“Patents suck”, said Google chairman Eric Schmidt at the Dreamforce conference on September 1. In fact, Google purchased Motorola mobility in large part for its trove of mobile phone related patents, as a “weapon of mass defense”, because patents have become a tool to obtain financial compensation from competitors largely unrelated to the original intent of providing inventors a period of exclusivity on their inventions.

In July, the radio show This American Life, had a great piece called “When Patents Attack!” about “patent trolls” in the Eastern District of Texas who have no other purpose in life than extracting protection money from companies with real businesses and products. Instead of threatening to set the business on fire, mafia-style, they sue regardless of the merits of the patents they have purchased (of course they have not invented anything themselves), and offer to settle out of court for large amounts of money. Patents have become the equivalent of cans of fuels and boxes of matches.

The financial industry has not been spared by patent trolls. Visa, Wells Fargo, MasterCard, Bank of America, Citibank, and many others have been sued for alleged infringement of patents related to digital currency systems that were never implemented by the owner of the patents and would make any software engineer roll on the floor laughing at their triviality.

In an intriguing twist, the America Invents Act is requesting that the Director of the US Patents and Trademarks Office put a transitional post-grant process in place for reviewing  the validity of covered business-method patents. The definition of “covered business-method patents” is explicitly narrowed down to:

A patent that claims a method or corresponding apparatus for performing data processing operations utilized in the practice, administration, or management of a financial product or service, except that the term shall not include patents for technological inventions.

Being no lawyer myself, I interpret the  goal of this post-grant review process as being a way to facilitate the debunking of dubious patents, or the defense against patent trolls. It is rather interesting that lawmakers have chosen financial products and services as the target for this transitional process. I guess that they placed a high priority on limiting the use of patents as a weapon against innovators trying to oil the wheel of a stalled economy.

The Amendment, part of the sweeping Dodd-Frank financial overhaul legislation, allows the Federal Reserve to put limits on the interchange fees that merchants pay banks when you swipe your debit card at their cash registers.

Today, those fees are ranging between 1% and 2% of the amount you purchase and have added up to $16.2 billion that merchants paid in 2010. As of October 1, 2011, the planned effective date for the new rule, those fees will be a maximum of 21 cents plus 0.05%, nearly 48% percent lower than before for a typical transaction of $40.

Lower fees sound like a good thing, assuming the savings are passed on to consumers and assuming that the banks can still afford to run the networks that make debit cards work safely and reliably.

If they can’t, consumers will see new fees tacked on to their bank debit cards and will respond by moving to lower fee alternatives. That, in turn, will prompt the banks to innovate their financial products while being mindful of not letting hidden fees get out of hand, for fear of sparking the regulatory backlash cycle all over again. And in the end, I predict consumers will gain fair, simpler, more transparent banking options, and retailers won’t be left holding the bill. But it will take a few tries to get there.

For background on hidden interchange fees, read Why You Should Care About Hidden Interchange Fees in 2011

For the details of today’s ruling, read the Fed memo posted by PYMNTS.com

Disclosure: Plastyc, a company that offers prepaid card services (prepaid cards are a sub-category of debit cards)is not directly affected by the proposed interchange rules, which only apply to prepaid card issuers with assets of $10 billion or more.

The Board has requested comment before February 22, 2011, on their proposed rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

Here is a copy of the comment I have sent to the Board:

Secretary,
Board of Governors of the Federal Reserve System,
20^th Street and Constitution Avenue NW
Washington DC 20551

RE: Comments to Docket 1404 – Debit Card Interchange Fee and Routing

I am the CEO of Plastyc Inc., a company devoted to delivering  financial services to the tens of millions of under-banked Americans.
We provide re-loadable prepaid card services in partnership with banks with less than $10B in assets.

Therefore, we are not impacted by the proposed regulations and can comment with the benefit of a position of neutrality.

We are particularly concerned by the un-intended negative consequences which are likely to impact the un-banked, under-banked and low income Americans. Below is a summary of such concerns, and suggestions on how to address them:

I remain at your disposal for any further input you may require.
Very Respectfully Yours,

Patrice Peyret

On December 16, 2010, The Federal Reserve Board proposed a new rule that would lower by as much as 84 percent the $16.2 billion in fees that merchants pay annually when you swipe your debit card at their cash registers. (The Fed asked for public comments on the proposal by February 22, 2011.)The idea is that merchants will save money and pass along savings to you.

Immediately, large U.S. banks and credit card issuers attacked the proposed rules as a threat to their industry, a handout to merchants who get out of paying their fair share of money network costs, and a booby-prize for consumers who gain no assurance of savings but almost surely would face higher banking fees.

See “Debit Card Fee Cap Could Mean Higher Prices for Consumers”

Behind the proposed new rules and the arguments against them are some key questions:

• Why should you care?
• What are the real costs?
• Who should pay?

Read the complete article in the Huffington Post

Payday Lending ... no more

In a recent article published by the Huffington Post, I argued that the days of abusive payday lending might be numbered, now that new online services like BillFloat are appearing at a fraction of the cost.

I also lamented that some prepaid card suppliers were cozying up a bit too much to the payday lenders…
Guess what: this week, prepaid card providers NetSpend and AccountNow are finding themselves sans the iAdvance short-term lines of credit with 3 digit yearly APRs that they were tackling to some of their cards.

The Office of Thrift Supervision asked MetaBank, the originator of the iAdvance product  to stop  offering it.

It is difficult to rejoice when your industry neighbors and competitors are getting hit, because the whole industry gets blemished.
As always, market players should always improve by taking the initiative to create better and cheaper products rather than by shedding existing bad products only when forced to.

