Financial innovation today and tomorrow

Josh Lerner, Amit Seru 14 September 2021



Financial innovation is intensely controversial. Nobel laureates have both lauded (Merton 1992, Miller 1986) and excoriated (Stiglitz 2010) these breakthroughs for their economic and social impacts. While economists have made initial steps to grapple with the consequences of financial innovation empirically and theoretically (e.g Beck et al. 2012, Biais et al. 2010), we know remarkably little about the even more basic question of where or by whom these new products and services are developed.

Our recent work with Nick Short and Yuan Sun (Lerner et al. 2021) seeks to address this gap using a newly constructed dataset of over 24,000 financial US patents applied for between 2000 and 2018. Patents can provide a valuable window into the nature of recent financial innovation. 

The financial services industry has historically differed from the bulk of manufacturing industries in the ability of innovators to appropriate their discoveries. In the US, there has long been ambiguity about the patentability of financial discoveries. At least since a 1908 court decision established a ‘business methods exception’ to patentability, many judges and lawyers have presumed that business methods were not patentable. Another concern limiting financial patenting was that it was very difficult for firms to detect infringement of their valuation- and trading-related patents.

Consequently, patent awardees were reluctant to incur the time and expense to file for awards. Instead, new product ideas diffused rapidly across competitors. As a result, patents traditionally only provided a limited guide to innovative activity in finance, in contrast to other fields. Between 1971 and 2000, only 445 financial patents were issued by the US Patent and Trademark Office. These patents represented less than 0.02% of all awards during this period.

Attitudes toward business method patents changed with the July 1998 appellate decision in State Street Bank and Trust v. Signature Financial Group. This case originated with a software programme used to determine the value of mutual funds, on which Signature had obtained a patent in 1993. State Street Bank sued to have the patent invalidated on grounds that it covered a business method. The Court of Appeals for the Federal Circuit reversed the finding. The court affirmed the patentability of the software since it produced a “useful, concrete, and tangible result”. 

State Street thus established that business methods were patentable subject matter on an equal playing field with more traditional technologies. Numerous trade press articles interpreted the case as unambiguously establishing the patentability of business methods. Conversations with patent practitioners suggest that the historical differences between patenting in finance and other technological domains have narrowed considerably in recent decades.

Identifying patents that are finance-related from patent filings remains a challenge. We first identify a set of patents that are assigned to financial patent classes and then train a natural-language processing model to recognise similar financial innovations that might be assigned elsewhere using the patent text and inventors’ names. This process allows us to analyse financial patents in a wide range of patent classes.

Figure 1 illustrates the dramatic boost in financial patent applications and awards over this period, showing the increase from a nearly infinitesimal share to between 0.4% and 1.1% of all grants. Moreover, financial patents were disproportionately important ones as measured by commonly used measures of patent value. We show that the patterns seen in patenting closely reflect those using another measure of innovative expenditures (corporate venture capital investments) and do not appear to be driven by shifts in the reliance on trade secrets.

Figure 1 Financial patents as a share of all utility patents

Notes: The number of financial patent applications was 35 in 1994, 1,125 in 2004, and 1,607 in 2014. Utility patents include new or improved ideas, processes, machines, and manufacturers.
Source: Researchers’ calculations using data from IFI CLAIMS, PatentsView, Derwent, and Capital IQ

We also show that an increasing fraction of patented financial innovations have focused on consumer rather than business applications. Moreover, the surge in financial patenting was driven by US information technology (IT) firms and those in other industries outside of finance. Banks and other financial institutions represented a modest share of the awards, with IT companies dominating. Banks and payments firms increasingly focused on their core areas, while IT firms and other financial firms have continued to patent widely in finance. IT, payments, and other firms were more likely to be issued process patents as well as consumer finance ones.

The share of US awardees relative to foreign firms is growing. And within the US, we see the rise of innovation in the greater San Francisco region (and the Pacific more generally) and the decline of the New York area.

