The tax preparation chain H&R Block unloaded its bank unit six years ago, but now it’s looking to diversify and sees an opportunity in providing digital financial services to less affluent U.S. households.
The Kansas City, Mo.-based firm has long enabled its customers to deposit their annual tax refunds on its Emerald prepaid debit card. But starting next tax season, Block plans to offer a digital bank account that will encourage steady year-round use.
While H&R Block has not released product details, company executives say that they plan to focus on existing customers, including many with low or moderate incomes, who lack strong banking relationships. “It will be very low-fee, high-featured and targeting the refund as the event to fund the account,” CEO Jeff Jones said in a recent interview.
H&R Block, which has roughly 10,000 locations across the country, is looking to reinvent itself amid its struggles to adapt in the age of do-it-yourself tax prep services. Shares in Block are down more than 40% from their peak in late 2015.
But in starting a challenger bank, H&R Block will join a crowded field of firms that offer mobile-centric accounts aimed at those who are unhappy with the fees charged by traditional banks. Chime, Varo and Green Dot are among the top competitors.
H&R Block has a few advantages, including strong brand recognition and an existing base of 8 million customers who fit the profile that the company is targeting. In 2019, some 5.4% of U.S. households lacked an account at a bank or credit union, while 8.5% of households used reloadable prepaid debit cards, according to data from the Federal Deposit Insurance Corp.
One challenge for H&R Block is that it can be difficult, without charging penalties and fees, to generate enough revenue from consumers with relatively low incomes, said Ron Shevlin, director of research at Cornerstone Advisors. “How many companies have tried that? And where’s the money to be made in that anyway?” he asked.
Challenger banks typically derive much of their revenue from interchange fees, often by partnering with banks that have less than $10 billion of assets and are consequently exempt from price caps on those fees.
Last year, H&R Block cut ties with
Jones is a former Uber and Target executive who arrived at H&R Block in 2017. He said that the earlier decision to sell H&R Block Bank, which stemmed from new rules that would have required the company to hold more capital, was the correct one at the time. The bank’s
The increasing popularity of do-it-yourself tax prep options, which may have been accelerated by the COVID-19 pandemic, is acting as a headwind to H&R Block, according to Mark Palmer, an analyst at BTIG. But he wrote in a recent research note that the company could get a boost in 2021 as consumers try to make sense of the tax treatment of income and capital gains generated during the pandemic.
Jones arrived at H&R Block with ideas about diversifying beyond the company’s roots in tax prep services, though he initially focused on stabilizing the company’s core business. Last December, he unveiled a five-year road map for growth.
One part of that plan involves converging H&R Block’s assisted tax-prep business with its do-it-yourself option, which trails Intuit’s TurboTax. The company plans to reduce its physical footprint over time, but does not envision closing all of its stores.
Another prong of the plan involves growth in the small-business segment. In 2019, H&R Block purchased Wave Financial, which had an accounting, invoicing, payroll and payments platform, for $405 million in cash. Wave targets very small businesses, those with fewer than 10 employees, by offering its core platform free and seeking to monetize customers with additional products.
Wave Money, rolled out last year, is a checking account that small businesses can use to receive payments from their customers. Wave charges account holders roughly 1% to 3% per transaction, depending on the payment method.
The digital bank account for consumers is expected to be introduced in October, in time for a launch in next year’s tax season. H&R Block’s network of stores, plus the Emerald Card, which has almost 2 million users, provide distribution channels for the new product, Jones said at the company’s investor day in December.
“We like where we start, given the business we’re in,” Jones said in the recent interview. “But make no mistake, we have to translate strategy into execution and product development, which is what’s underway now.”
Jones was mostly mum on specific product features, but he did say that H&R Block is evaluating the possibility of offering a card that would give consumers a choice between making a debit or credit transaction.
H&R Block has no plans to eliminate its two existing consumer credit products — a no-fee refund anticipation loan and a line of credit that carries a $45 annual and a 35.99% annual percentage rate.
The features of the new digital bank account will be key in determining whether H&R Block is successful, according to Shevlin. He noted that Chime has introduced innovative features such as providing customers early access to their paychecks and the ability to overdraw their accounts by up to $100 without paying a fee.
“Basic functionality is not going to win you anything,” Shevlin said.
