Business To Consumer Disbursements

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JUNE 2012

Ron Shevlin +1.617.338.6045

[email protected]

Gwenn Bezard

Business-to-Consumer Disbursements: Time to Take Notice

Business-to-Consumer Disbursements: Time to Take Notice June 2012

2012 Aite Group LLC. All rights reserved. Reproduction of this report by any means is strictly prohibited. 101 Arch Street, Suite 501, Boston, MA 02110 Tel: +1.617.338.6050 Fax: +1.617.338.6078 [email protected] www.aitegroup.com

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TABLE OF CONTENTS INTRODUCTION .............................................................................................................................................. 3

METHODOLOGY .............................................................................................................................................. 3

DISBURSEMENTS IN THE UNITED STATES ....................................................................................................... 4

TOTAL DISBURSEMENTS ................................................................................................................................. 4

DISBURSEMENT PENETRATION ...................................................................................................................... 4

ALTERNATIVE ECONOMY DISBURSEMENTS ................................................................................................... 6

GOVERNMENT DISBURSEMENTS .................................................................................................................... 6

EMPLOYER DISBURSEMENTS .......................................................................................................................... 7

MERCHANT DISBURSEMENTS ......................................................................................................................... 7

OTHER DISBURSEMENTS ................................................................................................................................ 8

PAYMENT METHODS USED FOR DISBURSEMENTS ......................................................................................... 8

THE IMPACT OF CHECK DISPLACEMENT ....................................................................................................... 11

NEW ECONOMY DISBURSEMENTS ............................................................................................................... 12

CONCLUSION ................................................................................................................................................ 15

RELATED AITE GROUP RESEARCH ................................................................................................................. 16

ABOUT AITE GROUP...................................................................................................................................... 17

CONTACT ...................................................................................................................................................... 17

LIST OF FIGURES FIGURE 1: ALLOCATION OF DISBURSEMENTS BY PAYER, 2011 ...................................................................... 4

FIGURE 2: PENETRATION RATE FOR B2C DISBURSEMENTS IN THE UNITED STATES, 2011 ............................ 5

FIGURE 3: NUMBER OF DISBURSEMENT TYPES RECEIVED PER CONSUMER, 2011 ........................................ 6

FIGURE 4: PAYMENT METHODS USED TO MAKE DISBURSEMENTS ............................................................... 9

FIGURE 5: ALLOCATION OF PAYMENT METHODS BY PAYER ........................................................................ 10

FIGURE 6: CHECKS DISBURSED BY PAYER ..................................................................................................... 11

FIGURE 7: ESTIMATES OF DISBURSEMENT CHECK PROCESSING COSTS BY ISSUER ...................................... 11

FIGURE 8: NEW ECONOMY DISBURSEMENTS OPPORTUNITY ...................................................................... 13

FIGURE 9: WHO WILL CONTROL THE PAYMENT PROCESSING OPPORTUNITY? ........................................... 14

LIST OF TABLES TABLE A: ALTERNATIVE ECONOMY DISBURSEMENTS IN THE UNITED STATES, 2011 ..................................... 6

TABLE B: GOVERNMENT DISBURSEMENTS IN THE UNITED STATES, 2011 ..................................................... 7

TABLE C: EMPLOYER DISBURSEMENTS IN THE UNITED STATES, 2011 ........................................................... 7

TABLE D: MERCHANT DISBURSEMENTS IN THE UNITED STATES, 2011 .......................................................... 8

TABLE E: OTHER DISBURSEMENTS IN THE UNITED STATES, 2011 .................................................................. 8



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INTRODUCTION

Over the past decade, many established and emerging payment companies have focused on

addressing consumer-to-business (C2B) payments, at the point of sale, online, and for bill

payment, as well as person-to-person (P2P) market opportunities. The interest has been

legitimate given the sheer size of the volumes at stake. In the United States, P2P payments

represent a formidable market opportunity, with about US$900 billion in transaction volume

predominantly being paid via cash and check. Retail eCommerce, on the other hand, is a US$200

billion market, according to the U.S. Department of Commerce. With so much focus on C2B and

P2P payments, however, an important segment has failed to receive the same level of attention:

government-to-consumer and business-to-consumer (G2C and B2C) disbursements.

