A new Treasury Department program to give people without bank accounts faster access to their tax refunds will help some avoid costly short-term loans. But careless consumers could end up racking up fees and padding bank profits.
The pilot program using debit cards has two goals: steering Americans toward lower-cost ways of getting their refunds quickly, and saving the government the cost of printing and mailing checks and other overhead expenses.
"It's part of a broader set of initiatives...to move toward the all-electronic Treasury," said Michael Barr, Treasury's assistant secretary for financial institutions. He said taxpayer savings are "a factor" in the move, but that Treasury sees tax time as an moment to encourage the use of lower-cost banking products.
Starting next year, the pilot tax account program will be offered to several hundred thousand Americans. Treasury will offer several different kinds of cards and study which are most effective. Eventually, the program could be expanded to reach the 9 million American households that don't have bank accounts.
For consumers, the debit cards will be virtually identical to checking accounts, though there won't be any checks. They will be insured like bank deposits and will shield consumers from having to pay for fraudulent purchases when cards are lost or stolen. In some cases, the cards will store other income and offer bill-paying services.
The cards' biggest advantage over paper checks is speed. People without bank accounts are more likely to borrow against their tax refunds and pay steep fees. That's because the checks can take six weeks to arrive far longer than the eight to 15 days it takes to have your refund deposited in a bank account.
Many people need the tax loans because they live paycheck to paycheck. Tax refunds often are their biggest cash infusion of the year. Many are willing to give up a big chunk just to access the money early.
Not everyone with a card will pay less, consumer advocates warn. Users may rack up fees they don't understand, whittling down a key source of income.
"Whether they're good or bad depends on how much they cost and what kinds of protections come with them," said Chi Chi Wu, an attorney with the National Consumer Law Center. She said cards such as the Direct Express cards used to deliver social security payments offer relatively low fees and good protections.
Treasury is still negotiating the fees for the tax refund cards. Officials would not name the bank that is close to securing the contract.
Wu pointed to another problem: The cards aren't regulated exactly like bank accounts. For example, users aren't guaranteed a free, printed monthly statement. That could pose problems for the elderly and others who are less likely to bank online.
"The fact that recipients aren't going to get paper statements is one indicator that there are significant differences" between the cards and bank accounts, she said.
Fees for account statements and other basic services make government debit cards a lucrative business for banks.
Barr said the benefits to consumers outweigh the costs. He said people will save money; use higher-quality financial products and enjoy greater consumer protections.
He added: "And it comes at a cost savings to the taxpayer."