The president of the United States signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The legislation includes provisions for advanced tax credits to Americans that meet certain eligibility criteria. While the IRS will be responsible for disbursing the tax credits as economic impact payments to qualified recipients, there are some gray areas surrounding the way the IRS will be disbursing funds.
The U.S. government today disburses a variety of payments to individuals across the country. About eight in 10 taxpayers receive their tax refunds by using e-file and direct deposit on ACH rails. Some taxpayers, especially underbanked and unbanked taxpayers, rely on paper checks in the mail. Not all federal disbursement programs allow for paper checks as a disbursement option, however. The U.S. Treasury’s Bureau of the Fiscal Service’s Direct Express program requires federal benefits such as Social Security to be distributed through direct deposit or through Mastercard-branded prepaid cards issued by Comerica Bank—arguably the largest prepaid card program in the country.
Faster payment options as they exist today may not be as affordable as traditional ACH transactions or as widespread in government disbursements, but there is a window of opportunity for faster payment providers. Faster payment options, such as Visa Direct or Mastercard Send, have some more qualitative benefits, with speed as the primary benefit—something the president and his administration are upraising.
Regardless of how the U.S. Treasury decides to disburse economic impact payments, the CARES Act is a stimulant of its own for the financial services industry. A waterfall effect will occur:
- Financial institutions (FIs) will receive an influx of deposits that will open additional lending opportunities and impact balance sheets. Per FDIC data, as of December 2019, U.S.-insured FIs hold approximately US$13.2 trillion in domestic deposits. If the CARES Act’s economic impact payments reach US$500 billon and if the IRS uses ACH or other electronic faster payment rails for disbursement, FIs can expect roughly US$300 to US$400 billion in deposits around the same time, discounting the unbanked. And even if the IRS sends any checks by mail, FIs can expect some deposits, either in-branch or, preferably, through remote deposit captures.
- While some Americans may hold their economic impact payments for emergencies, other Americans, with a new source of funds, will be enticed to use the funds to purchase groceries, electronics, and other consumer goods and services, giving merchants a new, short-term lifeline of additional revenue.
- As cards-based transactions remain a popular way to conduct business in the U.S., the networks and other payment scheme parties will intake additional revenue through interchange and fees.
As economic impact payments are intended for Americans under certain income thresholds, FIs that service a more affluent customer base will inherently receive less of the deposit share. While the CARES Act’s impact on prepaid card products remains somewhat unclear, FIs that issue tax-refund-oriented prepaid card products or offer tax-refund advance loans are likely to get a bigger, more disproportionate share of deposits.
There is also a gap. The Brookings Institution estimates that 70 million Americans will receive economic impact payments through a check. If the IRS decides to send any paper checks in the mail, unbanked and underbanked Americans may experience delays in receiving payments. Once a check is received, however, FIs with check-cashing services or brick-and-mortar licensed check cashers will have disproportionate opportunities, if they decide to charge any fees. This is where FIs and providers can make their case for electronic payment options—if millions of checks are sent by mail that must be cashed in person, does that impede lockdown and stay-at-home efforts?
The U.S. Treasury has difficult decisions to make. But unless the U.S. Treasury plans to send cold hard cash stuffed in envelopes to every recipient with disclaimers against depositing the cash at FIs, the way economic impact payments will be disbursed becomes table stakes. The CARES Act comes in at a time when the financial services industry and the American people may need it most.
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