G2C and B2C disbursements occur for many reasonsgovernment agencies issue tax refunds;

retailers and merchants issue overpayment refunds, product rebates, and brand incentives; and

employers distribute bonuses, expense reimbursements, and payments for freelance or side

work. Combined G2C and B2C disbursements dwarf the size of P2P and U.S. e-commerce sales

by a massive amount. In 2011, Aite Group estimates that non-payroll U.S. corporate and

government disbursements to consumers totaled nearly US$3 trillion. Of that total, corporate

disbursements accounted for US$2 trillion and government disbursements accounted for US$1

trillion. Given that a sizeable chunk of those transactions is still being transacted by checks, Aite

Group believes that opportunities exist for payment processors to step in and provide support.

Beyond helping corporations and government agencies reduce their disbursement costs, there is

another reason why payment firms should take notice of the disbursement market:

Disbursements are front and center to many new economy businessesbusinesses that

leverage online and/or mobile technologies as a critical component of a business model that

intermediates or disintermediates providers and consumers of a product or service. Although

many of those businesses are still early-stage, the volumes they handle represent double-digit

growth opportunities in the disbursement market. In other words, we believe these businesses

represent significant growth opportunities in the decade ahead.

This Aite Group Impact Note presents the findings of a consumer survey that uncovered the

types of disbursements that consumers receive, the payment methods by which they receive

these disbursements, the opportunity to help corporations and government agencies reduce

disbursements costs, and the opportunity associated with new economy businesses.

METHODOLOGY

In Q2 2012, Aite Group conducted a survey of 1,115 U.S. consumers. The sample was recruited

to represent the overall age, income, geographic, and gender distribution of the United States.

The data has a margin of error of 3 points at the 95% level of confidence.



4

DISBURSEMENTS IN THE UNITED STATES

TOTAL DISBURSEMENTS

Across the 19 types of disbursements that consumers were surveyed about, Aite Group

estimates that consumer disbursements exceeded 1.8 billion payments, for a dollar total of

roughly US$3 trillion, in 2011. Alternative economy disbursements accounted for the highest

percentage of both transactions and dollar volume.1 From a transaction volume perspective,

merchant disbursements were a close second, but payments from retailers and merchants only

accounted for 3% of the dollar volume. G2C disbursements accounted for 17% all disbursement

transactions and one-third of the dollar volume (Figure 1).

Figure 1: Allocation of Disbursements by Payer, 2011

Source: Aite Group survey of 1,115 U.S. consumers, Q2 2012

DISBURSEMENT PENETRATION

Federal and state tax refunds are the most frequently received type of disbursement, with 35%

of U.S. consumers receiving at least one federal or state tax refund in 2011. Sixteen percent of

consumers received a rebate for a product or service, and one in 10 received one or more

investment dividends or overpayment refunds. The penetration rate for the other 15 types of

disbursements Aite Group asked about in the survey was less than 10% (Figure 2).

1. Alternative economy disbursements represents payments made for non-traditional employment and

other money-making situations and arrangements

33% 38%

28%

3%

17%

33%

12% 16%

10% 9%

Transactions Dollar value

Percentage of Disbursements by Payer, 2011

Employer

Other

Government

Merchant

Alternative economy



5

Figure 2: Penetration Rate for B2C Disbursements in the United States, 2011


Despite the low penetration rates for individual types of disbursements, about half of all U.S.

consumers received at least one type of disbursement in 2011. About one in four received just

one, a similar percentage received between two and five, and 5% of consumers received six or

more types of disbursements (Figure 3).

