In a sign the federal government is continuing to recognize the value of prepaid debit cards, the U.S. Department of the Treasury in January plans to launch a pilot to test the delivery of tax refunds to card accounts held by financially underserved consumers.

The department already uses a prepaid debit card to dispense Social Security and Supplemental Security Income benefits. A department spokesperson could not say whether the MasterCard-branded Direct Express card would be used for the pilot.

The Treasury is seeking a financial-institution partner to issue the tax-refund cards. “We’re still finalizing the particular aspects of the program,” the spokesperson says. Comerica Bank issues the Direct Express card.

The Center for Financial Services Innovation, an advocate for financially underserved financial products, has been “championing the idea of delivering tax refunds on a prepaid card in order to [provide] a low- to no-cost transaction product to millions of tax filers,” says Melissa Koide, policy director for the organization.

The center estimates the federal government could save tens of millions of dollars per year converting check-based refund payments to an electronic form.

“I believe some of these [advantages] are starting to resonate” with the government, Koide tells PaymentsSource.

The Treasury will notify eligible taxpayers who can participate in the pilot through direct mail or payroll outreach. The outreach method includes partnering with employers to include offers to enroll in the pilot with the paychecks and pay stubs they provide to individuals who might not be using direct deposit for tax refunds.

The Treasury did not reveal the pilot’s eligibility requirements, but the spokesperson confirmed the department is determining which individuals would benefit most from a prepaid card. Some 30 million households could fall into that category.

In December, the Federal Deposit Insurance Corp. estimated 9 million households were without bank accounts, and another 21 million households had limited banking relationships

The response rate for the product will be high because financially underserved consumers view a tax refund as a way to address short-term financial needs and tend to do longer-term planning, Koide believes. “We hope the product would have a savings feature as well,” she adds.

The government already has experienced success with prepaid debit cards. Some 1 million consumers have a Direct Express card to receive Social Security and disability payments.

“The success they’ve had there has helped to pave the way for [this pilot],” Koide says.

Gwenn Bézard, a co-founder of and research director at Aite Group LLC, is skeptical about the government involvement in the prepaid sector. One challenge the Treasury faces is encouraging long-term use of the card, he contends.

 “The government will have to continue pushing the cards and committing to enhancing the products” if they are going to take off, Bézard says.

Moreover, financially underserved consumers might be uncomfortable having the government control the flow of funds or seeing their purchases, he adds.

“Do you really want the government holding onto your funds?” Bézard says.

The pilot also will help determine whether Treasury also would benefit from offering other prepaid products for everyday spending, the department noted in a news release.

Tax-preparation firms Jackson Hewitt Tax Service Inc. and H&R Block already offer prepaid cards to their customers who receive tax refunds.

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