Tax Refunds Issued on Prepaid Cards Take a Toll on Consumers

Debit cardTax refunds may look a little different this season in some states. Instead of issuing paper checks, a number of states will require that taxpayers receive their refunds either through direct deposit or, for those who are unbanked, prepaid debit cards. While the use of direct deposit and debit cards may save states money by cutting down on printing and mailing costs, taxpayers may wind up paying more in the long run.

Most states currently offer direct deposit, and some, including Illinois and South Carolina, encourage electronic payment of refunds but still offer to mail checks to those who want them or to those who do not have bank accounts. Increasingly, however, states have stopped mailing tax refund checks in favor of electronic transfers and prepaid cards. Oklahoma, Louisiana, Georgia, and Connecticut are among these states.

Oklahoma recently introduced the Tax Refund Card, which will be administered by MasterCard. Although the state claims that the card is a safe, convenient, and secure alternative to the traditional refund checks, many Oklahoma taxpayers are unhappy with the decision due to the card’s ATM fees and a $1.50 inactivity fee. Free withdrawals are available at any MoneyPass ATM network, but this network has limited locations, forcing consumers to use other networks that charge fees. Additionally, due to limits on ATM withdrawal amounts, taxpayers may have to make multiple withdrawals, thereby incurring multiple fees.

Both Louisiana and Connecticut have contracts with Chase to offer a similar tax refund debit card. In 2011, over one million Connecticut residents received tax refunds, while 45% of Connecticut taxpayers received paper checks. This year, this 45% will be receiving prepaid debit cards and paying hefty fees to access their money. 

An estimated 7.7%, or over 9 million Americans, are unbanked and therefore, do not have the option of direct deposit. Their only option will be such prepaid tax refund cards and the fees associated with them. One solution to this problem would be for states to create BankOn initiatives, which offer the unbanked the opportunity to open low-cost accounts  at mainstream financial institutions. These include so-called “second chance” accounts that provide those who have had an account closed in the past a second chance to open a new account. By starting BankOn programs, states have the opportunity to not only save the costs associated with paper refund checks, but also to provide their unbanked residents with a chance to enter the mainstream financial market. Ultimately, such access will enable residents to save more at tax time and build assets for the long term. Instead of taking a narrow view solely focused on cost containment, states need to expand their focus to include creating asset building opportunities for their residents that, in the long term, will prove even more lucrative for states. 

This blog post was coauthored by Alison Terkel.

 

More Fees Brought to You by Bank of America

Debit CardDebit card transactions have become a way of life. According to a recent Nilson Report, debit card use rose from 1% of transactions in 1995 to over two-thirds of transactions today.   Yet, for the over 38.7 million Bank of America debit card users such transactions will now cost more. Bank of America recently announced that it will charge a new $5 per month, or $60 annual, fee for its customers to use their debit cards for purchases

According to Bank of America, as well as other financial institutions that are considering similar fees, recent legislation has impacted their profits, and such fees are needed in order for them to remain profitable. Specifically, they blame the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank Act) provisions regarding interchange or so-called “swipe” fees. As we have discussed in previous blogs, the so-called Durbin Amendment to the Dodd-Frank Act granted the Federal Reserve (Fed) the authority to regulate the amount of swipe fees (i.e., the fees that a card issuer can charge retailers for transactions involving their cards) to ensure that they are “reasonable and proportional” to card issuers’ costs. Although, about $16 billion in interchange or “swipe” fees were collected in 2009; averaging around 44 cents per transaction, a report issued by the Fed found that the median total processing cost for debit and prepaid card transactions was actually 11.9 cents per transaction. Thus, the Fed issued proposed regulations that would have capped interchange fees at 12 cents, starting in July. After receiving public comment, the Fed ultimately decided in its final rule to cap the maximum permissible interchange fee that a card issuer may receive for an electronic debit transaction at the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This rule became effective October 1, 2011.

The new rules exclude banks with less than $10 billion in assets meaning it only applies to big banks, not community banks and credit unions. Yet, since this cap will cost large card issuers billions, they have been looking for additional sources of revenue. In addition to fees for debit card transactions such as the one proposed by Bank of America, debit card issuers are also considering “unbundling” (i.e., dividing debit card services into components and charging for each of them separately), as well as limiting the amount of debit card transactions. Free checking could very well be something of the past as well. Bank of America has already begun to charge $8.95 per month to open a new checking account with access to a teller and paper account statements. According to the latest data from economic research firm, Moebs Services, only about half of Wall Street banks are now offering free checking.

The fees and decline in free checking accounts has not gone unnoticed by the Obama Administration.  In a recent interview with abcnews.com and Yahoo President Obama called the $5 fee “not good business practice” and later added “this is exactly the sort of stuff that folks are frustrated by.” In the same interview the president urged lawmakers to confirm Richard Cordray, the nominee to lead the Consumer Financial Protection Bureau to ensure that the CFPB can prevent such arduous fees in the future. Vice President Joe Biden was also vocal about the subject saying the fee is another "tone deaf" move that the public is angry about. The administration is not alone in their opposition; many community leaders and advocates agree and have begun a petition against the fee at Change.org.

While everyone is up in arms over Bank of America’s new debit card transaction fees, clearly it’s low- and middle-class Americans who will suffer the most. In fact, account holders with a combined bank balance of over $20,000 or have a mortgage with Bank of America are not required to pay the monthly $5 fee. Low-income consumers who do not have large balances and more often than not, do not own homes, are therefore the ones being targeted by Bank of America. As Tom Feltner of the Woodstock Institute explains, banks will probably start competing at different levels in order to appeal to those with high balances, while those with low balances are the ones targeted to for extra fees. 

Under the rules, Bank of America can still charge 21 cents for debit card transactions and, since it only costs about 12 cents for the transaction, it will still make money, just not as much. And therein lies the crux of the matter—who gets to decide how much profit is enough? For too long, big banks have been the ones deciding this question to the detriment of the American public. The new regulations have taken the decision out of their hands, but of course banks are not going to give up that easy. So as they struggle to find other revenue streams, it’s up to us to ensure that consumers, especially not low- and moderate-income consumers, aren’t the ones forced to pay out.

This post was coauthored by Alison Terkel.