As we come close to the deadline to file income taxes for the 2019 tax year, you may find that tax filing software providers are selling financial products along with tax filing products. A financial product according to Cambridge dictionary1 is “a product that is connected with the way in which you manage and use your money, such as a bank account, a credit card, insurance, etc.”.

Many financial products, like savings accounts, are for sale by financial institutions and marketed as a benefit to the consumer with little or no benefit to the financial institution. Let’s clarify that institutions make money on financial products “sold” to consumers through a variety of ways including reinvesting the cash borrowed from consumers to make their own investments at a higher margin.

We can use Intuit Turbotax as an example of a company selling financial products along with tax filing services in order to increase total revenue. According to Intuit’s 2019 10-K or annual report 2 “Intuit helps consumers, small businesses, and the self-employed prosper by delivering financial management and compliance products and services. We also provide specialized tax products to accounting professionals, who are key partners that help us serve small business customers.”

• In 2019 Intuit made total net revenue of $6.8 billion 2

• $2.8 billion of revenue was made on consumer segment revenue which includes tax filing products 2

• Consumer segment revenue was +$0.3 billion higher in 2019 than 2018 “due to a shift in mix to our higher priced product offerings including TurboTax Live, a 5% growth in TurboTax federal units, and a higher average revenue per customer.” 2

  • Higher average revenue per customer might be interpreted as customers paying more for the same service or product 2

Intuit may have been able to increase revenue per customer by charging more customers a “Refund Processing Service Fee” 3 of $40**. Intuit’s description of this fee is: “The Refund Processing Service is an option for paying your TurboTax fee by deducting it from your federal tax refund. It's a convenient way to pay for TurboTax if you don't have (or don't want to use) your credit or debit card.” 4 A $40 fee for the convenience of staying seated and not being able to enter another payment method seems expensive.

The fee may be thought of as similar to the cost (or interest expense) on a short-term loan. Essentially, Intuit is lending customers the amount they would have had to pay for the tax filing service/product today in exchange for using funds from tax refunds guaranteed by the U.S. government in the future.

Let’s compare* the cost** of Intuit’s refund processing service fee for the Turbotax Deluxe 5 product of $60 and other high interest payment options to paying with cash:

• Cash: 0% APR + $0 annual fee

  • Approximate cost calculation (excluding tax and other costs/benefits): $60 + $0 = $60

• Intuit’s refund processing service fee of $40 3

  • Approximate cost calculation (excluding tax and other costs/benefits): $60 + $40 = $100

  • +$40; or +67% compared to cash

• Capital One Quicksilverone Rewards 6: 27% variable APR + $39 annual fee as of July 10th 2020

  • Approximate cost calculation (excluding tax and other costs/benefits): $60 * (1 + (0.27/12))^2*** + $39 = $63 + $39 = $102

  • +$42; or +70% compared to cash

• Capital One Platinum 6: 27% variable APR + $0 annual fee as of July 10th 2020

  • Approximate cost calculation (excluding tax and other costs/benefits): $60 * (1 + (0.27/12))^2*** + $0 = $63 + $0 = $63

  • +$3; or +5% compared to cash

The cheapest option is to use cash or a debit card for $60, followed by a credit card without an annual fee for $63. Intuit’s refund processing service fee option on the other hand could cost about $100 in total.

Intuit is not the only company charging customers a fee like this so try to opt-out of paying the fee if you decide you do not want to pay it.

MICHLEI – Proverbs 22:7 “The rich rules over the poor, and the borrower is servant to the lender.”

*Disclaimer: I am using my own methods of comparison and am NOT suggesting that this is the correct technical method to apply. Only you may be responsible for the method you use.

**rounding

***assuming a 2-month period from paying for the product with your credit card to being able to use your refund to pay off the cost on your credit card

References

1 https://dictionary.cambridge.org/dictionary/english/financial-product

2 https://s23.q4cdn.com/935127502/files/doc_financials/quarterly/2019/q4/817655_007_Print_CLEAN.pdf

3 https://turbotax.intuit.com/tax-tools/calculators/taxcaster under “* Important Offer Details and Disclosures” -> Pay for additional TurboTax services out of your federal refund: A $39.99 Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except TurboTax Business.

4 https://ttlc.intuit.com/community/choosing-a-product/help/what-is-refund-processing-service/00/25889

5 https://turbotax.intuit.com/personal-taxes/compare/online/

6 https://www.capitalone.com/credit-cards/average-and-building/