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Two critical questions exist for the prepaid industry. What will it take for prepaid cards to achieve widespread awareness and acceptance among a critical mass of consumers? When will prepaid users turn to the prepaid card as an ongoing financial tool?
The prepaid industry has been working hard to identify which consumer segments are most likely to use the product, to develop product features that meet consumers' financial needs, and to employ marketing strategies and distribution for wider and deeper market penetration. Yet, the industry has not reached the tipping point.
Public policy can facilitate consumers' access to healthy, reasonably priced financial services, particularly for middle- and lower-income households. One policy that could help drive awareness, uptake and ongoing use of prepaid cards is to provide prepaid accounts for taxpayers.
Each year, the Internal Revenue Service issues more than 100 million income-tax refunds worth billions of dollars to individual filers. The IRS issues nearly all of those refunds with paper checks, and it mails the majority of those checks to lower-income households. IRS data show that of the 60 million federal tax refunds issued via paper checks in 2005, nearly half went to households earning $30,000 or less. Many of those households lack access to reasonably priced financial services and may pay a disproportionate amount of their income to conduct routine financial transactions. They also are the least likely to have adequate savings to cover emergency expenses, such as car repairs or unexpected medical bills, which prompts them to use payday lenders and other expensive sources of credit.
Those households do, however, receive on average about $1,700 in federal tax refunds. In the aggregate, the IRS refunds nearly $50 billion annually to households with adjusted gross incomes of $30,000 or less, via paper check. That figure climbs to nearly $70 billion for households with adjusted gross incomes of $60,000 or less.
By using the federal government's annual connection with millions of tax filers at tax time and leveraging the billions of dollars disbursed as refund checks, the government could connect tax filers to a safe and affordable transaction and savings product. In fact, the IRS could deposit the refunds directly into assets and transactions accounts. They would be prepaid accounts the government provides to tax filers who do not directly deposit their refunds into existing accounts or elect to receive a paper check.
Besides tax refunds, consumers could direct other deposits into the accounts throughout the year, including wages and government benefits such as Social Security payments. By including other recurring benefits payments besides the annual tax refund payments, the accounts would be more likely to produce "stickiness."
To facilitate savings, the federal government automatically could deposit 5% of the tax filer's refund into a savings account.
The Federal Deposit Insurance Corp. would insure the accounts, which would include a reloadable, network-branded prepaid card that could provide ATM access, point of sale purchase capabilities, Web- and phone-based bill payment, and daily balance alerts.
Account holders could use their accounts to conduct routine financial transactions and build savings at a reasonable price. Other features could include remittance capabilities, checks and money orders.
For true market penetration, consumer education and awareness is essential. Before making the accounts available, an awareness campaign would inform tax filers of the advantages. To increase the odds consumers would use the accounts, employers and state governments could provide educational materials about the cost savings and benefits of loading wages and other funds onto the accounts.
The potential benefits of depositing tax refunds into accounts creates a powerful case for financial institutions to make a low-cost transaction and savings product available to lower-income consumers. And the millions of dollars the federal government would save by delivering tax-refund checks electronically, combined with helping to "bank the underbanked," present a strong case for the federal government to provide tax filers with an option on the tax form for such an account.
Melissa Koide is the deputy director of the Financial Services and Education Project at the New America Foundation. She can be reached at koide@newamerica.net.
