Thursday, January 13, 2011

Tax Refunds Move to Debit Cards

The U.S. Treasury Department plans to launch a pilot program Thursday to deliver tax refunds through prepaid debit cards, an effort to cut the expense of paper checks and aid lower-income taxpayers who don't have bank accounts.

About 600,000 low- and moderate-income taxpayers nationwide, a slice of those earning about $35,000 or less annually, will receive letters inviting them to activate a debit card that can receive direct deposits.

The program will cost the government about $1.5 million and marks the latest federal effort to send fewer payments by mail. The U.S. still issues an estimated 45 million paper checks a year for tax refunds. Each one costs the government about $1, including the cost of processing roughly 600,000 claims a year for missing checks. Each payment by direct deposit costs the U.S. about 10 cents.

"My goal, one that's been talked about for many years, is to get out of the check-payment business," said Richard Gregg, Treasury's Fiscal Assistant Secretary and one of the officials overseeing the program.

At the same time, officials across government have been exploring how to nudge consumers who don't have bank accounts toward lower-cost financial-services providers. An estimated nine million households—about one in every 12—don't have bank accounts, according to a Federal Deposit Insurance Corp. survey.

Some consumers were dropped by their banks while others say they avoid the traditional banking system owing to concerns about fees and overdraft charges. Many rely on higher-cost neighborhood check-cashing outlets and generally don't save much money as a result. The FDIC and Treasury already have separate programs to draw consumers without accounts into the banking system.

The new Treasury pilot program will provide consumers a debit card that has many features of a checking account, such as free bill paying and free ATM withdrawals at select machines. Consumers also can use the card for shopping, without added fees.

"They can use it in an ongoing way to pay bills, save money, get cash and have a real basic, robust, safe and convenient transaction account," said Treasury Financial Access Innovations Director Joshua Wright.

Half the 600,000 offers from Treasury will carry a $4.95 monthly fee, while the rest will be free. The letters will use a mix of messages, including some offering recipients a savings-account feature. Treasury officials said the different approaches will allow them to determine which is most likely to lead consumers to sign up for the card.

The program will be managed by Green Dot Corp., which has about 3.3 million prepaid cards across the U.S. The Monrovia, Calif., firm generally enrolls customers through retail stores or the Internet. "The fact that it's coming as an opportunity from the government directly to take advantage of the product is a different twist," said Steven Streit, the firm's chief executive.

On Green Dot's existing cards, about 40% of the dollar volume is from payroll direct deposit; consumers can also load funds directly. Most customers with direct deposit don't pay a monthly fee for their cards; the maximum monthly fee is $5.95 a month. The firm, which doesn't charge overdraft fees, earns most of its money from "interchange fees"—charges largely incurred by merchants when credit- and debit-card users make purchases.

The Treasury Department said it was also starting a pilot program to encourage some workers who receive wages through payroll cards—roughly 1.7 million people—to receive their 2010 tax refunds on those cards.

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