At a recent meeting, a big city mayor angrily confronted an executive of H&R Block: “Why do you charge poor people $130 to do tax returns. At our VITA sites, we do them for free!” At a meeting in Chicago, the leader of a large volunteer tax site refused to shake the hand of a Block executive. In a meeting in Washington, a senior banking regulator railed about the Block “ripping off consumers.”
Again and again, this story plays out. H&R Block, the nation’s largest tax preparation firm, serves over 19 million filers each year, of which 57% have annual household incomes below $30,000. While much of the financial service world has moved away from serving low income consumers, Block has embraced its low income clientele and it processes taxes that deliver over $35 billion of refunds to its customers. Block customers are fairly happy with their experience with the firm, as witnessed by satisfaction scores in the high 80s (out of 100) and 70 percent customer retention. Yet, Block is open to substantial criticism, primarily around a product that consumers demand, but activists and regulators abhor: the refund anticipation loan (RAL). This product gives consumers near immediate access to their federal income tax refunds, albeit in a costly manner.
Consumer demand for RALs is strong, with over four million of Block’s 16 million retail office customers choosing the product (Block serves an additional three million customers with its software and online “do it yourself” tax products). RALs are profitable for Block as well, contributing over $100 million to earnings annually. Yet a product that its users and Block shareholders both seem to like creates so much trouble that Block executives debate whether or not they should continue to offer it. At the heart, offering RALs opens them up to difficult questions: How can you justify charging poor people so much for this product? How can you justify earning such profits by selling to the poor? While many would urge business to serve poor customers, holding out the promise of the “fortune at the bottom of the pyramid,” to use C.K. Prahalad’s description, Block’s experience suggests that when a business tries to tap into that fortune, it must not only sell and deliver products that consumers want at a price they will pay. Rather, our commercial fortune seeker must also answer in public some hard questions: Is your price “fair?” Are your profits “too high?” Asked by consumer advocates, regulators and the media but not necessarily by consumers these questions form what we call “the paradox of profits.” Put simply, a business cannot serve the poor unless it is profitable. Yet firms that profit by selling to the poor are subject to criticism that manifests itself ultimately in costs which can make firms reconsider whether serving the poor is a good use of their resources, time and reputation.
In this piece, we discuss the paradox of profits, which at its heart revolves around societal norms about “fair” prices charged to the poor. In Part two of this piece, we discuss how economists, philosophers, religious thinkers, regulators and courts have approached the question of “fair” prices and profits. In Part three, we show how this social debate has played out in connection to Block’s RAL product. In Part four, we discuss potential unintended consequences of the paradox of profits. In brief, the public scrutiny around the profits and the poor impose a larger burden on certain firms, such as larger firms, more public firms, and firms with multiple product lines. As a result, in equilibrium, where public scrutiny is highest, the poor may be served by smaller, non public firms that try to avoid detection. This outcome may not be in the best interest of the poor. In Part five, we discuss how large firms can address the paradox of profits head-on, using the example of Block’s recent strategic initiatives to engage its potential critics.
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PDF Ebook H&R Block’s Refund Anticipation Loan: A Paradox of Profitability?
