Online Banking Fight

Banking behemoth Citibank recently launched a legal attack against a pint-sized competitor in the home-banking business, precipitating a courtroom battle that raises questions about the future of a nascent industry that promises to be worth billions.

In late November, Citibank filed a lawsuit in federal court against Online Resources &amp Communications of McLean, Va., for patent infringement. The suit alleges that Online Resources' ScreenPhone violates three Citibank patents, and it calls for a cessation of the infringement and treble the assessed damages. Online Resources denied the charges and filed a countersuit against Citibank seeking to invalidate the patents.

Matthew Lawlor, CEO of Online Resources, said the suit is without merit and expressed confidence in his company's ability to prevail. "Nuisance patents are part of the technology business. We can deal with Citibank because we're on solid ground."

Citibank officials failed to return repeated calls.

Mark Frieser, a senior analyst with Jupiter Communications Co., shares Lawlor's opinion. "I don't think they [Citibank] are going to win this; they don't have a valid case," he said. "Online Resources is right to be countersuing them."

Home banking via microprocessor-equipped screen telephones has become available over the past few years, but as more couch potatoes become couch depositors, bill payers and investors, credit card companies, online services, phone companies and other heavyweights are muscling in on the market for a piece of the action. Witness Microsoft's proposed acquisition of Intuit, maker of Quicken, the leading money management software, which the computer giant wants to offer over its pending online service. In May 1992, Online Resources inaugurated what it claims was the nation's first home-banking service to customers of Maryland National Bank, now part of NationsBank. Consumers conduct their banking via the company's $79 ScreenPhone, sold to depositors though participating banks. Online Resources provides support services, and also offers online investment services that allow users to buy, sell and check the status of stocks, bonds and mutual funds.

Lawlor suggested Citibank's actions represent an attempt to stifle competition from other banks and vendors offering screen phones and home-banking services.

"Citibank may be mounting nothing more than a than a veiled attack on banks that compete with it for the home-banking customer," said Lawlor. "Instead of competing head-to-head in the marketplace, Citibank initiated this surprise legal action."

Citibank introduced its own home-banking service in the Mid-Atlantic region two months ago, home to Online Resources' biggest market, where NationsBank just made home banking available to all of its 1 million customers.

"[It] was very strange that Citibank decided to sue someone that happens to be in the market that they are entering right now," said Frieser. "It's very hard for Citibank to compete when Online Resources' phone sells for less than $99 and [Citibank's sells] for $600." An anonymous source familiar with the case said Citibank is betting the lawsuit will frustrate Online Resources' attempts to market its system to other banks and financial institutions, giving Citibank a golden opportunity to push its own home-banking service.

"There is no doubt it puts a cloud over things," the source said. "Online Resources is trying to sell its service to other banks that are saying 'what if you lose this case and I'm using your system?'"

Asked if such a strategy sounded plausible, Frieser responded: "Absolutely, I agree." Although NationsBank continues to offer Online Resources' services and phones, the bank is studying Citibank's claim, according to the source. A NationsBank official declined to comment.

The lawsuit also raises the specter of something known in patent circles as submarining, a practice where one party buys a patent and silently sits on it until another party manages to turn a profit using a similar process. The patents are then unveiled and the unsuspecting party is submarined with a demand of royalties or slapped with lawsuit.

According to the anonymous source, Citibank informed Online Resources several months ago that it held several screen-phone patents. When Online Resources asked if the company was in violation of Citibank's patents, the bank said it was not, according to the source. After being hit with the lawsuit, Online Resources did some digging and discovered that Citibank owns a whole host of patents, the source said.

"They had plenty of years to enforce these," Frieser said of Citibank's patents. "Online Resources started business in 1989, but [Citibank] waited five years [to enforce the patents]," he said.

Lawlor said Citibank's actions contradict its convictions. "I find it ironic that over the past two decades Citibank has been quietly building a patent portfolio while at the same time it has been an outspoken critic of patents held by others," he said.

Interestingly, Online Resources claims a rather sweeping patent of its own, one that it says gives it "exclusive rights to process real-time electronic transactions of consumers who use any in-home terminal to purchase goods and services, and pay bills through a debit network, including automated teller machine networks."

According to the anonymous source, Online Resources said it will charge a modest licensing fee to anyone using a process covered by its patent, but "we have not charged anyone because no one has asked us."

Meanwhile, although Citibank has not indicated an intention to sue others, its lawsuit may indeed be a dry run for the big time. Frieser believes Citibank is using Online Resources as a guinea pig to test the validity of its patent claims before gunning for more resourceful rivals.

"In my opinion it looks like Citibank is taking on the smallest and weakest rival," said Frieser. "They are trying to strengthen the patents they have-a lot of which have never been enforced-in order to position themselves."