Official Payments: An E-Commerce Toll Road

Of course, many people live beyond their means — using their trusty credit
cards. So, whenever I hear of a new application for credit cards, I listen.

One that is very interesting comes from a company called
Official Payments (OPAY).

Basically, the company lets people use their credit cards to pay federal
and state income taxes, as well as property taxes, fines for traffic
violations and parking citations. The market is huge: such payments total
about $670 billion annually.

From January 15, 1999 to April 15, 1999, the company processed about 45,000
tax payments totaling $174 million to the IRS. This represented about 95 percent
market share. Interestingly enough, in a survey of its customers, about
89 percent said they would use the Official Payments service again.

Official Payments makes money by charging a so-called “convenience fee.”
This is either a fixed charge or a fee based on a percentage of the payment
made. In 1998, the company had revenues of $2.4 million. In the first
nine months of 1999, the company had $7.2 million in revenues. What’s
more, losses are moderate. The company lost $325,000 in 1998 and $1.5
million in 1999.

Government agencies like the service. First, it is more cost-effective to
have people pay electronically. Second, people are more inclined to make
tax or fine payments if it can be done via credit card. Finally, the
government does not have to develop its own technology infrastructure.

With its lead, Official Payments has many opportunities for partnerships.
Recently, the company signed a distribution deal with E*TRADE (the chief executive officer of
E*TRADE is on the board of Official Payments).

However, what is perhaps more important is that Official Payments has
strong relationships with government entities. For example, the company’s
1-888 phone number is listed on the instruction booklets for Form 1040 and
on the IRS Web site.

Quickly, Official Payments should be able to entrench itself as the de
facto credit card option system for government payments. And such a
position should mean a premium on the stock price.

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