4%

4%

5%

5%

6%

6%

6%

7%

7%

8%

8%

8%

9%

9%

9%

10%

10%

16%

35%

Content produced and distributed online

Multilevel marketing program

Medical trial

Affiliated marketing program

Tuition reimbursement

Property rent

Lottery/gambling gain

Employer gifts/bonuses/prizes

Business expense reimbursement

Insurance claim

Brand or store incentive

Freelance work

Government aid/assistance

Other government disbursement

Store credit or store membership credit

Overpayment refund

Investment dividend

Product/service rebate

Federal or state tax refund

Percentage of Consumers Who Received the Following Disbursements in 2011



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Figure 3: Number of Disbursement Types Received Per Consumer, 2011


ALTERNATIVE ECONOMY DISBURSEMENTS

Aite Group includes freelance work, affiliated and multilevel marketing programs, and content

produced and distributed as components of the alternative economy. In 2011, this category

accounted for more than 611 million disbursements, totaling nearly US$1.17 trillion.

The 8% of consumers who received disbursements for freelance work averaged roughly 16

payments per recipient in 2011 and received an average of more than US$2,300 in total

payments, making freelance work the largest category of disbursements from both transaction

and dollar-volume perspectives (Table A).

Table A: Alternative Economy Disbursements in the United States, 2011

Average per recipient Total

Type of disbursement

Percentage of consumers receiving disbursement

Annual payments received

Annual dollar volume

Disbursements (# in millions)

Dollar vale (In US$ billions)

Freelance work 8% 16.3 $2,329 322.8 $ 751.6

Rent/sublet/vacation rentals 6% 10.4 $3,127 72.0 $ 225.2

Lottery/gambling 6% 4.9 $700 72.4 $ 50.7

Affiliated marketing program 5% 6.0 $78 33.0 $ 2.6

Multilevel marketing program 4% 6.5 $3,190 32.9 $104.8

Online content 4% 8.9 $406 78.5 $ 31.9

TOTAL 611.6 $1,166.3


GOVERNMENT DISBURSEM ENTS

48%

24% 23%

5%

None One Two to five Six+

Percentage of Consumers Who Received the Following Number of Types of Payments



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G2C disbursement exceeded 300 million transactions and US$1 trillion in dollar volume in 2011.

Federal and state tax refunds were received by more Americans than were other types of

disbursements, and recipients of tax refunds averaged just 1.5 payments per recipient, for an

average of US$1,436 per recipient. Topping US$500 billion, other government disbursements

were the second leading category of disbursements in dollar volume in 2011, with recipients

each receiving slightly less than US$6,000 (Table B).

Table B: Government Disbursements in the United States, 2011

Average per recipient Total Type of disbursement





Dollar value (In US$ billions)

Federal or state tax refund 35% 1.5 $1,436 119.6 $ 171.8

Other govt disbursement 9% 8.2 $5,943 85.7 $ 509.6

Government aid/assistance 9% 10.4 $3,149 102.5 $ 322.8

TOTAL 307.9 $1,004.3


EMPLOYER DISBURSEMENTS

Employer disbursements include business expense reimbursements, employer

gifts/bonuses/prizes, and tuition reimbursement. In 2011, employer disbursements accounted

for nearly 188 million disbursements, totaling more than US$287 million (Table C).

Table C: Employer Disbursements in the United States, 2011

Average per recipient Total Type of disbursement






Business expense reimburse 7% 5.2 $2,256 82.7 $186.5

Employer gifts/bonuses/prizes 7% 3.5 $469 53.7 $ 25.2

Tuition reimbursement 6% 7.6 $1,474 51.4 $ 75.9

TOTAL 187.8 $287.5


MERCHANT DISBURSEMEN TS

Although merchant-related disbursements accounted for the largest portion of disbursements

by transaction volume, the relatively small dollar value per transaction caused merchant

disbursements to account for the smallest percentage of 2011 dollar volume (Table D).