Financial regulatory actions seem to have adversely affected innovation by financial firms, consistent with the broader literature (Aghion et al. 2021). In the years after the global financial crisis, financial innovation by banks shifted from locations with tight financial regulation to more permissive places. More speculatively, these results suggest that the seeming failure of banks and other financial institutions to expand their innovative scope may have (at least partially) been due to pressures from financial regulators. Not only may financial regulation have led financial incumbents to shift the location of innovative activities, but it may also have depressed their focus on innovation more generally.

By way of contrast, regions with the highest technological opportunities in general attracted financial innovation by payments, IT, and other non-financial firms. Overall, the evidence is consistent with two sets of explanations for the changed location of innovation: the push of regulatory pressures and the pull of technological opportunity.

We also examine the source of the ideas behind finance patents by exploring the relationship between financial innovations and the academic knowledge base. Over the sample period, academic citations in finance patents were associated with more impactful patents, an effect that held for such citations in general as well as citations to articles in business, economics, and finance journals. The relationship between academic citations and patent value became stronger over time, particularly in the 2015–18 period.

The number of citations (references), however, in finance patents to academic papers fell over time. This decline was most dramatic for banks, and for citations to business, economics, and finance journals. Citations have been to increasingly older academic articles. Three explanations can be offered for the patterns of fewer but more valuable academic references. First, as the focus of financial patents shifted to consumers, there may have been less relevant academic work to cite. Second, commercially relevant academic discoveries in finance may be harder to come by, consistent with Bloom et al. (2017). Finally, financial organisations, especially banks, may have less ability to absorb insights associated with consumer-oriented patents.

The failure of traditional financial institutions to maintain pace in consumer-focused innovation is puzzling. The results hint at factors that may have exacerbated the declining share of financial innovation by banks: the seeming decrease in relevant contemporaneous academic discoveries (or the ability to identify and absorb them), as well as regulatory pressures after the global financial crisis (see the discussion in Philippon 2019).

These findings have implications for policymakers and business leaders alike. To the extent that financial innovation, particularly geared toward consumers, is seen as desirable, government leaders may be factoring in the unintended effects on innovation of steps to tighten financial regulation. The findings also suggest the need for incumbent financial institutions to intensively explore alternative ways to access knowledge about innovations emerging from the IT sector, whether alliances, corporate venture capital, or acquisitions.


Aghion, P, A Bergeaud and J Van Reenen (2021), “Regulation chills minor (but not radical) technological innovations”,, 1 February.

Beck, T, T Chen, C Lin and F Song (2012), “Financial innovation: The bright and the dark sides”,, 2 October.

Bloom, N, C Jones, J Van Reenen and M Webb (2017), “Ideas aren’t running out, but they are getting more expensive to find”,, 20 September.

Biais, B, J-C Rochet and P Woolley (2010), “Rent capture through financial innovation”,, 25 March.

Lerner, J, A Seru, N Short and Y Sun (2021), “Financial innovation in the 21st century: Evidence from US patents”, NBER Working Paper 28980.

Merton, R C (1992), “Financial innovation and economic performance”, Journal of Applied Corporate Finance 4(Winter): 12–22.

Miller, M H (1986), “Financial innovation: The last twenty years and the next”, Journal of Financial and Quantitative Analysis 21: 459–71.

Philippon, T (2019), “The FinTech opportunity”, in J Agnew and O S Mitchell (eds), The Disruptive Impact of FinTech on Retirement Systems, New York: Oxford University Press.

Stiglitz, J E (2010), “Risk and global economic architecture”, American Economic Review Papers and Proceedings 100: 388–92.



Topics:  Productivity and Innovation

Tags:  financial innovation, financial regulation, FinTech, innovation, regulation

Jacob H. Schiff Professor of Investment Banking, Harvard Business School

The Steven and Roberta Denning Professor of Finance at Stanford Graduate School of Business, Senior Fellow at Hoover Institution, Senior Fellow at Stanford Institute for Economic Policy Research (SIEPR)


CEPR Policy Research