The U.S. government is offering millions of Americans, who have limited or no access to traditional banking services, an alternative to sketchy loan programs. The government notified 600,000 low- and moderate-income taxpayers via ground mail in January about activating a My AccountCard Visa Prepaid Debit Card. This card allows for the direct deposit of their 2010 federal tax refund onto the card.
“This innovative card can be used for everyday financial transactions, such as receiving wages by direct deposit, withdrawing cash, making purchases, paying bills and building savings safely and conveniently, giving users more control over their financial futures,” explained Neal Wolin, deputy secretary of the U.S Treasury department in the press release.
Upon receiving the letter the recipients learn how to sign up for the program, the cards’ features and how to use it to receive their refund and go about everyday financial transactions. The cards’ features include “free point of sale transactions, free online bill pay, free ATM cash withdrawals at more than 15,000 ATM machines nationwide, and free cash back at participating retail stores,” according to the release.
Approximately 9 million people are unbanked, according to the FDIC. They do not have a checking or savings accounts. Roughly 21 million are under-banked. They rely on alternative financial services instead of their checking or savings accounts.
Some under-banked and unbanked taxpayers seeking quick access to their tax refund opted for Refund Anticipation Loans (RAL). These short-term loans are usually for one to two weeks and are secured by the taxpayers’ refund checks. Banks issue them and tax preparers facilitate them. Annual interest rates are usually in the triple-digits, such as the 149% at Republic Bank & Trust of Kentucky. Consumer advocates found lenders of these programs prey on low-income individuals residing in areas with no banks or individuals with limited knowledge of English or no personal finance skills. The lenders would partner with rent-to-own stores and check-cashing companies.
Last year, federal regulators blocked these types of banks from funding these loans at places such as Jackson Hewitt Tax Services and H&R Block.
Although cheaper than the RALs, the Refund Anticipation Check (RAC) has become another questionable product for consumer advocacy groups. The bank opens a temporary bank account for the IRS to directly deposit the check. The cost to set up the account is typically $30. Consumer watchdogs advise opening up “real” bank accounts so taxpayers can avoid the check cashing fees to access their money from the RAC.
Meanwhile, the Treasury is trying out different variations of the My AccountCrd to evaluate which product features, fee structures and marketing messages resonate well with the taxpayers and whether the program can become an integral part of tax filing and the refund process.
Has this program worked for you? Has it worked in the banking industry?
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