An alliance between Citigroup Inc. and Microsoft Corp. indicates new ambitions from both players in merchant services.
The companies, which announced the alliance on Monday at the National Retail Federation's 92nd annual conference and expo in New York, will market a package tailored for small businesses in which Citicorp Payment Services Inc. will process transactions and Microsoft will provide point of sale and accounting system.
Sources say Citi has been attempting to edge back into the merchant business for some time. Piggybacking its transaction processing off Microsoft's retail management system, Microsoft RMS, should give it a boost, they say.
Brendan O'Meara, the product manager for Microsoft RMS, said in an interview Monday that adding Citi's merchant services to his company's system creates "a package that's easier to buy, more customized, appropriately priced, and as a result, will give us happy customers whom we can jointly retain."
The companies are targeting independent retailers of ticketed merchandise (as opposed to customized goods or services) with few stores. Mr. O'Meara said the market includes around 750,000 merchants, most of which have only one store.
Microsoft's software, combined with hardware of the merchant's or reseller's choice, replaces the disparate cash register and card terminal with one computer-based unit, he said. One result would be eliminating the merchant's task of stapling a store receipt to a card receipt, he said.
"There are a significant number of retailers who have yet to electronically bundle" their point of sale operations, Mr. O'Meara said. For small, stock-based retailers, "one size does fit all in terms of application."
On the processing end, Citi, which has processed transactions for Microsoft for around two years, would offer small merchants competitive rates for transaction services, he said.
Citigroup was kept out of the processing sector after 1992, when it sold its merchant unit, Card Establishment Services, to the investment firm Welsh, Carson, Anderson & Stowe for $175 million. First Data Corp. later acquired the unit.
A noncompete agreement prevented Citi from reentering the market for several years. Since the deal expired in 1997, Citi has rebuilt its merchant business by pitching its industry expertise in the e-commerce, retail, medical, corporate, hospitality, direct marketing, and business-to-business segments.
Julie Pukas, the business manager of the Citi merchant services unit, said that it has focused for the past few years on cross-selling to small business customers in the bank's area of operation, domestically and abroad.
The Microsoft agreement "allows us to bring two powerful brand names to the small and midsize markets," which are attractive segments for Citi, she said in an interview Monday. "We look at this really as a cross-sell opportunity for both" companies.
Les Riedl, the executive vice president of Speer & Associates, an Atlanta research firm, said the alliance gives the Citi unit "a fuller product set that it can talk to its customers and prospects about." Being able to offer "the Microsoft name brand is itself an advantage."
According to Mr. Riedl, the small-merchant segment is very fragmented and therefore attractive for big names like Microsoft and Citi, he said. For Microsoft especially, "the same factors that led to the success of consumer products hold true for small business," he said. "Many small-business proprietors are not unlike consumers. They're looking to use financial management software that's easy to understand, reliable, and well supported."
On the other hand, "the market is highly fragmented for a reason: small business is not a homogenous group," he said. "You have accounting software that exists specifically for decorators. The market is driven by specialists."
The Microsoft/Citi package will be sold as an upgraded version of Microsoft RMS through around 300 resellers in the United States beginning on Feb. 21 for $1,290 and up. Mr. O'Meara said that over 16,000 retailers, most of them in the United States, use the Microsoft system.
