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.

In the next year, look for H&R Block (HRB)to pulverize its competition for retail tax prep.  Fundamental changes, going on this week, will impact the tax prep marketplace.  It will be one of those disruptive events that should make winners  out of Block, and losers out of Liberty Tax Service and Jackson Hewitt.

The unknown is how JP Morgan will respond.  They are already in the RAL business with a lot of the independents.  Even so, tax season is about two months off.  Can they come to terms with Jackson Hewitt and Liberty Tax?  Can they reach an agreement in time for this year’s tax season?

How RALs Drive Tax Prep Services

The tax prep chains draw in customers based on two things: the quality of their tax prep service, and the availability of advances on expected tax refunds.   In today’s market, tax prepares must provide loans, or really 9 day advances – on tax refunds.  For the kind of consumers that flock to strip-mall tax places, that refund is the payola of the year.  It can often be as much as $2,000 for a family making approximately $40,000 per year.

Refund anticipation loans are a sizeable chunk of income for tax prep chains.  The chains take about 10 percent of the (more…)