With Chase out of the RAL business, H&R Block is faced with a identity crisis.
H&R Block is about to own the broken refund anticipation loan market. For tax years 2011 through 2013, Block will have a competitive advantage with a substantial regulatory moat. Through its sound contract with HSBC, Block will be able to offer refund anticipation loans to as many customers as would like one. Jackson Hewitt and Liberty will have some RALs, but they will have to ration their loan dollars. Unless something changes, the independents will be out of luck.
Conventional wisdom says that Block uses the lack of RALs to open up more market share in the retail space. That route probably leads to more tax return volumes. Since those new customers are coming to Block for their RALs, then in this instance, revenues from short-term loan products will also go up.
Fine, except it isn't that simple. RALs are no longer under the radar. Consumer advocates have been upset about refund anticipation loans for some time. Now, regulators and the media are catching on as well. The OCC finally put some energy into their "internal
guidance" on RALs this year. The OCC even forced Pacific Capital out of the business. The FDIC had issued a cease-and-desist letter to Republic in 2008. This spring, word came out that they had sent a letter to the tax refund departments at River City and Republic, suggesting that they prepare to wind down their operations.
Now, Block is suddenly cast in a role it never wanted. It may soon be forced to take up the battle for RALs. They will become the public face for a product that many consider predatory.
I don't think that Block wants this battle. They had taken the step of offering the lowest-cost RAL out there. They don't charge the add-on fees (technology fee, technology access fee, data and document storage fee...) that were popular at their competitors. They enjoy some RAL income, but unlike the guys in the Statue of Liberty outfits, they have other resources. Their advertisements emphasize tax prep service, not how fast you can get your money back.
The reputational risk posed by RALs could undermine how well Breeden & Co. can deliver on their tax-focused strategy. RALs will not bring Block the kinds of customers that they want. Pulling in customers from Liberty that couldn't get a RAL won't translate into new business for RSM McGladrey. It might put some more dollars into the local franchises. Then again, what enterprising young business person is going to be leave a Block office impressed after sharing a waiting room with a bunch of ex-Jackson Hewitt customers that were hoping to use their "refer-a-friend" coupon?
RALs are becoming a known "bad" in the minds of the public. They aren't quite the new payday loan, but they are coming closer and closer to that space. Block wants to be different than Liberty or Jackson Hewitt. The RAL crisis is forcing their hand. Will they keep with the plan, or will they allow RALs to redefine their brand?
Background on the RAL market and on Block's Strategy
Last week, Chase released plans to terminate its agreements with its tax preparer partners. Chase had 13,000 tax prep relationships, and many of those partners ran more than one tax site. It would be hard to find a community where at least one or two businesses are not impacted by this change. It follows the curtailment of RAL funding from Pacific Capital and warning shots from the FDIC to Republic and River City.
Let's review the narrative of Block's redesign since 2007. When Richard Breeden took over, he set out to return Block to its roots in tax preparation. That put an end to Ernst's subprime mortgage shenanigans (Option One/Sand Canyon). Later, that same strategy supported a decision to sell HR Block Financial Advisors. More emphasis on tax prep signaled the Second Look, where consumers can hire Block to review a completed return. Block put a lot of effort into revitalizing its tax software, which ultimately manifested itself in H&R Block at Home. Block has held onto RSM McGladrey, where it provides advice to small and medium-sized businesses. Finally, H&R Block Premium aims for upper and middle class households with complicated returns. They have Block Bank, an OTS-chartered thrift.
The core market for the new Block: small businesses, DIY, and the uppper-middle class household. The competitors: the Big Four, Quicken, and your local CPA. Block is going upmarket. They are also adopting the Wells strategy of selling multiple products to each consumer: i.e., the small business person who gets his business return at RSM, gets his/her return done at Premium, and considers putting an IRA account at Block Bank.