Personal Finance

Consumers Pass on Tax Refunds via Prepaid Cards

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These days, the Internal Revenue Service allows Americans to collect their tax returns electronically, via direct deposit into their bank accounts. However, this option is often not used by underbanked, low-income consumers, and now the government is working to determine how best to roll out these programs to a broader base.

Today, some 43 million Americans are underbanked, and another 17 million have no banking access at all, which may make it more difficult for them to receive their tax refunds in a timely fashion, according to a report from the nonprofit policy research organization the Urban Institute. This poses a potential problem for these consumers because those who do not have access to many traditional banking services are lacking because they generally have low incomes.

As such, the U.S. Department of the Treasury recently ran a pilot program that worked to deliver tax refunds to low-income consumers (those in households making less than $35,000 per year) through safe, low-cost card accounts, the report said. These accounts could be used even after the tax refunds came, just as a consumer would be able to use any other prepaid card: for direct deposit from their employers, as well as to make withdrawals from an ATM, complete transactions, bay pills and generally keep their funds in protected accounts.

The pilot testing of this program involved slightly more than 808,000 Americans with low and moderate incomes with a number of different card features, some of which were marketed as being more convenient, with others as being more secure, the report said. However, just 1,967 people who received an offer for such a card actually applied for it, accounting for just 0.3 percent of recipients. That’s below even the number of people who accept a credit card offered to them through direct mailing, which is closer to 0.8 percent.

Further, only about 16 percent of all cardholders had their tax refunds deposited onto these accounts, the report said. However, it should be noted that among people who used the cards actively, 48 percent chose direct deposit.

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Prepaid cards are often considered a good option for underbanked consumers to get a better handle on their finances, but many such accounts come with sizable fees that can make affording this kind of card difficult for those with lower incomes.

Image: kenteegardin, via Flickr

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