Low fees may be lynchpin for tax refund card adoption

With the 2013 tax season gaining momentum, results from the U.S. Department of the Treasury's pilot program to evaluate the take-up rate of prepaid cards as a delivery mechanism for federal tax refunds suggest that programs with low fees will experience higher take-up rates. An Urban Institute appraisal of the pilot said that the prime target for tax refund prepaid cards – the unbanked – will more likely enroll in and use such cards when monthly fees are kept to a minimum or not charged at all.

Treasury entered the Tax Time pilot in January 2011. The pilot comprised roughly 800,000 individuals randomly chosen from a population of 8.3 million adults expected of being in the low- to moderate-income categories (below $35.000 in household income). Through direct mail, the pilot offered them the MyAccountCard, a general-purpose reloadable prepaid card, to which tax refunds were loaded electronically, instead of taxpayers being mailed paper check refunds.

Since the purpose of the pilot was to analyze how best to configure future tax refund programs, the recipients were given eight different "treatments" of the MyAccountCard, with different fee schedules and card features.

The September 2012 Urban Institute report, Tax Time Account Direct Mail Pilot Evaluation, said that 1,967 people out of the approximately 800,000 who received the offer applied for the card, making for a 0.3 percent take-up rate. The researchers noted that 0.3 percent is in line with average take-up rates for direct mail credit card offers.

Urban Institute found that the most important factor that influenced individuals to enroll was the cost of the card. When people were offered a treatment that came with a $4.95 monthly maintenance fee, as opposed to a treatment that came with no monthly maintenance fee, the adoption rate was over 40 percent lower.

According to the researchers, card usage also decreased when the card came with the maintenance fee. "The likelihood of using the card within the first six months of the pilot was 47 percent lower for people offered a card with the monthly fee," Urban Institute said.

Additionally, cardholders were 55 percent less likely to use the fee-attached card six months after the pilot was launched and 52 percent less likely to direct deposit tax refunds into the prepaid card accounts. "Implications for future efforts suggest that Treasury direct its efforts primarily toward offering an account with a monthly fee as low as possible (zero if possible), even at the expense of additional card features such as a savings account," the researchers said.

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