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Table D: Merchant Disbursements in the United States, 2011








Product/service rebate 16% 3.9 $83 143.0 $11.8

Overpayment refund 10% 7.7 $353 189.0 $66.6

Store credit 9% 4.6 $74 101.1 $ 7.5

Brand or store incentive 8% 4.3 $99 81.1 $ 8.0

TOTAL 514.2 $94.0


OTHER DISBURSEMENTS

The Aite Group survey captured data for disbursements not included in the previous categories,

including investment dividends, insurance claims, property rent payments, and disbursements

for medical trial participants. These disbursements accounted for more than 211 million

transactions, totaling US$388.5 billion in 2011 (Table E).

Table E: Other Disbursements in the United States, 2011








Investment dividend 10% 10.5 $2,798 126.3 $ 353.3

Insurance claim 8% 3.4 $4,401 29.5 $ 130.1

Medical trial 5% 5.1 $91 55.6 $ 5.1

TOTAL 211.4 $388.5


PAYMENT METHODS USED FOR DISBURSEMENTS

Among consumers who received at least one disbursement in 2011, six in 10 had a disbursement

deposited directly into their bank account. Nearly half received a check, and about a quarter

were given a gift card or prepaid debit card. About three in 10 recipients were paid by some

other payment method, including cash or PayPal (Figure 4).



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Figure 4: Payment Methods Used to Make Disbursements


61%

48%

23%

15%

29%

Direct deposit to bank account

Check Gift card or prepaid card

Credit to credit or debit card

Other (e.g., cash, PayPal)

Percentage of Recipients Who Received a Disbursement by the Following Payment Methods



10

Direct deposit was most frequently used in government-related disbursements like tax refunds,

aid and assistance, and other government disbursements. In merchant-related disbursements,

checks were most frequently used, especially for rebates and overpayment refunds (Figure 5).

Figure 5: Allocation of Payment Methods by Payer


20% 19%

43%

27% 24%

20% 27%

18%

20%17%

16%18%

9%

9%11%

11%

14%9%

11%13%

33%22% 21%

32% 34%

Alternative economy

Merchant Government Other Employer

Allocation of Payment Methods by Payer

Other (e.g., cash, PayPal)

Credit to credit or debit card

Gift card/ prepaid card

Check

Direct deposit to bank account



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THE IMPACT OF CHECK DISPLACEMENT

Government agencies, merchants, and employers disbursed more than a quarter of a billion

checks in 2011 (Figure 6). Given that the cost of distributing disbursements ranges from US$6

per check to US$12 per check, Aite Group calculates that merchants could save up to US$1.7

billion annually by eliminating disbursement checks. Employers stand to save almost US$1.5

billion, while government agencies could eliminate up to US$670 million in disbursement costs

(Figure 7).

Figure 6: Checks Disbursed by Payer


Figure 7: Estimates of Disbursement Check Processing Costs by Issuer


139.9

56.9

51.3

18.1

13.6

55.9

30.0

14.3

11.6

32.1

14.3

10.0

7.8

MERCHANT

Overpayment refund

Product/service rebate

Store credit

Brand or store incentive

GOVERNMENT

Federal or state tax refund

Government aid/assistance

Other government disbursement

EMPLOYER

Business expense reimbursement

Tuition reimbursement

Employer gifts/bonuses/prizes

Disbursement Check Volume by Payer, 2011(In millions of transactions)

$728 $840

$335

$1,456

$1,679

$670

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Employers Retailers/merchants Government

High/Low Estimates of Disbursement Check Processing Costs (In US$ millions)



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NEW ECONOMY DISBURSEMENTS

Over the past few years, a range of businesses have emerged as part of a new economy for

which disbursements are key. As discussed earlier, a new economy business leverages online

and or mobile technologies as a critical component of a business model that intermediates or

disintermediates providers and consumers of a product or service. While the term "new

economy business" encompasses a large number of firms, we focus our attention in this report

on those that leverage disbursements to consumers or small businesses.

