Banks Put Their Money Where Their Users Are

By Costanzo, Chris | American Banker, November 7, 2000 | Go to article overview

Banks Put Their Money Where Their Users Are


Costanzo, Chris, American Banker


Sometimes technology rollouts are a headache for First Union Corp. senior vice president Peter Browne: Project managers are not obligated to use his choice of vendor and the top brass may have to sign off too.

But when Mr. Browne, who works in First Union's information security division, wanted to introduce a software system that digitally authenticates people's identity, he had no problem persuading his colleagues to use his vendor of choice -- after all, the bank had bought an equity stake in the vendor in August.

First Union's $21 million investment in Arcot Systems Inc. "makes it easier for us to get the software deployed," Mr. Browne said. "It's just a better thing to say -- 'Our bank has a stake in this.' "

Welcome to the latest wrinkle in technology procurement: An increasing number of banks are making capital investments in companies whose software they also use. The initiatives bring together a desire to take advantage of the huge windfalls that are possible through early investments in start-up software companies, and a need to plug technology holes at the bank.

Groups responsible for making these so-called strategic investments are popping up with increasing frequency at the biggest banks. Their mission is entirely separate from that of banks' venture capital groups, because they cannot merely invest in a company that looks like a good risk -- they must also ensure that the bank could use the company's products or services in a way that gives it a strategic advantage.

The synergies extend far further than alleviating system installation headaches. Banks with early stakes in emerging-growth technology companies are positioned to reap the benefits of initial public offerings or rising stock prices.

Plus, with a paper profit hanging in the balance, banks have extra incentive to help their chosen technology companies succeed. Both vendor and bank become that much more motivated to refine a system that can be sold in massive quantities elsewhere.

Often, just the announcement of a bank's relationship with a tech company sets the company's stock price on an upward course. Investors are hip to a technology company's ability to benefit from a close relationship with a bank that has a huge customer base and a built-in sales force.

Bank of America Corp. has equity investments in a number of companies, including the wireless provider 724 Solutions Inc.; the electronic marketplace operator Ariba Inc.; the electronic billing company CheckFree Corp.; and the small-business-services provider Biztro Inc.

Bank of America also licenses software and services from these companies, and the full relationship pays dividends. "When companies announce partnerships with Bank of America, they see an improvement in their stock prices," said Mark Argosh, senior vice president of consumer and small-business e-commerce at bankofamerica.- com. "It's more than just theory, it has been proven time and again."

The nature of the relationship shows why. In addition to capital, Bank of America's partners on the consumer side gain access to the bank's 2.7 million online banking customers. On the corporate side, they can take advantage of a nationwide sales force.

"Versus being passive venture capital investors, we bring to the table instant success," said Pam E. West, senior vice president of corporate e-commerce at bankofamerica.com. For that type of assistance, "why not participate in the upside" of a stock price lift?

Meanwhile, investments by Bank of America's Strategic Alliance and Investment group have helped the bank's Internet business group, bankofamerica.com, ease the burden of its heavy research and development expenditures. Bankofamerica.com is devoted to working with the bank's business groups to develop and bring to market capital-intensive, Internet-related services such as digital marketplaces and bill payment/presentment. …

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