H&R Block Plans to Reduce Refund Lending Costs by Opening Bank Accounts
One million tax return clients of H&R Block may soon have low cost bank accounts. In an effort to reduce the cost of refund anticipation loans for the 2007 income tax season, the company has announced plans to enable clients to open bank and savings accounts utilizing its nationwide network of 12,500 tax preparation offices, including an expansion of 300 to 400 offices currently underway, for free during the coming tax season.
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The action comes only days after H&R Block announced that its seasonal first-quarter loss had grown fourfold, to $131.4 million, or 41 cents a share, in May, June and July. The loss, according to the Kansas City Star, is mainly attributed to recently disclosed mortgage business problems. First quarter revenues fell to $540.8 million from $615.0 million a year ago. Revenues for Tax Services, however, rose $66.0 million, a 15 percent improvement over last years’ $57.2 million. In addition, revenues in Business Services rose 62 percent, to $205.1 million, reflecting the October 2005 acquisition of the American Express Tax and Business Services Unit.
H&R Block Bank, which began operations May 1, is part of the newly created Consumer Financial Services segment. First quarter revenues for this segment, which includes H&R Block Financial Advisors, and H&R Mortgage, as well as the bank, were $108.3 million, with a pretax loss of $7.8 million. The Bank had an asset base of $566,8 million by the end of the first quarter, earning an annualized pretax return on average assets of 1.15 percent. The efficiency ratio (non-interest expense divided by revenues less interest expense) was 35 percent and the annualized net interest margin (net interest revenue divided by average assets) was 3.65 percent.
“H&R Block has a long history of helping American families get the most from their financial lives,” H&R Block Chairman and CEO Mark A. Ernst said in a statement announcing the program. “The steps we’re taking today build on that legacy by helping millions of our clients access the banking system in a unique way to reduce their costs and take another step toward a brighter financial future.”
“Our new H&R Block Bank is off to a strong start,” Ernst noted in a statement regarding first quart financials. “We began building the balance sheet with deposits, mortgage loans and investment, and we look forward to leveraging the Bank’s capabilities to offer attractive financial products and services to our tax and other clients.”
New Low-Cost Banking Solution
With a target of opening 1 million next generation bank accounts, H&R Block will be giving clients the benefits, such as direct deposit, of a traditional banking account, blended with a pre-paid card that eliminates the risk of overdraft fees for easy bill payment, purchases and ATM withdrawals, all for free.
“With direct deposit of a tax refund into an H&R Block Bank Account, clients can receive their tax refunds in less than half the time of a mailed IRS check,” Ernst explained. “And clients can avoid fees for tax refund loans or check cashing that together can cost $145 or more just at tax time. With year-round use, added savings averaging $460 annually are possible.”
Accessed using the new H&R Block Emerald Pre-Paid Card, this low-cost banking solution will be opened for free and features easy account access, no overdraft fees, no minimum balance requirement, no transaction fees for purchases, FDIC insurance, and convenient monthly statements. In addition, the bank card provides a way to avoid high-risk check-cashing fees for nearly 3 million H&R Block customers who do not currently have a bank account. The card account can also accept payroll and other deposits at thousands of retail locations across the country.
“Using its understanding of the desire of consumers to combine the safety of an insured bank account with liquidity and pricing transparency, H&R Block Bank will provide consumers who have traditionally not used bank accounts with access to lower-cost solutions at scale,” Ellen Seidman, executive vice president of Shorebank Corp. and former director of the Office of Thrift Supervision, said in reaction to the announcement.
High Yield Savings Solutions
“For many Americans, the day they file their tax return is the one day of the year that they have managed to accumulate a non-negligible sum of money. As such, their tax refund represents a terrific opportunity to generate some long-term savings,” said Dr. Richard H. Thaler, professor of behavioral science and economics at the University of Chicago Graduate School of Business. “What H&R Block has done is create a structure in which taxpayers can take advantage of that opportunity. By allowing them to open an account and directly deposit a portion of their tax refund, reluctant savers are much more likely to act. This creates a potentially powerful tool to help solve one of the most important problems facing our country.”
In addition to the next generation banking solution, H&R Block also announced two new savings accounts enabling clients to turn their tax returns into savings. At 5.25 percent annual percentage yield (APY), H&R Block’s Easy Savings Account and Easy IRA offer among the highest rates of return in the country for FDIC-insured deposits.
The Easy Savings Account, designed as a basic emergency fund, offers convenient access at ATMs. The Easy IRA enables clients to save for retirement using a tax-advantaged account that makes it simple to claim the Retirement Saver’s Credit, a federal matching incentive for low- and moderate-income savers.
Both accounts have no minimum balance requirement and no opening or annual account maintenance fees for H&R Block’s retail tax clients. The annual fee is also waived for non-H&R Block clients who maintain a $300 minimum balance.
Reducing the Cost of Refund Lending
H&R Block, in cooperation with its partner HSBC Taxpayer Financial Services, will significantly reduce the cost of refund lending for the upcoming tax preparation season.
For a $2,800 refund anticipation loan, which is the average loan size for H&R Block, the cost could be reduced more than 40 percent compared to last year. This same $2,800 refund loan can cost as little as $60, including a finance charge of less than 1.1 percent, when the loan is combined with a bank account. As an 11-day loan, the finance charge on this $2,800 loan translates to a 36 percent APR, which meets benchmarks suggested by many consumer advocates.
“Used in combination with an H&R Block Bank account, lower-cost loans can be a bridge to entering the financial mainstream,” Ernst said. “I’m hopeful that our action will trigger price cuts and reforms throughout the RAL industry.”
The action builds on past H&R Block efforts to improve refund lending. Over the last several years, the company has reduced refund lending fees, improved client disclosures and tax preparation training, incorporated suggestions from consumer advocates, and supported stronger RAL regulation to ensure that consumers can make more informed choices.
Improving Financial Education and Advice
“Many middle-income Americans have been left behind as traditional financial institutions focus on those with higher incomes,” Ernst said. “Tax time is a unique moment during which we can meet our clients’ distinct needs with planning and advice that’s simple and actionable.”
To expand its financial education and advice programs, the company will upgrade its H&R Block Advantage Report, a free report that customizes tax tips, budgeting, borrowing and savings information, alerts to government benefits, and action plans for each tax client.
Steven Brobeck, executive director of the Consumer Federation of America, acknowledged H&R Block’s efforts, saying, “The Consumer Federation of America supports any of H&R Block’s efforts that benefit lower-income households by lowering the cost of essential banking services, by providing new and effective savings opportunities, and by informing clients how to lower banking costs and build personal wealth.”
The company said it plans to introduce additional financial advice and education tools for the 2007 income tax season.
“This announcement represents a dramatic and profound step forward in the tax preparation business for low and moderate income Americans,” said Steven Dow, executive director of Community Action Project of Tulsa County, one of the nation’s largest providers of free services for low-income taxpayers. “H&R Block’s decision to promote savings and simultaneously reduce the cost of banking services and the cost of loans is a monumental and welcome shift in the operating philosophy of the commercial tax preparation business.”
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