Taxpayer refund checks are becoming extinct in certain states as the government-issued prepaid card phenomenon spreads to new categories.

Although only several states so far have made the move to eliminate tax-refund checks altogether, the business opportunity for banks and other vendors issuing prepaid cards could be significant if all 50 states follow suit.

Oklahoma and Louisiana have eliminated paper check taxpayer refunds for the 2011 tax year, replacing them with network-branded prepaid cards for those that do not opt to have their refunds directly deposited to bank accounts.

New York this year also will offer tax refunds via debit cards, but taxpayers still may opt to receive a paper check when filing returns. The state has not indicated whether it will continue to offer paper-check refunds next year.

States say doing away with checks is saving them hundreds of thousands of dollars annually and will ease burdens for thousands of unbanked consumers that previously turned to check-cashing services to get their tax refunds.

Banks are getting in on the act by serving as vendors of the programs. But third-party providers such as Xerox Corp. also are getting involved, creating new potential competition.

“Banks can be prepaid issuers and can support ancillary services associated with a prepaid card,” Beth Robertson, director of payments research for Javelin Strategy & Research, tells PaymentsSource.

Vendors earn fees by providing the services and may reap additional revenues from unclaimed funds, Robertson notes.

And consumers “need to understand potential fees and also issues related to unclaimed property,” she warns.

Card networks also benefit, but vendors contacted did not provide a profit breakdown on network or ATM-access fees.

The Louisiana Department of Revenue in December unveiled plans to issue only prepaid cards to taxpayers those that do not choose direct deposit. JPMorgan Chase & Co. provides Louisiana’s Visa-branded prepaid taxpayer refund cards. Cardholders are allowed one free teller-assisted bank withdrawal and unlimited free access to funds through Chase- or MoneyPass-branded ATMs and through retail locations that accept Visa.

The Oklahoma Tax Commission also this year will provide tax refunds exclusively via debit cards for those taxpayers that do not choose to have funds deposited directly into bank accounts as the result of a bill the state’s legislature passed last year.

Affiliated Computer Services, a Xerox Corp. unit, provides the MasterCard-branded taxpayer refund debit cards for Oklahoma that include one free teller-assisted bank and unlimited MoneyPass-branded ATM withdrawals anywhere in Oklahoma, plus unlimited retail transactions wherever MasterCard is accepted.

The Oklahoma tax-refund debit cards will face having $1.50 per month deducted from the card account after 60 days of inactivity, Oklahoma authorities state.

The New York State Department of Taxation and Finance for the 2011 tax year introduced the option for taxpayers to receive refunds via a Bank of America Corp. MasterCard-branded debit card or paper check, explaining that reducing checks will result in “considerable” savings to the state.

Taxpayers in New York have one year from the date of issuance to use the funds. Unused funds will be returned to the Tax Department. There are no fees for inactivity.

New York’s taxpayer refund debit card provides unlimited free ATM withdrawals from machines in the AllPoint network; cardholders will pay a $1 fee when making withdrawals from ATMs in other networks, plus whatever surcharges the machine’s deployer assesses. Taxpayers may receive one free bank-teller withdrawal; additional teller-assisted withdrawals cost $1.

In Oklahoma, Louisiana and New York, married couples filing jointly will each receive a card providing access to the funds.

So far, only New York sought to clarify its role in sorting out which spouse receives the funds, explaining on its website: “Because the debit card account is a joint account, each card provides access to the entire amount of the refund. As is the case with paper checks, disputes regarding who accesses the funds aren’t a Tax Department matter.”

Tax-preparation service companies, including H&R Block Inc. and Jackson Hewitt Inc., have helped pave the way for consumer familiarity with receiving tax refunds via debit cards, Madeline K. Aufseeser, a senior analyst with Aite Group, tells PaymentsSource.

“People are used to this channel, and they seem to like it,” she says.

Competition among vendors to provide tax refunds via debit cards also is likely to heat up over the next few years as more states look to follow the federal government’s lead in distributing more benefits via debit cards, Aufseeser says.

Xerox is looking to provide tax-refund debit cards for other states besides Oklahoma, a spokesperson tells PaymentsSource.

“Odds are very high we’ll see more states doing this next year,” Aufseeser says.

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