeedsUp™, another example, is a Canadian equity crowdfunding platform for limited private placement offerings for early stage businesses.
FinTech also generates financial inclusion and opens new markets through the provision of microfinance solutions, which offers small amounts of financing to new customers that may not have been qualified for traditional funding sources.[5] A prime example of this is M-Pesa™, a mobile-phone microfinancing service that launched in 2007 by Vodafone™ for the largest mobile network operators in Kenya and Tanzania — Safaricom™ and Vodacom™.
New personal investment solutions are also emerging. Toronto start-up Borrowell™ offers online lending technology to provide low-interest personal and business loans, and the low-fee automatic rebalancing system by another fellow Toronto start-up, Wealthsimple™, recently raised $10 million in Series A funding
from Power Financial Corporation.[6]
REGULATORY COMPLIANCE AND AUDIT
Establishing fairness and trustworthiness of financial transactions becomes increasingly complex as different types of financial transactions emerge. Organizations expend significant resources to adhere with evolving regulatory requirements.[7] The rise of FinTech provides innovative tools that may help alleviate the burdens of such compliance, validation and verification.
Companies can leverage technology such as distributed ledgers, block chains, encryption, automation, and others to perform tasks which otherwise would have been impractical or impossible with traditional methods. While these technologies are starting to gain in capability and acceptance, it is a challenge to understand how evolving jurisprudence and regulatory activities apply to FinTech innovation. Legal requirements may develop out of step with technology, and compliance may be uncertain where regulation is drafted around outdated or obsolete technologies.
The full article is available in the latest issue of the Intellectual Property Journal, volume 28(3), pp. 303-314.
Maya Medeiros is a lawyer, patent agent, and trade-mark agent at Norton Rose Fulbright LLP Canada (Toronto). Maya Medeiros’ practice focuses on the creation and management of intellectual property assets in Canada, the United States and around the world.
Brian Chau is an Associate at Norton Rose Fulbright, focusing on intellectual property, primarily patent prosecution, strategy, and portfolio management.
[1] There are several other examples: Adyen also provides point of sale technology for retailers, and Braintree (acquired by PayPal™) provides an online and mobile payment application that aggregates different payment options and currencies, and offers an API for developers.
[2] The Standing Senate Committee on Banking, Trade and Commerce, Digital Currency <http://www.parl.gc.ca/Content/SEN/Committee/412/banc/rms/
12jun15/home-e.htm>.
[3] S. Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008).
[4] A digital currency secured with encryption is a cryptocurrency. A prime example is Bitcoin™, which is the most widely used cryptocurrency-issuing system built on a block chain framework. Cryptography greatly decreases the vulnerability of the block chain to unauthorized or malicious changes.
[5] Many people worldwide, for example, do not have access to traditional banks.
[6] Financial Post, online: <http://business.financialpost.com/entrepreneur/fpstartups/wealthsimple-aims-to-turn-financial-services-industry-on-its-headwith-
new-low-coast-approach-to-investing>.
[7] Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173), Sarbanes-Oxley Act of 2002 (Pub. L. 107-204, 116 Stat. 745).