Wal-Mart Stores Inc. Wants to Help You Get Your Income Tax Refund

By Markets Fool.com

A new service from Wal-Mart will enable U.S. taxpayers to pick up tax refunds in cash from the big-box retailer's stores. The taxpayers might have to pay a minimal fee (up to $7) to tax preparers that are partnering with Wal-Mart on this initiative, but the company itself will not charge anything. This seemingly innocuous new service could be a big money churner for Wal-Mart and help boost its store traffic and comparable-store sales in the U.S. Let's look at how.

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Source: The Motley Fool.

What's the move?
This new program, dubbed Direct2Cash, allows American taxpayers to "skip the check" and collect their federal and state tax refunds in cash from Wal-Mart stores. The company is partnering with two financial services companies -- Tax Products Group, or TPG, and Republic Bank & Trust Co. -- for this initiative.

It works like this: People can register with the more than 25,000 tax preparers offering the service around the country. The tax preparers could charge anything between nothing to $7 for registration. As soon as the refunds accrue, subscribers will receive a confirmation code via email from TPG or Republic Bank (two codes if the taxpayer is eligible for both federal and state refunds). On producing this code together with personal identification at a Wal-Mart store, people can get their cash refunds up to $7,500 immediately.

Wal-Mart tries to solve taxpayers' problems...and its own
Let's first identify the program's target audience. Taxpayers who receive refunds as a free and fast direct deposit from the IRS won't be interested. This suggests the service is aimed at people who do not receive a direct deposit -- typically, low-income consumers without a bank account.

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This group today receives refunds through a paper check in their mailbox. The problem is that these checks take a long time to arrive, there are security issues, and, most importantly, it can be expensive to cash these checks.

This "paper checks" customer group is key for Wal-Mart as past trends have shown delayed refunds have dented the company's sales. In May 2013, after releasing the first-quarter results, then-Wal-Mart CEO Mike Duke toldanalysts, "Sales were pressured primarily by delayed tax refunds, which caused customers to put off discretionary purchases." In thatquarter, Wal-Mart traffic fell by 1.8% year over year in U.S. stores and same-store sales fell 1.2%.

With Direct2Cash, the company plans to solve both the taxpayers' and Wal-Mart's problems in one go.

Source: Various. Chart by author.

Cash to spend
Taxpayers who register for Direct2Cash will have to come to Wal-Mart stores to collect the refund. This will boost Wal-Mart's store traffic, which has declined for the past two years in a row. As recently as the fiscal third quarter, Wal-Mart had positive comp sales growth in the U.S., but store traffic was still in the red.

The retailer's masterstroke is that not only will more people enter its stores, but they will immediately have ready cash for impulse purchases.

The IRS receives roughly 150 million returns each year, and eight out of every 10 taxpayers receives a tax refund, on average. According to a 2014 study by the Federal Deposit Insurance Corporation, roughly 28% households in America are either "unbanked" or "under-banked." Wal-Mart estimates tax refunds to average around $2,900. Let's do some rough number crunching using these figures:

Source: Various. Chart by author.

Wal-Mart has not released any forecast on how many people could opt for the Direct2Cash program, nor are there any benchmarks to gauge what proportion of the tax refund money could be spent at Wal-Mart stores.

But the above analysis suggests some 33 million people could visit Wal-Mart stores with close to $100 billion in cash in the next two months. If the retailer has the right deals and products to grab their attention, it could see a healthy sales boost in the upcoming first quarter (February to April) of fiscal 2016.

Direct2Cash is not Wal-Mart's first attempt at providing financial services to customers. It already offers tax-preparation and cashing for tax refund checks.Services such as these help Wal-Mart widen its financial services portfolio, and boost store traffic.

But what sets Direct2Cash apart is it serves three purposes: taxpayers get their refunds fast and easy so delayed refunds do not get to dent sales; footfalls increase at Wal-Mart stores; customers get cash in hand to spend while they are at the store. Daniel Eckert, senior vice president for services at Wal-Mart, told CNN, "It's always a good thing to have customers in our stores who have jingles in their wallets and their pockets."

The article Wal-Mart Stores Inc. Wants to Help You Get Your Income Tax Refund originally appeared on Fool.com.

ICRA Onlineand Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.