Why, after years of holding out, is Citicorp close to joining the NYCE electronic banking network?

The answer: to be a big player in point-of-sale transactions, Citi has no other choice.

Indeed, the factors in its decision are far different from those involved eight year ago, when a group of regional banks formed NYCE in order to share automated teller machines.

Then Citicorp defiantly decided to go it alone, concluding that its massive fleet of ATMs would not only provide effective service but also differentiate the giant bank in the marketplace. And many observers think that rationale has been proved right.

But now consumers are expected to increasingly use their ATM cards for purchases at grocery stores and gas stations. For Citicorp's cardholders to participate. it seems clear the must join NYCE, which promises to be the dominant point-of-sale network in the Northeast.

"One of the reasons that Citi is reputed to be joining NYCE is because they want to have access" to NYCE's point-of-sale network, said David Dove, president of Dove & Associates, an electronic banking consultancy based in Boston.

The Debit Route

Citicorp does have alternatives, namely the two national debit-card networks -- Visa U.S.A.'s Internet and MasterCard International's Maestro. "But neither of these is a particularly strong brand in the Northeast, Mr. Dove noted.

The American Banker reported last month that Citicorp is in the final stages of negotiations to take a stake in NYCE, a decision that would be interesting for a number of reasons.

First, it would be the capitulation of the last of the go-it-alone players in the ATM business.

Vast Majority in Networks

In the past few years, every other large bank that had once tried to operate a proprietary ATM network -- including BankAmerica America Corp. and NBD Bancorp -- has joined a regional network.

But even if Citicorp has some things in common with NBD and BankAmerica, it is also a unique case.

By most accounts, Citicorp made the automated teller machine.

The nation's largest financial institution was not the first to install the self-service banking terminals. But in the 1980s, it embraced the technology like no other financial institution, saturating the New York market with sophisticated touch-sensitive screen terminals that are still the envy of many competitors.

Once the ATMs were deployed, the bank proved more adept than any other financial institution at persuading customers to use them. More than 80% of Citicorp's basic banking transactions are now handled by ATMs, versus the industry average of less than 40%.

Inspiration for NYCE

In fact, Citicorp's ATM program was so successful that the other banks in the region banded together and formed NYCE as a way to compete.

But while the ATM continues to be an important delivery mechanism, the two most common ways to increase ATM revenue -- adding new machines and increasing transaction fees -- are slowly becoming obsolete.

Fewer banks are increasing the size of their ATM fleets because the machines have almost saturated the U.S. market. And many banks are hesitant to raise transaction fees any further.

Therefore, most bankers view the nascent debit point-of-sale business as the best source of transaction-based revenue growth in the next decade.

Transactions Mushrooming

There are currently almost 100,000 point-of-sale terminals in the United States that accept ATM cards for purchases, and the number of POS debit transactions has grown steadily from three million in 1987 to more than 23 million in 1992.

Most experts agree that if Citicorp expects to catch the wave of POS transactions while it is still breaking, the bank must join NYCE soon.

Not surprisingly, the sticking point in the negotiations between Citicorp and the seven financial institutions that own NYCE appears to be the price Citi will pay for a stake.

"The real problem is that if Citi has an 18% to 20% share of the New York [electronic banking] .market, it would probably want a share of the company that's comparable to that," said Richard Speer, chairman of Speer & Associates an electronic banking consulting firm based in Atlanta.

Expensive Share

"Twenty percent of NYCE can be pretty expensive right now -- particularly if the other owners don't want to give it up in the first place."

Mr. Speer noted that NYCE has appreciated significantly in value since Bipin Shah, a former CoreStates Financial Corp. executive and one of the architects of the MAC network, offered to buy NYCE for $125 million almost two years ago.

Thus Mr. Speer estimates that an equity position could cost Citibank up to $50 million.

Complicating the Citi-NYCE negotiations are overtures from the Electronic Payments Services Inc., the Delaware-based network whose MAC ATM brand competes with NYCE in several northeast states.

Some experts believe Citicorp is unlikely to join that network because MAC's POS mark is never likely to be much of a presence in New York as long as NYCE is around. Still, NYCE must still take the threat of having Citi go to MAC seriously.

As one ATM network boss put it, a Citi-EPS deal would "parachute the enemy into a strong position right in NYCE's backyard." Citi operates almost 2,000 ATMs, which represents about 15% of NYCE's total ATMs.

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