The Future of Banking

Never Write a Check to the IRS Again
By Jim Nelson
October 3, 2007

Since 2003, the country's biggest check processor, the Federal Reserve, has reduced its number of check processing locations from 45 to 22. I seriously doubt that they are expecting fewer payments. So why would they get rid of the places that process these payments? The answer has nothing to do with checks or check+ processing…

In 2003, there was a tipping point on IRS payments. For the first time in U.S. history, more people paid their taxes with something other than cash or checks; they paid electronically:

As always, the U.S. government is behind everyone else. This tipping point happened everywhere else first. Take a look at this chart showing the amount of non-cash payments in other countries for 2003:

This trend is not expected to slow down at all. Electronic payments are supposed to increase 12.4% annually through 2009. During that period, companies like Tier Technologies, Inc (TIER: NASDAQ) could be making some serious money.

Tier is a financial transaction processing company with a special electronic payment division. Through this division, they process everything from income and property taxes to bill payments and educational fees. They are one of two processing companies that handle IRS payments for the government. With this security, they should be able to take advantage of this growing industry.

They expect electronic IRS payments to increase 20% per year over the next three years. If this happens, it could make a lot of money for Tier shareholders. But there’s a lot of risk when it comes to this company…

Tier is currently being tied up in court over a class-action lawsuit for “price fixing.” One of the execs apparently fudged the numbers on some earnings and violated GAAP accounting rules. 21st Century Equity Research, LLC, who is recommending Tier, expects the lawsuit to settle for around $4 million. I think this number is low.

According to their findings, the average settlement in courts for this kind of lawsuit is $20 million, which is a lot of money for any small-cap. They do have enough cash to cover this, but when it comes down to it, do you want to invest in a company that bends the rules for their own interests?

While there may not be a great investment opportunity in this rapidly growing field, there may be a few in a similar one — eMoney.

eMoney, along with other types of electronic commerce, is a fairly new and growing idea. Everything from PayPal (a online money transfer hub run by eBay) to e-Gold, Inc. (an online gold-currency bank) makes up this niche market.

If you don’t already know what eMoney is, it is a type of electronic cash different from online banking. It lets people use untraced cash to pay for things. Instead of using an online banking transaction to pay someone for something, you can use eMoney or electronic credits to pay. It is the online equivalent of regular greenbacks.

One way eMoney has been made somewhat popular is through Smart Cards. These things are popular in Europe. They are basically cards that store information on them such as electronic credits (each of which stores a certain amount of currency) that are used to buy things just like cash. I know it sounds like a debit card, but most of these are not tracked by a bank somewhere.

Nonetheless, thousands of different investments can be made from this, but finding the right one is still a challenge…

Many of these types of companies operate with almost no capital at all, and do very little business, so far. There have been many studies and academic articles written about the possible future of eMoney. But, the truth is no one really knows. We just aren’t there yet. But, we have to keep our eye on this…

Sincerely,
Jim Nelson

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Jim Nelson is the managing editor of Penny Sleuth, a daily small-cap e-letter with more than 110,000 subscribers. Jim has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach.

He holds a degree in Political Science with a minor in History from the University of Pittsburgh.