Tomorrow is the annual shareholders' meeting for H&R Block. I will be there, speaking out against the company's intentions to continue to offer RALs without the debt indicator.
Block is unique in the RAL space, because it has a line of credit with a bank partner that is large enough to satisfy any level of RAL funding that the company seeks to facilitate with its clients.
Pacific Capital was forced to cease offering RALs at the end of last year, due to an order from their
regulator, the Office of the Comptroller of the Currency. JP Morgan Chase decided to voluntarily exit the RAL business. Ohio Valley Bancorp remains involved with some digital preparers, but there are rumors that it may leave the business soon. Republic Bancorp is going to go ahead with RALs, but they do not have the capital resources to satisfy all of the tax prepares that would have been able to offer RALs in the past.
The current playing field is sharply different from just a year ago. The independents, who had been relying on Chase, are largely without an option. Jackson Hewitt and Liberty will share what is available from Republic. MetaBank, an Iowa lender that offers refund checks for JTX last year, has signaled that it will partner with a new entity - Santa Barbara Tax Products Group - to offer RALs. The details on that still remain to be clarified, as their regulator (the OTS) has not made their feelings known about the situation.
That means that Block is the last tax preparer standing.
Block's CEO announced that his firm would go ahead with RALs on August 5th, just hours after the IRS announcement that it will no longer tell banks when there is an outstanding obligation due to the federal government from a RAL applicant.
The debt indicator held up a lot of applications. In 2005, more than 844,000 RAL applications were offset.
Block already has 45 percent of the RAL market (approximately) and they are lining up to get more of it. Unfortunately, they are going to get more of a very unstable and risky business.
There are some major strategic risks:
- Block is differentiating itself not by its tax preparation, but instead by loans. What's worse, those are bad loans. My sense is that Block's preparers want to do taxes, not sell loans.
- Block is going to take on a lot of bad debt expense. Block has an agreement to buy back the share of loans that HSBC can't collect on when they go bad. That could add up to a lot of losses for the company. Imagine if 400,000 Block RALs go bad. The average RAL is about $2,500. That amounts to $1 billion in bad debt. Does Block want to get 400,000 judgments in court? How many of those judgments are going to be with consumers that don't have $2,500 in savings? How many of those consumers are going to decide that 2011 is the last year that they go to get their taxes done at Block.
- Last, the company's relationship with its customer base is at risk. Unless I have it wrong, I don't see how a TY2011 customer that has been getting debt collection calls after his RAL soured is going to decide to come back for more tax preparation services in 2012. Block lost 700,000 customers between 2009 and 2010. This only adds new pressure on that trend.
This is the message that I am going to take to the H&R Block board. I imagine that this is going to be an act that falls on deaf ears. I think it's just common sense. I hope that Block listens to reason.