In fact, we believe that disbursements have become a key part of a number of new economy

participants business models. New economy market players for which disbursements are key to

their business model or operations include the following:

Marketplaces: Online marketplaces where consumers or small businesses sell physical

goods, digital goods, or services. Unlike an eBay or Craigslist, where payment is handled

between buyers and sellers, payment is taken by the marketplace, which then takes

care of disbursing it to the seller, minus a cut of the proceeds. Examples include

StubHub, where consumers can buy tickets from other consumers; iStockphoto, where

pictures can be purchased from individuals or small businesses; oDesk, Elance, Guru,

RentACoder, and GetAFreelancer, where freelancers provide their labor. Other

marketplaces also apply, like Keen, a psychic marketplace. Other models include

HomeAway/VRBO and Airbnb, where sellers monetize their vacation properties or their

principal place of residence. Other players, such as Answers.com, are often referred to

as leveraging "crowdsourcing." Certain adult websites, where amateurs get paid for

online performances, fall into this category as well.

Application stores: These intermediaries collect payments from app buyers and then

disburse the payments to the developers; examples include Apple, Facebook, and app

stores for Android devices.

Advertising and affiliate marketing: Performance-based marketing in which a business

rewards one or more affiliates for each visitor or customer brought about by the

affiliate's own marketing efforts; Google falls in that category with its AdSense network.

Social media players: These include social media networks like Facebook and Twitter.

Gambling: This category includes players that enable consumers to bet on poker, horse

races, sporting events, and other casino and multiplayer games; leading firms in this

space include Ladbrokes, Bewin.

Coupons/rebates: This category includes firms that process coupons and rebates for

consumers in the online and mobile channels.



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The gross dollar volume of disbursements generated by new economy businesses remains

relatively small in comparison to the overall disbursement opportunity: New economy-related

disbursements represented less than 1% of the total U.S. corporate and government-to-

consumers disbursements in 2011, for instance.

New economy disbursements have two unique characteristics, however: 1) They predominantly

use electronic instruments, such as prepaid cards, PayPal, Skrill, Payoneer, ACH, or wire, and 2)

they are rapidly growing.

Based on the volume processed by leading players targeting new economy disbursement

opportunities, we estimate that U.S. new economy disbursements will grow at a 43% CAGR

between 2012 and 2015, reaching US$59 billion in transactions by 2015 up from US$21 billion in

2012 (Figure 8).

Figure 8: New Economy Disbursements Opportunity

Source: Aite Group

We believe that the market opportunity associated with new economy disbursements is driven

by a significant shift in the broader world economy, and that various players in payment will gain

or lose out from the trend in the coming years. Much as Western Union rose through the 1990s

by focusing on the needs of immigrants crossing borders in search of better economic

opportunities, and similar to how PayPal benefited from the rise of global e-commerce in the

early 2000s, we believe the decade ahead will open up new opportunities related to processing

disbursements as a wider and wider range of new economy businesses make disbursements a

central part of their business model (Figure 9).

$7$10

$15

$21

$30

$42

$59

2009 2010 2011 2012 2013 2014 2015

New Economy Disbursements (from U.S.-based businesses to individuals located within and outside the United States)

(US$ Billion)



14

Figure 9: Who Will Control the Payment Processing Opportunity?

Source: Aite Group

Already, a range of players are vying to control the disbursement flows driven by the new

economy. They include:

Digital wallet players, such as eBay's PayPal, Apple, Google, and lesser-known players

such as Skrill, WorldPay's envoy, ProPay, and Hyperwallet.

Card payment networks such as MasterCard and Visa.

Messaging networks such as SWIFT.

Payment processors with roots in prepaid card processing and program management,

such as Obopay, Payoneer, and Wave Crest.

Banks and non-banks with global payment infrastructure such as Citigroup, JPMorgan

Chase, Wells Fargo, and Earthport.

