Bank Products in the Tax Office

The Problem with Bank Products

In some tax offices, banking products based on income tax returns have been considered inappropriate, and practitioners have elected to avoid offering them in any form. The day has arrived, however, when the product offerings of many participating banks have expanded and warrant a fresh look. It is also important to realize the perceptions of your client and potential client.

New Products for a Diverse Marketplace

While the RAL (Refund Anticipation Loan) has been the primary offering since the inception of tax-related bank products, new products have changed the market. For example, you can e-file returns for clients who don’t have an immediate need for their money. Once their refund is issued, you can print a check in your office for the client’s refund, less any fees to be paid to you! Your client does not pay ANY of your fees upfront, the turnaround is basically the same as Direct Deposit, and the bank sends your fees via Direct Deposit to your account! This is especially convenient for the estimated 10 million Americans without checking accounts and for those who may not have a permanent address, such as migrant workers. And the fee is very modest compared to RAL fees. If your client has a bank account, you can use this same product and give them Direct Deposit, still withholding your fees!

Yet even as we consider these products, the RAL has consistently drawn the greatest numbers. Why? It’s more expensive, after all. It does provide money to the taxpayer the fastest possible way, but for the cost, is it worth the few days that it buys?

Product or Service?

First, identify the RAL for what it really is. It is not a conventional loan in the traditional sense. Those who apply have a completely different set of guidelines as to whether they will be accepted. It is a product, provided jointly by a bank and you, which assists a taxpayer in getting money into his hands quickly.

Second, recognize the source. Most RALs are funded primarily through proceeds of EIC (Earned Income Credit). It was neither earned nor withheld.

With that in mind, what are the perceptions of your clients? Understanding this is critical. Recognizing the RAL as the convenience product it is, we draw a number of parallels to our own experience.

The Convenience Factor

Most of us will pay extra money—sometimes twice as much—for items at a convenience store that we could otherwise get at a grocery store. To get a conventional loan against an anticipated refund would require a substantial amount of time for the taxpayer and most banks do not even make such loans; just the cost of booking the loan would exceed their revenue given the short term of the loan. Then, after finding a source, the process of the loan application and the acceptance period would render it undesirable at best.

Why is this convenience worth so much? There are myriad reasons folks require money short term. The rent, electric, or some other emergency expense may be due; they may be in transient housing or at some other temporary address. Many don’t have a checking account; they would have to opt for the much slower paper check.

Many would feel they could not afford the expertise of a paid professional and, apart from your tax prep expertise, would possibly not get nearly as much money refunded. This taxpayer may even see the cost of the RAL as simply a deduction from money that he never had or handled, but will now get to handle sooner than he otherwise would have. The fee, regardless of its size, does not have to be handled separately by the taxpayer. Because he never handles the fee, and because the funding comes from a source other than having earned it, the perception of cost is nominal - almost free.

The Bottom Line, Your Bottom Line ...

What does it all mean to you? Clearly, the demand is present in the marketplace. Most are simple returns; you can prepare them with basic tax knowledge and minimal preparer liability - allowing you to use less expensive staff. Many firms will prepare these returns through a separate company and utilize a different location than their primary tax practice.

Because of the simplicity of these returns, your practice can generate hundreds per hour in fees.

Finally, the season for this product is VERY short - about 4-5 weeks. The peak is the last week and a half of January and the first three weeks of February. It is fast and furious. Then it’s over. More dramatic than even the 105 days of tax season as you know them already. Much more compact. And much more fun.