H & R Block and Everyday Financial Services

1) Benefits and costs of the EFS program from the perspective of Investors: In 2003, Blocks US Tax business saw a decline in the number of clients and tax returns prepared even as the total number of tax returns prepared nationally grew. Analysts used client growth as the primary metric for measuring company success and future profitability. Hence, from the investors perspective, client base growth and retention was important. The EFS program achieved just that through various methods. By providing Alternate Financial Services products like check cashing, payday lending, wire transfers, Block was able to increase its offering of services to clients and maintain client loyalty. By cashing only government and refund checks, Block was able to reduce its risk and bad loans, which would be favored by its investors. Revenue projection was between $197,000 and $267,000 with an EBITDA margin of 20% to 32%. These factors in conjunction with the increase in number of clients and profitability would gain a positive reputation amonganalysts, which would prove beneficial to both individual and institutional investors like Berkshire Hathaway, which has an 8% ownership in H&R Block. Customers: Alternative Financial Services (AFS) was a rapidly growing industry in the US with annual revenues of $6.4 billion in 2001 and growing at 10% annually. Since the majority of H&R Blocks customer was from the low-income spectrum of the population and low-income customers formed a major portion of the unbanked part of the population. They made use of the various services that AFS provided like check cashing, bill payment, payday loans, wire transfers etc. By entering this industry, H&R Block was able to provide these services in addition to their Refund Anticipation Loan (RAL) and tax preparation. This greatly benefits the customer because of the low costs of H&R Block. They had significantly lower costs, as much as 50% of the other AFS providers. Clients also showed interest in many of H&R Blocks pilot programs like ATM services, notary public services. By offering these range of services at a significantly lower cost than their competition, the customers would greatly benefit from the additional products that H&R block had to offer keeping in line with the firms get more, keep more, save more mantra. Existing business divisions: Management at Blocks Kansass headquarters were worried about the damage to the image of the firm by providing these services. They were also worried about the perception that Blocks higher income clients would develop about the firm if they started providing these Alternative Financial Service (AFS) products. Furthermore, they were worried if offering these services would be viewed negatively in the market place and hurt the brand image with negative publicity. There was also another worry that these offerings would fail to generate revenue and be a burden on the existing business divisions of Block.

2) If I were Ernst and Yabuki, I would strongly recommend H&R Block to go ahead with their Everyday Financial Services (EFS) program by taking the Alternative Financial Services route. There are various reasons for this recommendation. One, the AFS industry was a $6.4 billion, rapidly growing industry in the US. The current competition in the industry was mostly unconcentrated and the barrier to entry was very low. In fact, it would be relatively easier for Block to offer these products because it was mostly the unbanked customers who used these services and Block already reached about 27% of these customers and 11% of marginally banked customers. So they already had a large client base that would be certain to use these products. If Block did not offer these services, these customers would go to another provider. Blocks unbanked and marginally banked customers spent between $400 million and $500 million on these products with other providers which Block could easily earn by providing these services. Moreover, research and projection of costs that Block would incur by offering these services was significantly (50%) lower than other firms. Hence the low cost could be passed on to the customers to maintain customer loyalty and increase its client base. Also, initial pilot programs and market research had shown that about 47% of clients surveyed had show interest in these products. With stock market analysts using client growth as a metric, by offering these services Block would significantly improve its client base thus gaining the favor of the analysts and the market. This would only serve to benefit the investors, both individual and institutional investors. Also, by increasing its suite of products and services, H&R Block would be in line with its mantra of get more, keep more, save more.