For some banks, technology investing has taken on a new and more literal meaning.
Beyond their normal spending on hardware and software, these institutions are making investments in technology companies.
The objective is not necessarily to turn a quick profit or even to reap the long-term gains that venture capitalists seek-though at some top banks, venture subsidiaries have served as windows on the high-tech world.
They instead view these as "strategic investments," with an eye to improving their understanding of, gaining access to, and getting a competitive edge from the explosion of new interactive and electronic- commerce technologies. If the investments bring dividends or stock-price appreciation, so much the better.
The tactic follows logically from the fact that "banks are major buyers of technologies," said Lawrence A. Willis, executive vice president of First Manhattan Consulting Group. "They are looking for closer relationships with the vendors, and that may take the form of a direct equity investment."
Citigroup and Chase Manhattan Corp., for example, have assembled portfolios of strategic investments in partner companies. But the phenomenon is not confined to the money-centers. The $2.3 billion-asset Carolina First Corp. has done the same. It is not the only community bank to find its way to the leading edge.
As if to validate the trend, three former investment bankers this fall established the first fund for investing in financial technology companies, mainly in the fields of digital payments, on-line banking, electronic commerce, and financial software for large institutions.
Twelve of the top 20 U.S. banks have signed up, seeding the fund with $120 million, said one of the partners, who declined to reveal the name of the fund or its participants until another round of funding closes in the coming quarter.
Member banks would gain exposure to promising new technologies that the fund would root out, and they ultimately would own pieces of those they have helped to become successful, the organizer said.
This is not your previous generation's banker-vendor relationship, and it could ultimately change the ways the buyers and sellers relate to one another.
Citigroup declined the invitation to participate in the joint investment fund because, for one thing, "they didn't want to have to share the technology with everyone else," said the partner.
"The key question is whether technology providers should occupy a vendor role or a partnership role," said James D. Dixon, group executive for technology and operations at BankAmerica Corp. "My gut tells me that there is probably more productivity, profit, and satisfaction if the technology provider slants more toward the vendor role than partnership role."
John C. Backus, chairman of the executive committee of Intelidata Technologies Corp. in Herndon, Va., said he can see the merits in a bank's making strategic investments. But from his perspective at a home banking software company, "I am not sure I want a bank to know everything so they can do it themselves."
"Banks have the capital to give to start-up companies dealing with this new channel," said Charles W. Ogilvie, executive vice president for sales and marketing at Atlanta-based Security First Technologies, which got its first capital infusion from Huntington Bancshares and Wachovia Corp. and has seven bank investors. "Putting some skin in the game" helps the companies stay alive.
The Citibank unit of Citigroup has aggressively invested in such strategic partnerships as Security First, Integrion Financial Network, Meca Software, and Transpoint, which is an Internet billing consortium co-owned with First Data Corp. and Microsoft Corp.
Citibank has also bought into XaQti Corp., a semiconductor supplier developing a system it calls "network on a chip;" Integrated Computing Engines, a maker of hardware and software for super-fast visual computing; and Unwired Planet Inc., a provider of browser software for cellular devices.
Citibank, NCR Corp., J.P. Morgan & Co., Lehman Brothers, and Merrill Lynch & Co., together invested $28 million in Sensar, a biometric identification vendor selling a system based on iris patterns.
Chase Manhattan has centered its technology investment strategy in Chase Capital Partners, a private equity unit with $6 billion of assets under management. Only a small portion of that is in technology companies, but Chase officials expect them-including iXL Holding Inc., Yoyodyne, N-Able Technologies, Multex Systems, Geocities, and GlobeSet - eventually to benefit the bank.
"If Intel is investing in companies that are vendors to Intel, we should be doing the same thing with Chase," said John R. Baron, general partner of Chase Capital Partners, referring to the Silicon Valley microprocessor manufacturer. "Investments in the early stage create a great understanding about what the ultimate future engine is and whether we need to rethink the path we are going down."
Mr. Baron said Atlanta-based iXL, a Web site design company, shows how synergies can arise. Chase participates as both a lender and as a customer of iXL's Consumer Financial Network, which lets employees of subscribing companies shop for discounted financial products.
