Are you tired of hearing about all the threats of nonbanks encroaching on banks' traditional markets? Brace yourself one more time, for the most significant threat yet. Automatic Data Processing Inc., the country's largest payroll processor, has acquired access to the payment system by obtaining a bank charter. On the surface, it looks like a simple cost- cutting measure to reduce the bank-imposed expense of wire transfers by gaining direct access to the Federal Reserve System. The move does make ADP less dependent on banks for payroll processing. But the real opportunity for ADP - and the real threat to banks - goes far beyond settlement services. Most businesses today, whether large or small, rely on an outside payroll processor. As a result of intense competition, both national and regional payroll processors are finding it increasingly difficult to grow their businesses and maintain profit. Their markets are saturated and their services have been relegated to commodity status. Despite this position, the payroll processors are in a very unique servicing position. For most Americans the third-party payroll servicer is the first entity in the payment system value chain to process, allocate, and account for funds. Payroll processors are responsible for not only producing payroll checks but originating the electronic transfer of funds for direct deposit, savings, investments in 401(k) accounts, taxes, and other funds transfers.
As we move further away from paper and branches to electronics, the ability to capture the funds at their originating source becomes a competitive advantage. Certainly the government saw the value of the payroll interface when it imposed the collection of taxes at the point of payroll. The government further relied on the payroll origination point for the direct distribution of tax-deferred dollars into 401(k) plans, medical reimbursement accounts, and other defined benefit programs. Charitable organizations such as the United Way have exploited the power of point-of- payroll processing by promoting deduction plans that nab the money each pay period. And credit unions, relying on the payroll interface with their sponsoring organization, used point-of-payroll processing to spawn one of the biggest nonbank deposit bases in the financial services industry today.