COVID-19: Move to Digital Banking Highlights IP Risks

Social distancing measures aimed at slowing the spread of the COVID-19 pandemic have led to access restrictions at bank branches across the country, with many even closing temporarily. Customers are also being more discerning when it comes to in-person interactions. A recent study found that 82% of consumers are concerned about going to their local bank or grocery store during the pandemic.

The ongoing public health crisis has accelerated the financial sector’s yearslong shift toward digital banking. And although many American consumers will return to branch banking once social distancing measures are eased or lifted, their use of digital banking will likely continue to grow — creating new risks for banks related to intangible assets.

Growing Risks

To provide customers with fast and reliable digital services, banks require effective — and valuable — digital tools, which can be built in-house or acquired through technology partners. Banks have heavily invested in financial technology, but trailed technology companies in such patents by more than 15 to 1 as of July 2018. Forward-thinking banks will continue to invest in intellectual property (IP) to generate competitive advantages in delivering digital services.

But the cost of intangible asset risk can be staggering. IP infringement litigation and disputes about patents and intellectual property — between banks, technology companies, and the banking customers of those technology companies — can cost banks and others hundreds of millions of dollars each year.

Evolving Insurance Needs

In parallel, risk managers should adjust their insurance portfolios to reflect the growing value of intangible assets. Banks have historically purchased insurance to protect traditional assets such as deposits and real estate. Intangible assets, however, are more difficult to value and insure. Intangible assets are difficult to value because they are not traded on traditional financial exchanges, they are non-rivalrous — meaning they can be simultaneously held by more than one company — and their value can fluctuate significantly over time. Traditional insurance underwriters have historically found it difficult to quantify and predict risks related to such intangible assets.

Fortunately, new IP insurance solutions are now available to meet the evolving needs of even the most progressive financial institutions. Among other risks and costs, these emerging products can help to protect three areas from which the largest IP costs typically emanate:

  • Defense costs and damages (including both settlements and judgements) arising from a third party’s allegation that a financial institution has violated the third party’s patent, copyright, or trademark rights or misappropriated the third party’s trade secrets. 
  • Costs arising from the financial institution’s contractual obligations to indemnify its customers, vendors, or trading partners if those entities are alleged to have infringed on a third party’s intellectual property.
  • Defense costs arising from a third party’s attempt to cancel or invalidate a financial institution’s registered intellectual property assets, including patents, trademarks, and copyrights.

As financial institutions continue to invest in digital strategies and more intangible assets are added to their balance sheets, they need to effectively protect themselves by reassessing their risks, quantifying associated costs, and exploring effective IP insurance solutions.

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Jason Sandler

Senior Vice President, FINPRO