H&R Block CEO William Cobb acknowledged that the wait on regulatory approval for their sale to B of I Federal Bank has now gone on for so long that the company will have plan on using its bank for the 2015 tax season.
At the close of last year's tax season, H&R Block reached an agreement to sell its bank for the second time, as their prior intention to sell the bank to Republic Bank of Kentucky was scuttled in the prior year for a similar delay. It appears that the Office of the Comptroller of the Currency has decided to wait in lieu of rejecting the application. It is no secret that a bank whose main business is to sell tax settlement products cannot transition to a new owner while simultaneously ramping up. As such, any sale probably has to occur prior to Halloween.
Personally, I'm not quite sure why this happened. From an advocacy perspective, a sale to Republic Bank would have been a disaster. Republic's reputation was built on its aggressive issuance of refund anticipation loans. When the FDIC asked Republic to step back from RALs, the Louisville company contested the decision in court. By contrast, their main competitors in the space both withdrew in response to similar pressure.
But of B of I doesn't have that kind of record. B of I has begun to step its toes into the issuance of prepaid debit cards, but its long-term focus has been in the kinds of unusual markets that are largely left to niche players. For example:
- If you want to borrow to furnish your dentist's office: then the C & I Lending division of B of I Bank is your place.
- If you want to buy $10 million in tax liens? Again, your answer is B of I.
- If you want to convert a stream of cash flows derived from a winning lottery ticket into a lump sum payment? Want to use those cash flows as collateral for a loan? Then B of I Federal Bank's AnFed Bank is waiting to hear from you.
- If you recently agreed to a massive settlement from a personal injury claim. Are you going to receive it in installments? If you want a lump sum payment, then AnFed is there for you, too.
Yes, B of I does engage in mortgage and small business lending. B of I owns Apartment Bank, which as its name would infer is concentrated in lending on multi-family developments. They own Bank X, which runs a fee-free, overdraft-free, NSF-free, monthly-fee free, and minimum balance-free checking account.
But it is truly a one-of-a-kind bank. More to the point, they are a bank whose track record lacks for any evidence that they might be planning to prey on the consumers who they would attract with Block Bank.
In fact, the hard-to-explain nature of this turn of events if furthered complicated by the fact that Block Bank has been doing some very consumer-friendly things as of late. Look no further for evidence to support that idea than last week's anncouncemtn that Block will be a participant in the CFPB's Project Catalyst program. Block is piloting a new savings program which aims to encourage tax filers to see their refund as the opportunity to build a nest egg. For the next three years, Block will conduct several experiments to see what works for their customer base. They will share those results with the CFPB. Ultimately, any successes will then be disseminated as industry best practices.
My opinion is that Block deserves a lot of credit for their willingness to make another stab at savings. Few issuers want to get involved with savings, mainly because there is no interchange to be had from the dollars that are parked in those sub-accounts. For better or worse, prepaid is driven by the spend. Save is nothing more than an afterthought in most cases. Besides, it is not as if consumers have demonstrated much in the way of demand here. NetSpend has been offering a five percent savings account on some of its cards. Most accounts never averaged more than $100 in balances over the course of a year. But if at first you don't succeed.....
So what's up?
Just a few minutes ago, a reporter told me that the only reason Block stepped back was because they were running out of time. Well, of course. The idea that time is of the essence is lost on no one. When the clock ran down last year, Block made the same choice. A regulatory delay is tantamount to a regulatory denial.
Is this about refund anticipation checks? While refund anticipation loans drew A LOT of heat from advocates, there has been very little noise out there with regard to RACs. A RAC makes it possible to put off paying tax prep fees until the arrival of a refund, which for many filers is a necessity. If this is the reason, then my guess is that it is driven by concerns over the increase in costs for RACs. Traditional supply-and-demand signals don't work here, as no one really feels the cost of the service. The price is steep. Certainly the price comes in well above the cost to the issuer. How high are we talking about here? If a filer wants to put off prep fees for both state and federal returns, then Block charges $44.95. If they want to put those refunds on to a paper check, the cost goes up by another twenty dollars.
I hope that a conversation about how to fit the Community Reinvestment Act to the realities of prepaid debit card issuance is taking place. With an acquisition, the purchasing bank would normally be required to submit a strategic plan to its regulator which outlined how it would meet the credit, investment, and services needs of the communities that it serves.
Unfortunately, the notion of community is tied up in Banking 1.0. The CRA only looks at actions in the MSAs with branches. This forces even the most well-intentioned prepaid card issuer to write a laughable plan.
Look no further than what is taking place at Green Dot Bank. The Federal Reserve allowed Green Dot to write a CRA plan based upon mortgage lending and community development investment. Then, they said that the only are of concern was the Provo, Utah MSA. Green Dot is doing some great things in Provo. Their employees serve on the United Way, they are making some community development investments in the area, and as their branch is located near the campus of Brigham Young University, they are originating mortage loans in a low-to-moderate income area.
Bully for Provo! But, it is hard to imagine how the plan could have been written to create more separation between Green Dot Bank's consumers and their strategic plan. The arrival of the mono-branch bank with deposits from across the country challenges the assumptions of the CRA. What if they wrote a plan that rewarded a bank for adding financial literacy, credit building, and more use of behavioral incentives to encourage savings? Block is going to do that, by the way. I hope that their acquiror writes those activities into the plan, and that their regulator gives the bank credit for doing so.