• go to the Student Cards section of the Visa website
• pick a card
• click on the Apply button

Do you get any hint that you are not eligible if you are less than 21 and don’t have a co-signer on the card or can’t prove that you can repay the debt?
No.
In spite of the CARD Act being in effect since February 22, 2010, banks are just looking the other way. To be fair, maybe they are actually filtering people less than 21 out after enrollment. I did not go all the way through a full enrollment to check.

Wouldn’t the banks have a lot to gain by being upfront and claiming loud and clear that they are OK with not dragging students less than 21 year old further into debt and being happy to comply with the new law?

Instead, it is business as usual for the big banks. Consumer protection? Not their cup of tea. Demonstrating good will and compliance? Naaahh…

I predict a massive consumer exodus from these inconsiderate corporate giants in favor of fair and transparent services offered by innovators.

None of the current provisions in the bill seems to address the crucial problem of “Fat Fingers”. On Thursday May 6, Wall Street may have gotten pretty  close to total collapse because some trader supposedly placed an order to sell billions of shares of Procter and Gamble instead of millions.

With 30% of Americans being now considered overweight, the dangerous proximity of the “B” and “M” keys on computer keyboards has been a ticking bomb for quite some time.

Go ahead, check your own keyboard right now: the letter “N” is the only line of defense protecting the financial world from certain failure.
Can we keep counting on this single-letter levee to avoid future disasters?

Worse! Extend your keyboard inspection to the vicinity of the letter B and be very afraid…

A fat finger still greasy from a lunch of hamburger and fries quickly swallowed at the trader’s desk to save time and keep those bonuses up, could result in Trillions, not to mention Gazillions, of shares or dollars being ordered to change hands.

It is not a question of if, but when Armageddon will strike.

Unless we take some serious and immediate action.

This is where my suggested Fat Finger Amendment comes in:

Keycaps shall immediately be re-arranged with the four letters M, B, T and G relegated to each of the far corners of all computer keyboards.

Steve Jobs, please order your software engineers to patch the virtual keyboard software of iPads and iPhones right away.

A key piece of new regulation, The Credit Card Accountability Responsibility and Disclosure Act of 2009, act includes important provisions that go into effect in three weeks. One important change makes it illegal to provide credit cards to people under 21 unless an adult over 21 co-signs for the card or the younger adults show proof that they can pay off the debt. Other provisions limit certain fee types and gee charging methods for most credit cards.

In response to this and other new regulations, traditional banks are scheming up new ways to charge customers, as Ron Lieber at the New York Times profiled here. The banks customer-unfriendly reaction will drive increasing numbers of individuals to discover that there’s a new game in town and embrace change.

That new game in banking is technology. It makes it possible to service people’s payment needs in new ways that are better, faster and more affordably than before,

In particular, people who have long been overlooked and underserved by the old banking establishment – the young and people with low balances — will adopt new products and services online, on cell phones and on cards that are more accessible, more affordable and that meet their needs better than the corner branch of a large bank.

It’s unlikely that people will see these innovative new products come first from large banks. Their overhead costs – including large executive salaries and real-estate leases — are too high, and they have too much to lose from change to undercut their existing business. But in response, over time, even the traditional banks will be forced to innovate without fee-gouging in order to compete for customers.

These new services will come in many varieties. There are good examples in a recent report by analyst firm Forrester Research titled “Hot Banking Banking Tech Companies to Watch In 2010” . For instance, Bling Nation works with community banks to provide local payment services using contactless tags affixed to the back of cellphones. And Econiq helps community banks and credit unions coach customers about financial services based on their life events such as a new child. (My company, Plastyc, Inc., is also mentioned the report. It has no commercial ties to Forrester Research.)

And in my conversations with industry innovators, I’m hearing exciting ideas for new ways to embed payment services into other products and services that people use on a daily basis.  Here are three examples:

• Merchant debit accounts. Rather than dragging consumers further into debt, some merchants of durable goods like appliances or used cars, are securing recurrent direct debits from un-banked but dutifully employed consumers, by encouraging them to sign up for a prepaid card account into which salaries can be direct-deposited by employers and from which monthly payments for access to the goods can then be directly debited.
• Paying for cell phone services. Consumers who use prepaid cell phones for themselves or their family will be able to top up those phones with airtime right from within a payment card account, instead of having to buy “scratch cards” or obtain a “PIN” and redeeming them over the phone
• Cause-related services. Non-for-profit organizations like the Economic Empowerment Initiative or Amar’e Stoudemire’s Each One Teach One foundation are coupling their financial literacy programs with prepaid cards for teens.

These examples are transformative because they flip the payment services model by aligning the vendor and the customers’ interests in finding effective, affordable, reliable payment options. This alliance is especially promising for customers who are not served well by traditional financing options.

In order for these next generation services to transform banking, people have to trust them. So many of them will be linked to safety nets such as FDIC insurance and payment networks such as Visa.

Even with those safety nets, change will stem from the early adopters and those feeling left out or angered by the old consumer banking establishment.

But very quickly, smart consumers across the economic spectrum will realize that there’s a new game in town and power balance is shifting from the bankers to the consumers.

It lists a pretty damning list of new fees and new ways of obfuscating them that have been created by banks to keep making money on the backs of consumers while circumventing the impending Credit CARD Act of 2009.

See also WalletPop for a good summary of what these new fees are.

OK, so I have been complaining about a lack of innovation in financial services in a prior post. Actually, I lamented the lack of innovation at the service of customers. It seems that there is plenty of innovation at the disservice of customers.

You have to love the cover illustration provided by Mark Fiore for the CRL report.

Illustration by MarkFiore.com