Each year the U.S. Treasury Department issues over one-hundred million refunds worth billions of dollars to individual tax filers.

Almost half of all refunds are issued via a paper check, with the majority of those checks being mailed to lower-income households. This presents a scaleable opportunity to provide these households with a low-cost transaction and savings account on the tax form.

IRS data show that of the 60 million federal tax refunds that were issued via a paper check in 2005, almost half were mailed to households earning $30,000 or less. These are the very households who typically lack access to reasonably-priced financial services and who are most likely to pay a disproportionate amount of their income to conduct routine financial transactions. They are also less likely to have adequate savings to cover emergency expenses like car repairs or unexpected medical bills, which often leads to payday lenders and other expensive sources of credit.

These households do, however, receive on average about $1,700 in federal tax refunds. And when examined in the aggregate, almost $50 billion is annually refunded to households with AGIs of $30,000 or less, via paper check.

The potential of those refunds as deposits creates a powerful case for financial institutions to make a low-cost transaction and savings product available to lower-income consumers.

Direct deposit of wages and benefits is one of the great financial innovations of the last 30 years. It saves employers and benefits providers millions of dollars in both the purely administrative costs of writing checks and the hassle of replacing checks that are lost or stolen; it provides workers and benefits recipients with quick, safe and reliable access to their funds; it encourages those who are unbanked to move into the financial services mainstream; and, when the payors use their market power to cut good deals, it can mean higher quality financial services at lower prices for lower-income recipients.

Between 10 and 20 million Americans are unbanked, meaning they lack a basic checking or savings account. An estimated 40 million others are underbanked--they have a bank account but may have difficulty retaining it, and are not fully integrated into the financial mainstream.

What deters low and moderate income individuals? Households living paycheck to paycheck often avoid traditional bank accounts for their minimum balance requirements, high overdraft penalties, monthly maintenance fees, and delayed deposit of checks. As a result, public-private efforts to pilot initiatives are addressing this disconnect between mainstream market offerings and low-income banking needs and yielding important insights into consumer demand. However, in an effort to tailor public and public-private initiatives targeted towards under-banked populations, it is important to listen to their preferences to structure valuable programs that they will use. In this regard, policy-makers can look to the private sector's experiences for guidance.