In recent years the Internal Revenue Service has pushed electronic income tax filing and direct deposit for refunds. But most of the 100-plus million refunds the IRS issues annually are still accomplished by mailing paper checks to recipients. The majority of checks are mailed to lower-income individuals, a portion of whom can be termed unbanked.
But the unbanked are starting to receive their refunds on open-loop, reloadable prepaid cards. It reduces overhead costs for the IRS - paper, postage and handling. It also reduces the costs for recipients without bank accounts. Instead of having to cash checks at check cashing businesses that charge high fees, refund-loaded prepaid cards come with minimal fees.
Furthermore, refund cards act as alternative banking tools. Unbanked consumers can use Visa Inc.- or MasterCard Worldwide-branded cards to pay for goods and services online, as well as in face to face retail environments.
According to Brent Watters, Senior Analyst at Boston-based consultancy Mercator Advisory Group, the market for cards loaded with tax refunds can be lucrative. While still in the preliminary stages of exploring this market, Mercator estimates the load amount on open-loop, reloadable refund cards might exceed $800 million in 2009.
Tax preparer H&R Block, with its Emerald Card program, is the leader in this market, accounting for more than half of Mercator's projected total load volume. In 2008, H&R Block reported 2.6 million Emerald Cards were in circulation. The IRS stated the average tax amount refunded to taxpayers was $2,383 in 2008.
Watters combined those two statistics to come up with an approximate 2008 load volume for the Emerald Card at $460 million. To account for the remaining portion of that $800 million figure, Watters pointed to the potential amounts garnered by newer players in the market: Jackson Hewitt with its ipower CashCard and UniRush LLC with its RushCard, for example. Financial institutions recognize tax refund cards can act as a gateway product for establishing relationships with unbanked or financially underserved consumers.
"Just like the program manager or issuer of a general purpose reloadable card, they want to build a relationship, and what a great introduction," Watters said. "Get your tax dollars loaded onto here. Start learning the benefits of these cards. So, absolutely, it's a good way to promote additional services."
In 2008, The U.S. Department of the Treasury's Financial Service implemented a prepaid card on which Social Security payments are loaded.
"That was a major program, and we identified it in our prepaid benchmark study," Watters said. "We're going to see some pretty amazing growth out of various federal government agencies turning to the cards for making payments."
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