Bucks Blog: Despite Promise, Federal Tax-Refund Debit Cards a No Go

Giving consumers who lack accounts at a bank or credit union the option of getting tax refunds on multiuse, prepaid debit cards may help bring them into the financial mainstream, a report from the Urban Institute finds. But the accounts must be low-cost, easy to use and available early in the tax season to encourage their use.

The study examined the MyAccountCard, a card offered in a pilot program to low- and moderate-income families during the 2011 tax season by the U.S. Department of the Treasury, and found the card is “a concept with promise.”

However, the program wasn’t renewed in 2012 and there are no plans to continue it because the number of people who ended up using the cards was small, said Richard Gregg, fiscal assistant secretary at Treasury. Roughly one-third of those who were issued the cards used them in the first month, but the remaining two-thirds never used them; the report said it may be that people found the “multiple steps” necessary to use them “cumbersome.”

Roughly 70 percent of tax refunds are issued electronically, he said, and Treasury is still seeking ways to increase that proportion — but not by using the model tried in the pilot program.

Electronic delivery of tax refunds into bank accounts is common among upper-income families, but is rare among low- and moderate-income families because roughly 7 million of them lack a checking or savings account, the report said.

Commercial tax preparers offer their own prepaid card products, the study noted, but they require using that particular preparer in order for filers to get a tax refund electronically on the card.

While the report didn’t address potential fraud, there have been some reports that prepaid cards can make it easier for thieves to illegally claim refunds after filing fake tax returns.

In the Treasury program, adults with household incomes under $35,000 and little connection to mainstream financial services were offered a prepaid card for receipt of their tax refunds. The card could also be used on an ongoing basis for everyday financial needs, like getting paychecks by direct deposit, getting cash from A.T.M.s, making purchases and paying bills.

The Treasury Department chose Bonneville Bank as the financial agent for the program, which used Visa-branded Green Dot cards.

The program showed that the card was attractive to its target audience: Adults who were most likely unbanked were three times as likely to use the card, the evaluation found.

People who were mailed the offer to participate in the program in mid-January were far more likely to apply for the card than those contacted in early February.

Charging a $4.95 monthly fee, compared with charging no fee, decreased applications by 42 percent, and decreased the likelihood of directly depositing a tax refund into the card accounts by 52 percent.

A linked savings account offered with the prepaid card was unpopular, perhaps because participants had to activate the account online, the evaluation found.

Roughly 800,000 randomly selected people were mailed a MyAccountCard offer under the program. Of those who received the offer, 1,967 people applied for the card. That “takeup” rate of 0.3 percent is at the low end of the takeup range of 0.3 to 0.8 percent of those who apply for direct-mail credit card offers, the analysis found. But unbanked customers were “significantly” more likely to apply than the group overall.

The Urban Institute report noted that the card could save the government money by reducing reliance on paper checks and could help low-income taxpayers avoid high-cost refund-anticipation loans. The authors recommended that if the pilot program were ever expanded, the card should be as low-cost as possible. They also advised that the card’s availability, along with application details, should be publicized well before tax season and made as simple as possible.

Another caveat they noted is that the MyAccountCard can’t be used to pay tax-preparation fees, which likely hindered its use because low- and moderate-income filers often don’t have the $150 to $400 preparation fee up front. Including an option to pay for tax preparation as part of getting a refund on the card should be investigated, they suggested.

Funding for the evaluation was provided by the Treasury Department.

Would you get your tax refund on a prepaid card if it could also be used for day-to-day financial business?

Article source: http://bucks.blogs.nytimes.com/2013/01/08/despite-promise-federal-tax-refund-debit-cards-a-no-go/?partner=rss&emc=rss