President Obama’s new mandate that all recipients of government checks could be a game changer in the prepaid market. The policy, which makes all recipients of repeat government payments required to accept their payments through direct deposit, should put more Treasury-designed Direct Express cards in the pockets of Americans.

The new rule makes a lot of sense. The motive for this policy, reported by ABC on June 14th, is not driven by a political agenda. Rather, it is just a cost-cutting measure. ABC suggests that it will save at least $60 million per year. Ultimately, it might result in an annual savings of as much as $120 million.

The new rule would go into effect in March 2011.

Where it Will Matter

The idea is that government checks would be sent to “personal accounts,” or would be paid to recipients via Treasury’s Direct Express debit card. That card, issued by Comerica Bank, is the ideal debit card program. It is largely free of fees.

This rule should expand the number of households that put a Treasury Direct card in their pockets. Consumers may realize that this is a great product, and certainly a far more affordable option compared to the products offered by Green Dot, NetSpend, or the Rush Card. That would be bad news for MetaBank, Urban Trust Bank, Bancorp Bank, Columbus Bank & Trust (Synovus), and First Bank of Delaware, all of whom issue debit cards through marketing relationships.

What If

Let’s imagine that these changes, which are currently open for comment, take place. It changes the landscape of prepaid debit cards.

Ah, but let’s just imagine that the rule didn’t exclude payments from the IRS.  Let’s consider a hypothetical: all tax refunds have to go through a bank account or a Direct Express card.  Again, this is all hypothetical, but if refunds were included, it would be the next major disruption for RALs.  I’ve noticed that some tax preparers are already buzzing that this could be coming.

The date is not irrelevant.  Starting after March 2011 means that the new rule would still have a muted impact on RAL demand in 2011. Most RAL and RAC consumers file their taxes as soon as they can. Tax-payers wait as long as they can, while those getting a refund get down to their preparer soon after their W-2s come in the mail.

This would have macro and micro consequences. The issue of tax settlement is still not addressed. How will consumers pay for the cost of their tax preparation.  The motives that are suggested by consumers with the economic preferences that are implicit in the choice to use a RAL are the ones least likely to have the $70 to $200 needed to pay for their tax prep. Perhaps JTX or HRB would be willing to extend credit. Perhaps. That would be quite a feat, though.  Moreover, it would mean that the tax prep business would suddenly become a debt collection business.

On a firm level, the impact of the disruption are even harder to estimate.  H&R Block has a commitment from HSBC to provide its RALs for at least the next years, and at a scale that their current book of business will never extinguish. Jackson Hewitt, on the other hand, has to be scrappy. Their funding with Republic is limited, and by their own estimates, they only had enough RAL funding last year to satisfy about half of what their customers might have wanted. That is one check in favor of JTX, because they may have dodged a bullet.

At the same time, if there is no means for paying for settlement, then tax prep is suddenly a debt collection business. It could require a lot of liquidity to extend credit, even for just 9 days, to millions of consumers. JTX only has $7 million in cash. They just won’t be able to do that. Block, by contrast, has more than $1.7 billion in cash and cash equivalents. That is a night-and-day difference. Liberty’s balance sheets, as a private company, are not readily available. So that is one check in favor of Block.

The last unknown is the degree to which consumers would shop around for a RAL.  Block thought it would have an advantage this year. Having missed that opportunity, they’re now telling investors that they will see a gain next year. Well, maybe. Part of this is an issue of management. Another force, though, is the behavioral impulse of consumers. Many people, upon arriving at their Jackson Hewitt shop and finding out that they would have to wait at least a few days for their refund, still went ahead and filed there. People appear to like continuity, even when it is only a simple return.

The RAL market, as part of the tax market, is about to be disrupted anyway. Jackson Hewitt is about to be delisted. How is that going to help? JTX is already under enough pressure to perform. Their loan with Wells Fargo won’t let them stumble again.

H&R Block’s Q4 Earnings Call is interesting, not just to someone who follows tax preparation, but what the changes at this company tell us about the nature of our larger economy.

Although many would agree with Woodrow Wilson that ‘what’s good for GM is good for the country, and vice versa,” it could also be said that whatever ills plague working people are sure to have an impact on H&R Block. Block is the nation’s largest tax preparer. They file one in every seven returns in the United States.

While they do have a broader range of services than some of the other chains, they still depend upon basic 1040A (more…)

JP Morgan Chase’s decision to exit refund anticipation lending means that 13,000 independent tax firms will no longer have a means to advance their customers the cost of tax preparation.  Chase gave notice this week, with the intent to give their former partners as much time as possible to prepare for the next tax season.   RALs may not be entirely eliminated before next year, but at the same time, the marketplace is fractured. Block will have RALs, and some stores in the Jackson Hewitt and Liberty chains may as well.  The “mom and pops” will not, unless something changes shortly.

This should put pressure on policy makers to find an answer for tax settlement. It is a question that concerns not just the IRS, but also the OCC, the tax prep chains, and even consumer advocates. What is to be done?

We still can’t ignore that RALs were a problem. They were a solution to tax settlement costs, but they came at a high cost.  There were all kinds of externalities for all kinds of market players.

• They seemed to invite tax fraud.
• They created the platform for all kinds of additional fees, from “technology fees,” to “e-file fees,” to “account fees.”  The money drained the accounts of needy people, and undermined the impact of the Earned Income Tax Credit.
• (more…)

No kidding.  I spent about 40 minutes on the phone this morning, and I think I understand it.  Last night I spent about 40 minutes learning how to apply a buffer around a vector, then create a new layer, in order to analyze geospatial data.  The Block Emerald Advance is roughly as difficult.

My review of this card is that affords a low-cost line of credit, when evaluated from a long-term perspective. At the same time, it is hard to spend your money.  This account is best for someone who wants to establish a line of credit and then make minimal payments to it over time, without actually spending any money. There are people who would gain utility from such an account. Anyone who wants to embark on an effort to restore their credit would be able to find a satisfactory option, given the alternatives, through the Emerald Advance.  At the same time, the account has a complex fee structure. If you are late on your payments, you will incur a lot of additional fees. Its an account that you want to maintain in good standing.

The card’s structure is actually split into three different elements. There is a line of credit, a spending account (the “Spend”, and a savings account. The savings account pays interest, and the line of credit costs interest.

Consumers can open the account with an initial deposit. The account opening fee is $45. That fee is characterized as (more…)