Chase and Bankers Trust Corp.-a high-tech greenhouse in its own right, through the BT Ventures subsidiary-recently led a $15.5 million investment round for GlobeSet Inc. of Austin, Tex. After that, Chase vice chairman Joseph Sponholz and Bankers Trust vice chairman George Vojta took board seats.
That gave them front-row positions with one of the top innovators in secure Internet payments software. BT Ventures is developing quite a track record with companies on banking's leading edge, having spun out GlobeSet, the digital certificate company Certco, the interactive training company Zoologic, and IQ Financial Systems for risk management.
Venture capitalists like the presence of strategic investors that can make a business as well as monetary contribution, said Ferrell Sanders, a general partner with Asset Management Associates of Palo Alto, Calif., which was an investor along with Visa International in Nuance Communications, a voice recognition systems company.
"We're seeing more and more banks making investments directly through their information technology departments or at the holding company level, unlike in the past," said Scott Wu, vice president of Montgomery Securities, who has helped advise banks involved in forming the on-line banking consortium Integrion, among other deals.
In a recent San Francisco Business Times article on strategic investing, Mr. Sanders said, "There is some concern that corporate partners are less price-sensitive than other investors and will bid up deals, but in general the positives outweigh any negatives."
Banks investing for strategic reasons are not as likely as other capital providers to be affected by market fluctuations, Mr. Sanders said.
E-Trade Group has made strategic technology investing a high priority.
"We invest if it is a great technology company and if it meets a critical need for us to grow our company," said Linda D. Nash, vice president of customer management for the Palo Alto-based on-line brokerage leader.
E-Trade has taken minority positions in companies whose services it had already purchased: Digital Island, an Internet services provider; Critical Path, an e-mail services provider; and Third Age Media, a Web site with content aimed at adults older than 50.
E-Trade itself is part-owned by Softbank, the Japanese-controlled technology and publishing empire, which has led to numerous business and alliance deals within the family.
Carolina First Corp. has used an investment subsidiary as a way to outsource the development of technology it could not build on its own, said Mary M. Gentry, treasurer of the Greenville, S.C.-based company's CF Investment Corp.
"Instead of paying for them, we are offering ourselves as a customer and taking an investment position so that we can share in the upside," Ms. Gentry said.
Carolina First has bought 49% of Information Technology Services Inc. of Greenville, which designs electronic document filing systems; 48% of Syneractive Marketing of Columbia, S.C., a Web site design company; and 10% of Corporate Solutions International Inc. of Norcross, Ga., a provider of credit scoring software.
As a customer, "we know first-hand about the technology and whether it is really working," Ms. Gentry said.
A Carolina First investment in Affinity Technology, the developer of automated lending machines, has not yet paid off. Performing a bit better is NetBank Inc., the Internet bank that Carolina First helped jump-start in 1997.
In 1993, a group of 11 community banks invested in client/server core processing software being developed by Phoenix International Ltd. of Maitland, Fla.
"I really didn't want venture capital money," said Bahram Yusefzadeh, chief executive officer. Rather he sought "involvement in the design and review of our software, networking with other banks, and their commitment" that they would be customers once the software was ready.
Mr. Yusefzadeh eventually discounted the price of the software to the bank investors, providing a benefit beyond the 1,500% appreciation in the company's stock over the past five and a half years. The number of banks using Phoenix's software has grown to 121 from 34 at the end of 1996.
"Partnerships provide an opportunity for people with ideas to bring them to fruition," Mr. Yusefzadeh said. "It absolutely adds a tremendous amount of value for all parties involved."
"For the first time, banks are having to deal with technology at the consumer level rather than in the back rooms," said Paul D. Harrison, president and chief executive officer of Meca Software of Trumbull, Conn., a major-and multibank-owned-force in on-line banking software. "The world of consumer technology moves so quickly and requires so many updates to stay current that it is very difficult for any one institution to do everything alone."
American Banker National Journal's Technology Daily