The regulatory crackdown on refund-anticipation loans is poised to redistribute market share from one tax preparer and its bank partner to their rivals.
Unless Pacific Capital Bancorp Inc., which regulators have ordered to leave the business, sells its tax-loan unit and finds additional funding for it by Friday, Jackson Hewitt Tax Service Inc. will start the tax-preparation season without funding for more than half of its RALs.
Jackson Hewitt, the nation's second-largest tax preparer, all but acknowledged that it will cede major ground to its competitors this year. Such a shift could have lasting implications for firms offering products and services to underbanked consumers.
"It's potentially disastrous for Jackson Hewitt," said Vishnu Lekraj, an analyst at Morningstar Inc. "If they lose the ability to provide RALs … they also lose the ability to service taxpayers, who would go to competitors."
Of those rivals, H&R Block Inc. — with its own bank, a suite of alternative financial products and a seemingly stable RAL partnership with HSBC Holdings PLC — appears best positioned to reap the benefits.
H&R Block has "a bank, so they can tailor products to what they need; they have lines of credit, they have other products that they can provide and develop to replace RALs," Lekraj said. "The profitability of those products is probably not as great, but they're able to keep market share and provide products that other competitors can't."
Sheila Cort, a spokeswoman for Jackson Hewitt, would not discuss its rivals or long-term outlook. "We're speaking to some large banks and some other funding sources. … Our key objectives continue to be to quickly find a solution," she said.
H&R Block did not return calls. HSBC wouldn't comment.
Refund-anticipation loans and checks are pitched to lower-income, and often unbanked, consumers as a quick way to obtain refunds and to pay for tax-preparation services without out-of-pocket expense. These products help companies like H&R Block, Jackson Hewitt and JTH Tax Inc., which does business as Liberty Tax, attract customers.
Last month the Office of the Comptroller of the Currency blocked Pacific Capital from funding these loans this tax season, leaving Jackson Hewitt and Liberty scrambling to find alternative sources of funding. Pacific Capital, of Santa Barbara, Calif., said it had signed a letter of intent to sell its tax division to a private-equity firm. The banking company, which would not comment for this story, has yet to close the sale.
Consumers can start applying for refund-anticipation loans on Friday, and experts said most such loans will be made by mid-Feburary. Given that deadline, the value of Pacific Capital's unit appears to be quickly diminishing.
"It's not worth very much, buying a business when the primary revenue stream is nonexistent," said Terry Keating, managing director at Amherst Partners LLC, an investment bank. "Is it worth something if the unit can't operate? I would argue, as a buyer, no. Certainly that impacts Pacific, and lowers what they can recoup out of the business."
Liberty has shifted most of its business to Republic Bancorp Inc. of Louisville, which also said it would fund about 45% of Jackson Hewitt's loans this year.
But Jackson Hewitt has so far been unable to make up the difference — and in a regulatory filing Wednesday it gave up most hope.
"The company does not expect to have a RAL program in place by the beginning of the 2010 tax season on January 15, 2010 for the remainder of the RAL program," the filing said. "The company is continuing all efforts to assist in securing RAL funding … for the 2010 tax season," but "no assurances can be given."
The filing also disclosed that Meta Financial Group Inc. had agreed to fund half of Jackson Hewitt's refund-anticipation checks. Such products are less risky, and have attracted less regulatory scrutiny, than RALs, but they also take longer and are less profitable.
That deal "may help save some of the customers from leaving or going to competitors," but "it won't be as profitable for Jackson Hewitt," Lekraj said.
Meta, of Storm Lake, Iowa, had signed a "preliminary agreement" to fund loan and check products for Pacific, according to an e-mail that Pacific sent to its tax preparation partners. (The e-mail was posted on an online message board last week.) Jackson Hewitt referred questions about the e-mail to Pacific and Meta, neither of which would discuss it.
Jackson Hewitt's founder — who now runs Liberty — had a different take on who would benefit from the flux. "If we talk about the number of customers that switch this year, Block will win," John Hewitt said. But "if indeed Jackson Hewitt goes under, many of those franchisees are going to look for another home. We're the best choice."
To make that happen, Hewitt is recommending that his franchisees pay their Jackson Hewitt counterparts $50 to $100 to refer customers who want RALs.