Market Penetration
We have been asked about the Check Guarantee and Verification market potential we reported at the ETA Spring Meeting and Exposition in March of this year, and why it is different from industry numbers reported in May.
Each year The Nilson Report, published in Oxnard, California, issues its analysis of the Check Guarantee and Verification marketplace for the prior year. This data is provided to The Nilson Report by the various companies who are a part of the report. In the May 1997 issue (Number 644) The Nilson Report reported the Verification volume for 1996 to be $231B and Guarantee volume to be $55B, for a total of $286B. In addition, it reported the merchant penetration to be 327K locations, with 240K Guarantee locations and 87K Verification locations for the year 1996.
Among the top five Guarantee organizations, the company with the greatest growth in 1996 was reported to be CrossCheck, Inc., at 33%, followed by NPC Check, TeleCheck, and with a decline of 3%, Equifax Check Services.
Two months prior to Nilson's report, The Green Sheet reported our numbers for the Guarantee and Verification industry at the ETA Spring Meeting. Our numbers reported Verification volume for 1996 to be $204B with Guarantee at $51B for a total of $255B, resulting in 12% lower volume than subsequently reported by The Nilson Report. In addition, we presented at the ETA conference merchant penetration of 325K merchants, with 227K Guarantee merchants and 98K Verification merchants. Our total for 1996 was reported as 800K outlets utilizing either Guarantee or Verification services. The Nilson Report subsequently reported 878K outlets, approximately 10% higher.
Our research reflects that about 8.1% of all merchants and 20.2% of retail merchant locations in 1996 outsourced authorization (Verification) or the responsibility for the check (Guarantee) which represented between 4% and 5% of the total value of 1996 retail checks. Approximately 325,000 merchants owning 800,000 locations were outsourcing their authorization process or the risk of check loss during 1996, as reported by the various Check Guarantee and Verification companies invol-ved. We believe the reported industry numbers are overstated in terms of merchant locations by about 10%, due to a level of sales puffing, and the fact that many merchants utilize more than one service, in particular a Verification service along with a Guarantee service, resulting in merchant locations being double counted.
Given the 2.2 million merchant locations in the United States, 1 the location penetration for outsourcing some or all of the check risk problem would represent 36.4% of the potential locations (800 thousand/2.2 million). While there are approximately 2.2 million retail and wholesale merchant locations, this figure does not include "service" locations which are actually retail locations. Some examples of such locations are auto repair, miscellaneous repair, hotels, motels, and other lodging facilities. When these locations are included the number of merchant locations jumps to 4.08 million,2 and the location penetration for outsourcing Guarantee and Verification dollar volume drops to 20.2% as noted above.
In addition, during 1996 some $255 billion in outsourced Guarantee and Verification dollar volume was handled by the various Check Guarantee and Verification companies in the industry. We believe that the industry reported volume is also overstated by about 12%, for some of the same reasons noted above. This means that outsourced volume (verified, guaranteed or assigned to collections) represented between 4.5% and 5.1% of the $5 trillion retail and wholesale sales and service volume, during 1996. It further means that only 5% of the dollar volume and 8% of the merchant relationships in the marketplace have as yet been penetrated, with the balance wide open for potential check service sales.
1. U.S. Bureau of the Census, County Business Patterns 1994, U.S. Government Printing Office, Washington, DC, September, 1996. Table 1a, p. 1. Also, County Business Patterns 1993, US Government Printing Office, Washington, DC, September 1995. Table 1a, p. 1. Wholesale and retail establishments based on a linear regression analysis with an r-squared value of .8405.
2. Ibid. Service and retail establishments based on a linear regression analysis with an r-squared value of .9836.
