After several relatively quiet years, the tax refund banking product sector is suddenly active.
Last month, the Office of the Comptroller of the Currency released updated rules for its banks. The new guidance updates its bulletin from 2010. For the most part, the new guidance rewrites many of the previous principles in the 2010 document. But there are changes, both in tone and in specifics, which merit some review. I will provide some commentary on that further down in this entry.
But before, I would also like to mention what has been going on with an old player. Just a few weeks ago, SBTPG issued a press release for its PreFund product. You may remember that SBTPG was once a part of Pacific Capital Bank. After PCBC had been nudged from the refund anticipation loan business, SBTPG went out on its own. SBPTG soon created a relationship with MetaBank. For the time, this partnership resulted in refund transfer products. But then last spring, Green Dot purchased SBPTG. According to Green Dot, their interest in SBPTG was derived from its large market share in processing. Green Dot's leadership suggested that owning SBPTG could create downstream opportunities to capture more prepaid card accounts.
PreFund is a loan program which preparers can offer to their clients. The PreFund process works like this:
- Preparer signs a contract with PreFund to offer free loans.
- Consumer files at the preparer.
- Preparer processes return through SBPTG.
- Having passed a set of underwriting criteria, the funds are sourced from 1st Money.
- Proceeds of a sum up to $600 - minus the preparer fees - are disbursed onto a Green Dot prepaid card.
Add to that the July 16th announcement from MetaBank that it would purchase Fort Knox Financial Services and its Tax Processing Group subsidiary for approximately $50 million in stock and cash, and you have a relative firestorm of activity. Fort Knox's Refund Advantage has facilitated approximately 100,000 refund transfers in each of the last few years. The company says it has relationships with about 10,000 EROs, most of whom are operators of independent preparation firms. With RA's FeeAdvantage, the preparer pays Fort Knox $14.95 for each product. The product is free to consumers.
What This Could Mean
I appreciate the effort made by OCC staff to add more granularity to their bank product guidance. The OCC's concern is laudable. There is new language that requires banks to document that the filer has the ability to repay and that standard assumes the worst-case scenario where the consumer does not receive the full amount of the contemplated tax refund.
Although support for mystery shopping was a part of the 2010 guidance, this version goes into much more detail about how such work should be done. Although it still allows verification to be done in-house, the guidance mentions how a third-party entity could create added benefit to compliance efforts. Because of this change, I see an opportunity for some larger community groups to participate in mystery shopping.
As has been the case in the past, the new guidance expects banks to make sure that consumers receive a robust set of disclosures. As well, the banks will remain responsible for verifying that third-parties give their employees adequate training.
In another wrinkle, it appears that the OCC will look with skepticism on institutions that devote a large share of their capital to short-term tax refund products. In outlining the nature of an ideal internal control, the document mentions that banks might establish limits on the total dollar amount of tax refund-related products relative to the institution's capital base.
But while the OCC has improved upon a standard that was already excellent, the net effect will be limited to products issued by MetaBank and B of I Federal. Of the banks in this space, only those two are regulated by the OCC. The capital allocation approach would impact Republic Bank (Kentucky), but it is regulated by the FDIC. At least for now, however, it is the non-banks who are driving the change in the product mix.
The new SBPTG approach is one example of a process that is taking place outside of a bank. True, Green Dot will participate when consumers elect to load a PreFund disbursement on to a Green Dot card. That said, the refund (up to $600) comes from Texas-based 1st Money Center. 1st Money Center makes instant cash advance loans in several states, and it appears that it also offers title loans.
But in some ways, PreFund is another iteration of other post-RAL shutdown strategies. PreFund is akin to Refundo in that its clients are preparers. It is the preparers who pay for the PreFund product. For consumers, the service is free.
Liberty's JTH Financial is an example of a non-bank taking a more traditional approach because the customer still pays for the product. While not all of the product sold in a Liberty Tax come from JTH, most do. In fiscal year 2015, JTH Financial funded 73.4 percent of the refund transfers used by Liberty. Slightly fewer than half of filers utilized a product during the last tax season. Will their offering drive more customers to their stores? This is a hard question, but certainly, one that is important to Liberty: "Future growth of financial products revenue will largely depend upon increasing the attachment rate, increasing the number of customers served, and possible future fee increases." (Liberty 10-k) Liberty reported that it received $37 million in revenues from financial products but only $13.9 million in tax prep fees from company-owned stores.
Now that B of I Federal Bank has received approval to purchase H&R Block Bank, there is another unknown. Will there be a refund loan product in Block stores this year?