Money transfer companies such as Western Union.

Globalization of economy

accelerates

Labor moves across borders Corporations focus on core business

Observation

Timeline

Big

pic

ture

Tre

nd

ben

efa

ctors

1990s 2000s 2010s

The Decade Ahead: The Rise of New Economy Disbursements

?

Immigrants send money back home

Corporations make payroll processes

and disbursement more efficientIm

plicatio

ns

China rises as world factory

India rises as IT labor supplier

Manufacturing moves out of developed

economies

E-commerce rises

Skilled labor from around the world

becomes available

through marketplaces

New intermediaries rise in a number of

sectors and unlock

new value

Prediction

Rise of e-commerce propels new payment

players (e.g., PayPal)

Prepaid cards cannibalize checks as disbursement in selected

areas (e.g., mail-in

rebates)

New intermediaries build their business

model around

controlling payments

and disbursements (e.g., HomeAway,

Airbnb, Odesk,

istockphoto, Stubhub)



15

CONCLUSION

From a transaction volume standpoint, corporate and government disbursement

to consumer market represents a large opportunity. It also represents a large

opportunity to displace paper checks via electronic payment means.

Assessing the disbursement market as a mere opportunity to displace checks

would be a grave mistake, however. The rise of new economy businesses that make

disbursement a key part of their business model has considerable implications, the

most obvious of which is opening double-digit growth opportunities in transaction

volumes.

Less obvious is that it raises the importance of controlling the payment flow to a

new level of strategic importance. In the 1990s, when first-generation marketplace

eBay came to the scene, payment was an afterthought, a process left to the buyer

and seller to figure out. Even today, payments on eBay continue to occur between

buyers and sellers. Although most are processed by eBay's PayPal, payments are still

made, in essence, directly from buyer to seller. Today, with the new generation of

marketplaces and new economy businesses, payments are usually tightly controlled

by the marketplace itself. In the case of oDesk, for instance, payments flow from

buyer to Odesk, and are then disbursed from Odesk to the seller of services.

Another example is the approach of first-generation marketplaces like

HomeAway/VRBO, which originally treated payments and disbursements as an

afterthought (they only recently introduced a payment solution, which competes

with PayPal, checks, and other payment means). This contrasts with the approach of

a second-generation home rental marketplace, like Airbnb, for which controlling

payments and disbursements has been core tenet from the get-go.

Over the next decade, we believe disbursement flows will become an increasing

area of competition among payment firms. For payment processors that haven't yet

made disbursement a key area of development, it's time to take notice and develop

a game plan.



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RELATED AITE GROUP RESEARCH

The Key to Prepaid Card Satisfaction and Loyalty, November 2011.

The Borrowing Habits of Alternative Financial Services Customers, June 2011.

Prepaid Debit Cards: Barriers to Adoption, December 2009.

Branded Prepaid Card Processors: A Vendor Evaluation, October 2009.

The Card Industry: Between a Rock and a Hard Place, June 2009.

The Pulse of the Prepaid Card Industry, March 2009.



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ABOUT AITE GROUP

Aite Group is an independent research and advisory firm focused on business, technology, and

regulatory issues and their impact on the financial services industry. With expertise in banking,

payments, securities & investments, and insurance, Aite Groups analysts deliver comprehensive,

actionable advice to key market participants in financial services. Headquartered in Boston with

a presence in Chicago, New York, San Francisco, London, and Milan, Aite Group works with its

clients as a partner, advisor, and catalyst, challenging their basic assumptions and ensuring they

remain at the forefront of industry trends.

CONTACT

For more information on research and consulting services, please contact:

Aite Group Sales +1.617.338.6050

[email protected]

For all press and conference inquiries, please contact:

Patrick Kilhaney +1.718.522.2524 [email protected]

For all other inquiries, please contact:

[email protected]

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Business To Consumer Disbursements