Updates on RAL Industry

For many reasons, the nature of how tax preparers enable their clients to get an advance on their expected tax refunds is changing.

Earlier this month, the IRS announced that it will not offer the debt indicator for the upcoming tax season. Advocates were ecstatic about this event. Absent of some notice about the tax position of a RAL consumer, the new normal in RAL underwriting triggers all kinds of problems for this product. It makes the product more more risky. Given that most of the active players in this field are relatively small banks (MetaBank, Ohio Valley Bancorp, Republic Bank of Kentucky), the new rules should make regulators look twice. There are new challenges to the safety and soundness of these institutions.

Santa Barbara Tax Products Group and MetaBank signed a four-year agreement on August 20th. MetaBank will provide funding for both RALs and RACs to SBTPG. I think that SBTPG will end up competing with Ohio Valley Bancorp’s Loan Central for the scores of independent tax shops that lost a source for RALs when JP Morgan exited.

Republic’s 8-K of August 5th, 2010 (the day of the IRS announcement) offers a candid assessment of the new playing field.

• Republic will raise pricing on its RAL product. Jackson Hewitt, which will tap Republic for about half of its RAL needs, says that it will raise prices by at least $100.
• Republic expects consumer demand for RALs to remain inelastic relative to higher prices.

Republic then hints at the next step for the IRS.

The IRS also plans to explore th epossibility of providing a new tool for the first quarter 2012 tax filing season to give taxpayers a mechanism to use a portion of their tax refund to pay for the services of a professional tax preparer. This product would likely present direct competition for the BAnks’ Electronic Refund Check (“ERC”) products.

Republic’s portrayal of the IRS’ plans only reiterates the response that has been expected. The IRS knows that demand for RACs and RALs are both factored by the need to avoid paying out-of-pocket for tax prep. To me, the more significant element of this announcement is the timing. By waiting until 2012, the IRS is creating a “wild west” atmosphere for the next tax season.

The tax prep chains are in an odd mode. John Hewitt (Liberty) recently said that Block will have the best RAL product. H&R Block’s Kate O’Neill Rauber (other business) pointed out that there will still be a need for non-bank products with a direct deposit function. Those cards are available at Block, but it also means that consumers may pay attention to the differences in the Block and Green Dot products, which have no line of credit, and the MetaBank cards, which can be “enhanced” with a credit line.