Concord EFS (Nasdaq: CEFT) processes the fastest-growing form of payment -- debit cards. Debit cards are on their way to replacing cash and checks at the checkout line, and credit cards might be the next to fall by the wayside for smaller purchases, as merchants continue encouraging forms of payment that minimize transaction costs.

Electronic benefit transfer (EBT) transactions, or the electronic delivery of government benefits, are the fastest growing form of payment in the United States. Concord processes 50% of all EBTs in the country, with projections showing up to one billion transactions by 2005. Overall, the company is a steady performer, averaging 30% sales growth and 35% earnings growth over the last 10 years.

Concord's numbers of transactions have also increased at a higher rate than the rest of the market. In 1999, Concord's volume of debit card transactions grew 40%, while the industry grew 21%. During the same year, Concord's credit card transactions grew 35%, compared to the industry's 7% growth. EBT transactions grew 100%, while the overall market reported 75% growth.

Concord's business
Concord's business consists of payment services and running ATM machines. Payment services consist of processing credit, debit, and EBT transactions. The company receives payment for credit transactions based on a percentage of the sale, while debit and EBT transactions provide a flat fee.

The actual transactions can include authorization or back-end services. Authorization is verifying the card is valid and the purchase is within the credit limit, while back-end services include tasks like tallying sales transactions and settling funds between the credit card company or cardholder's bank and the merchant's bank.

ATM services make up the rest of the Concord's business. The company runs more than 50,000 machines throughout the U.S., roughly one of every six ATMs in the country. It receives a monthly payment for the service and a fee based on the number of transactions. Concord also operates the nation's second-largest electronic funds transfer (EFT) business, which allows customers to access funds from ATMs not operated by their financial institution.

Concord's competitive advantage
Concord's competitive advantage is its own financial institution, EFS National Bank. By owning a bank, the company is able to perform its own automated clearing house (ACH) and wire transfer transactions. Typically, a company like Concord would partner with a bank in order to transfer funds from the credit card company or debit holder's bank to the merchant's bank. The integration of a bank reduces costs and has helped Concord garner additional market share.

The company's other noticeable advantage is its target market, mainly gas stations, convenience stores, and supermarkets. While some would argue Concord's business would suffer during difficult economic conditions because consumers make fewer purchases, it's unlikely that in the event of a slowdown people would cease buying food, gas, burritos, and Slurpies. At least this Fool wouldn't.

95% of Concord's revenue is also recurring. Credit, debit, and other processed transactions provide revenue immediately once the services occur. Monthly and per transaction fees that occur on the ATM side are typically collected two weeks after the end of the month. Also, Concord is able to collect the fees electronically, which reduces any collection risk. This type of predictable income is essential for any potential drip investment.

As the demand for transaction processing increases, the competition will intensify. Concord has wisely aimed its services at the fastest-growing forms of payment: debit cards and EBTs. The company has also engineered its products toward growing business segments that encourage the use of cashless commerce. Plus, its large ATM network gives it the opportunity to leverage additional customers toward its debit-processing business, something a competitor like First Data (NYSE: FDC) can't do.

After looking at Concord's business, I'm led to believe the company deserves further consideration for our high-growth study. The company has expanding opportunities for its new and existing businesses, while its products continue to grow in consumer relevance. Its competitive advantages of owning a bank, leveraging its ATM network, and catering to supermarket and petroleum merchants has given it a unique niche in its industry.

Although I'm still not very familiar with this market, the company appears to be an interesting long-term idea. One thing that worries me is the company's relatively low gross margins. Concord has posted gross margins below 30% for the last several years, but has begun to show signs of improvement. I'm also worried that the ATM market could become saturated. While Concord grew its ATM transactions 17% in 1999, total transactions for the industry declined 2%. These will be some of the issues to consider closely once we complete our Finalist List.

Mike Trigg is not a big fan of credit cards. Back in college, his senior thesis was entitled, "University Students Exceed Maximum Credit Limit: A Case Study." To see his holdings, view his profile. The Motley Fool is investors writing for investors.