Sector Watch: Transaction processing services

Transaction processing services for government agencies is a large, growing market. Companies that provide these services under long-term contracts with the U.S. government enjoy years of recurring revenues since contract terms typically range from two to ten years.

Two small-cap beneficiaries: Tier Technologies, Inc. (Nasdaq: TIER) and Stanley, Inc. (NYSE: SXE).

A large market for electronic payment processing is developing around tax collection. The Taxpayer Relief Act of 1997 authorized the U.S. Treasury to accept credit and debit card payments for federal taxes. In 2006, the IRS expanded credit card payment options to include business tax payments. Between 2001 and 2006, the number of taxpayers making card-based payments grew 47% annually, to 2 million from 288,000.

Despite this rapid growth, credit/debit card payments currently represent just 1.2% of personal and business taxes paid, suggesting a large, untapped market.

The total market for personal and business federal tax payments exceeded $1.8 trillion on a net basis in 2006. The state tax market also presents significant growth opportunities. State tax receipts were estimated at $706 billion in 2006, with individual income taxes representing $244 billion of the state total and sales taxes accounting for $226 billion of the total. Of the 50 states, 26 have already adopted card-based payments. The local market for tax payment processing consists of some 3,000 counties, 13,500 school districts, 16,500 townships and more than 19,400 municipalities across the United States.

Other payment processing opportunities in the public sector include university tuition payments and utilities bills. According to the U.S. Department of Education, there are 6,400 degree-granting colleges and universities in the United States serving 17 million students and generating annual tuition payments of $230 billion. The U.S. Census recorded 6,700 public utilities across the United States generating consumer payments totaling nearly $400 billion annually.

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