Financial Innovation in the 21st Century: Evidence from U.S. Patents

We explore the evolution of financial innovation, using 24,000 U.S. finance patents applied for and granted over last two decades. Patented financial innovations are substantial and economically important, with annual grants expanding from a few dozen in the 1990s to over 2000 in the 2010s. The subject matter of financial patents has changed, consistent with the industry’s shift towards household investors and borrowers. The surge in financial patenting was driven by information technology and other non-financial firms. The location of innovation has shifted, with banks moving activity away from states with tight financial regulation. Concurrently, high-tech regions have attracted financial innovation by payments, IT, and other non-financial firms. Analyses of the returns to financial patents suggests that the social value of these innovations are higher than their private value. We present a simple model to explain these trends. The changing dynamics of financial innovation that began in the 1980s and 1990s may have lowered the private returns to innovation and increased the desirability of patent protection for financial innovations. Regulation of banks following the financial crisis of 2007 may have raised the costs of innovation, leading them to invest less in such activity.