Copyright 2005 The Washington Post
The Washington Post
April 10, 2005 Sunday
SECTION: Financial; F01
LENGTH: 1020 words
HEADLINE: Preparers Moving to Tax-Refund Debit Cards
BYLINE: Caroline E. Mayer, Washington Post Staff Writer
In the past, taxpayers anticipating a refund had three ways to get their hands on their money. They could wait six to eight weeks for a government check to arrive in the mail. They could have the refund automatically deposited in their bank account, which takes about two weeks. Or they could pay high interest fees for a so-called refund-anticipation loan and get their money immediately.
Now several tax-preparation firms are offering a fourth alternative -- plastic.
Slowly but steadily, tax preparers are sending consumers their refunds on prepaid debit cards. The cards look like credit cards but act like bank cards, with the consumer's name and number on them, because users can't charge more than the amount available in their "account," in this case the amount of the refund.
The cards give the consumer access to the refund money in about two weeks. That's not so much faster than the Internal Revenue Service's automatic deposits, but it's a boon for taxpayers without bank accounts, the market to which the plastic refund card is targeted.
"We realized that there are a rather large number -- about 35 million Americans -- who are 'unbanked' and don't have bank accounts, and another 50 million who are 'underbanked' and don't have large balances or don't frequently make deposits," said Peter Tahinos, senior vice president of marketing for Jackson Hewitt Tax Service Inc., the nation's second-largest tax-preparation firm. "So when it comes to tax time and they receive a check, they have a hard time cashing it," said Tahinos, whose firm has teamed up with MasterCard to offer refunds on its CashCard.
H&R Block, the nation's largest tax-preparation firm, with 11,000 offices around the country, is testing its Debit Plus Visa card in 238 offices, including 24 in the District and Maryland. Now in its second year, the program may be rolled out nationally next year, company spokeswoman Denise Sposato said. Like other firms, H&R Block declined to say how many customers have signed up for the card, noting only that it's a small but rapidly growing percentage.
Consumer advocates say prepaid debit cards may be a preferable alternative to the high-cost refund-anticipation loans that many tax preparers offer low-income taxpayers who don't want to wait for their refund checks. Those loans have come under criticism from consumer groups and are a target of class-action lawsuits because of their high fees. A recent consumer coalition study said a taxpayer expecting a $2,050 refund pays about $100 for the loan, including a fee for setting up a temporary bank account to receive the refund electronically from the IRS. Since the loan is for only about 10 days -- between the time the money is advanced and when the actual refund reaches the tax preparer or the designated financial institution that lent the money -- that fee works out to an annual interest rate of 187 percent, the study said.
As an alternative to these loans, the prepaid cards "can be a low-cost method of delivering tax refunds quickly," concluded the study by the National Consumer Law Center and Consumer Federation of America. But the groups said these cards are not good deals if they are offered in tandem with refund-anticipation loans.
Of course, the card's value all depends on the card's fees, the groups added.
Rockyourrefund.com, a Web site designed for 18- to 24-year-olds, sells its customers the Rush Visa Card, founded by hip-hop mogul Russell Simmons, for $9.95. It takes about a week to get the card, just in time for the IRS to deposit the refund to the customer's account. To use the money, however, the card holder is charged $1 for each store transaction, up to a maximum $10 a month. Each ATM withdrawal costs $1.50.
The sign-up fee for H&R Block's Debit Plus is $24.95, but there is no fee for store transactions and users can make one free withdrawal per month from an ATM. After that, there is a $1.50 charge for each withdrawal. There is no monthly fee for four months, but consumers are charged $2.50 a month thereafter to maintain a balance on the card.
Consumer advocates also warn that these cards are not subject to federal rules that insure the funds or limit a consumer's liability to $50 if the card is lost or stolen.
The Federal Reserve Board and Federal Deposit Insurance Corp. are now considering such rules.
In the meantime, some card issuers voluntarily offer some protections, although the liability may be limited. Visa, for example, limits liability to $50 for all fraudulent transactions on its network, but not for transactions processed on ATMs.
Even so, Visa officials consider the card to be safer than a cashed check. "You have to walk around with cash and could fall prey to criminals . . . and if you lose the cash" there is absolutely no protection, said Nizam Antoo, director of prepaid products for Visa USA.
Antoo said plastic refund cards are "becoming a very big business" because a large number of unbanked consumers are getting large refunds.
And strategically, he added, the cards offer a starting point for banks to encourage the unbanked to open an account or take out loans or credit cards -- "to bring this consumer demographic into the financial mainstream."
Yet plastic also encourages spending, a concern to economists and others who think Americans should be putting at least part of their refunds into savings. "The tax refund is a lump sum that you haven't relied on during the course of a year, so it's a useful and appropriate" amount of money to save, said Michael S. Barr, a University of Michigan law professor who specializes in banking regulations and consumer services.
But having the plastic makes it easy to spend, as Gladys Kemokai, a New Jersey payroll coordinator, discovered.
Kemokai, who had closed her checking account because of the high fees, signed up for the Rush Visa Card to get her $3,600 refund. The money arrived in mid-February. Two weeks later she and her husband used it for a wedding trip to Las Vegas. Only $30 remains on the card. That, she said, she will save "until something bad happens."
LOAD-DATE: April 10, 2005