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H&R Block, Walgreens banking ventures pose a threat for US banks

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H&R Block, a tax preparation company, plans to offer a digital bank account targeting underbanked individuals and those without strong banking relationships.
Source: Getty Images North America

Banks could be facing new competition from a couple of well-known brands as tax preparation company H&R Block Inc. and pharmacy store chain Walgreens Boots Alliance Inc. are looking to launch financial service products.

Through its partnership with MetaBank NA, H&R Block plans to offer a digital bank account targeting underbanked individuals and those who lack strong banking relationships. Walgreens announced March 30 that it plans to offer a bank account for its customers through partnerships with InComm Payments and MetaBank. While the retail companies' widely recognized brands and nationwide footprints present a threat to banks, industry consultants said securing those banking relationships long term could prove to be a challenge.

"[Banks] absolutely are worried, and I think they should be worried," said Lane Martin, a partner at Capco, a management and technology consultancy focused on the financial services industry.

H&R Block's and Walgreens' banking aspirations come at the same time retail giant Walmart Inc. gears up to launch a financial technology startup company.

"You can look at this as being about financial services and banking and payments, and that's true, but it's mainly about influencing the consumer," Sam Kilmer, a senior director at Cornerstone Advisors, said in an interview. "[Banks] should keep an eye on it [and think] 'Are my bank's payments top of wallet or is someone like Walgreens or Chime or H&R Block or Walmart winning that battle?'"

During its investor day in December 2020, H&R Block outlined its "Block Horizons" strategy, which included aspirations to create a digital bank account for the underbanked population. Each year, H&R Block processes about 20 million tax returns, according to Hamzah Mazari, an analyst with Jefferies.

"The advantage is using their foot in the door with respect to helping customers with their taxes as basically an immediate onboarding step to establish credibility and trust ... and then make it so that you can naturally extend that relationship into banking," Martin said.

H&R Block is looking to get back into banking after selling its banking unit to Axos Financial Inc. in 2015, but H&R Block retained some exposure to those accounts. Martin and Mazari said the company is looking to launch a digital bank through a partnership model to avoid the regulations of being a bank.

"As we sit today, they don't want to become a bank, but they want to grow their financial services business into a much bigger business," Mazari said.

Martin likened the cyclical nature of acquiring banking customers each tax season to BankMobile's strategy of having many exclusivity agreements with colleges and universities in order to advertise to incoming first-year students.

In addition to the customer base at their fingertips, H&R Block's more than 12,000 retail locations give them an advantage over other digital banks targeting underbanked consumers, Mazari said in an interview.

"What the others can't do is sit face-to-face with the underbanked population while they're doing their taxes and then sell them [a bank account]," Mazari said.

While these advantages could help H&R Block secure new account openings as tax returns roll in, these relationships may not be sticky. Many digital bank users are considered "elastic," searching for the best products and rates, Martin said.

"If they do open up an account, what are they going to be doing differently that will have someone continue to maintain that account and use them as a primary financial services relationship?" Kilmer said. "That remains to be seen."

H&R Block has not yet detailed what products it will offer. Walgreens announced that it will offer rewards on all purchases with its banking solution as part of its new customer loyalty program.

"It's not just about the financial services and the revenue but about the incentive to continue to use that card in other places," Kilmer said. "How can you use the payments and the reward system to drive more sales for Walgreens?"

Like H&R Block, Walgreens will also benefit from its massive retail footprint. In a time where retail locations are losing to online shopping, Walgreens has more than 9,000 locations that provide essential services and still bring in a lot of foot traffic, Kilmer said.

"The number of interactions that you could have with Walgreens over a year, depending upon where you're at in your life and various other things, could be fairly significant," Kilmer said. "You might not be going to a bank branch, but you might be going to a Walgreens."