using Kahr’s Associates card.
Most of Kahr’s biggest breakthroughs, though, came once he ventured off on his own and started a company called First Deposit (later renamed Providian Financial). Making big money in the credit card business, he understood, meant attracting a customer who was at once comfortable owing a lot of money yet loath to default on that debt. Providian was the first to send out mailers with teaser rates so low that a large portion of those already deep in debt were likely to transfer that debt to them. These customers, Kahr’s research showed, weren’t price sensitive but instead preoccupied by the minimum payment they needed to make each month. Providian could get away with charging an APR of 23 percent rather than 18 percent because the company more than halved its minimum payment, from 5 percent of the total owed to 2 percent. Under the Providian model, the credit card was little more than a small loan device—and if Kahr’s ideal targets weren’t the world’s safest customers, they were certainly lucrative. In time, others would follow Providian into these treacherous but financially rewarding waters, including now well-known brands such as Capital One and Advanta (bought by JPMorgan Chase in 2001). Ultimately many of the big banks would brave these same frontiers. It was no wonder. Publications such as
Inside his office, Ogbazion bent down to remove a box from one of his desk drawers. He has a round, pleasant face, thinning hair, and a small mustache. He was wearing jeans, running shoes, and a yellow fleece West Point pullover from his younger brother’s alma mater. He repressed a small smile as he removed the box’s top and leaned it forward. Inside he had more than one hundred now-defunct credit cards. “I look at this and I wonder what I was thinking,” he said. But of course he knew exactly what he was thinking. He wanted four stores and, once he had four, he wanted eight. He would max out one card and then another but there were always more companies eager to extend him another. So he would transfer as much as he could to these new cards, thereby freeing up the old ones for further cash advances. He knew he was playing a dangerous game. “I was paying rates as high as twenty-five, twenty-six, twenty-eight percent,” Ogbazion said. A store would typically break even its first year and, if it was in a good locale, start generating profits approaching 50 percent in its second. But Ogbazion was too impatient to continue opening a few at a time. So in 1998, he opened another eighteen locations. “I hit three hundred grand, four hundred grand in credit card debt several times,” he confessed.
Ogbazion’s company was in its sixth year in 1999 when Jackson Hewitt, the number-two player in the field, contacted Ogbazion about buying the chain. They were offering $2 million. At that point, he was twenty-five years old and operating twenty-six stores around the greater Cincinnati area, a part-time business generating $2.2 million in annual revenues. He had 150 or so tax preparers working for him, and of the 26,000 returns they had prepared that tax season, 20,000—three in every four—included a rapid refund arranged through Bank One. His business had grown bigger faster than he ever imagined and he was reluctant to sell. “It was almost like Bill Gates before Microsoft trying to imagine the computer business being as big as it would be,” he said. Sure, Ogbazion was hundreds of thousands of dollars in debt, but could you imagine Bill Gates selling Microsoft only six or seven years after he started it?
In the early days, the challenge was convincing the skeptics that there was a market for a fast tax return. “People often ask why anyone would pay extra money to borrow against a refund,” Jeanie Lauer, an H&R Block marketing director, conceded in a newspaper interview appearing shortly after the company started offering this novel new product. “Some people have a certain mindset in which they just want the money now and they don’t care if they have to pay an additional fee.” But then H&R Block faced something like the opposite problem: the intrusion of countless imitators craving the kind of profits H&R was earning from its RAL customers. None proved more aggressive or more ambitious than John Hewitt.
There’s an increasing sameness to working-class neighborhoods in America today, in no small part because of Hewitt. Just as there are commercial signifiers that indicate a person has entered a relatively affluent neighborhood—a Banana Republic, a Pottery Barn, a Barnes & Noble, a Williams-Sonoma, a corner Starbucks —there is a similar geography of poverty that tells visitors they have crossed to the other side of the tracks. The region of the country or the race of a community’s inhabitants do not matter so much as its economics. Whether in a rural town, an aging first-ring suburb, or the urban neighborhoods that house a city’s low-wage workers, you’ll find the same small coterie of big-name poverty businesses. There’ll be a check-cashing outlet near a pawnshop near a Rent-A-Center or Aaron’s rent-to-own. And invariably one will also find a Jackson Hewitt, the company John Hewitt founded in 1982, or a Liberty Tax Service, the chain Hewitt created after Jackson Hewitt was sold out from under him for nearly $500 million. At the start of 2009, there were 6,600 Jackson Hewitt outposts scattered in working- class communities across the country—a number that dwarfs the combined number of the country’s Gap and Banana Republic stores. Liberty Tax Service is only about half as large as Jackson Hewitt yet there are more than twice as many Liberty branches in North America as Barnes & Noble, Williams-Sonoma, and Pottery Barn stores put together.
John Hewitt has always been a man in a hurry. A self-described math whiz (“I was the best I’d ever met,” he told one interviewer), he dropped out of college at nineteen to take a job doing taxes at an H&R Block. Less than two years later he was promoted to assistant district manager. He had recently turned thirty and was working as an H&R regional manager when Hewitt, his father, and a small group of other investors bought a six-office company, called Mel Jackson Tax Service, based in Virginia Beach, Virginia, for him to run. His budding chain, which he bought for $375,000 and renamed Jackson Hewitt, was still a pipsqueak when Hewitt boasted about the day he would surpass his old employer, a company then more than one hundred times as big as his own. If anything, Hewitt pushed the rapid refund even more aggressively than Block. Like its rival, Jackson Hewitt partnered with Beneficial and then started pushing its product on television. You can almost see company president Esther Gulyas’s head shaking in wonder over the hundreds of people who descended on Jackson Hewitt’s Boston offices. “The fee for the refund anticipation loan is high,” she conceded in an interview with
Block had introduced the anticipation loan to the tax world but Jackson Hewitt used the product to build a small empire. For Hewitt and his cohorts, the RAL wasn’t just a way to boost revenues, it was also the linchpin of its growth strategy. Where the venerable Block operated offices in a mix of neighborhoods, Jackson Hewitt focused almost exclusively on less affluent areas. In 1989, the company cut a deal with Montgomery Ward to open mini- offices inside its department stores; a few years later, it signed a similar deal with Walmart. It even experimented with tax desks inside a pair of national mailbox chains. When in 1997 the company turned to Wall Street for additional capital to speed its expansion, it released a prospectus documenting the details of its operations. Four in every five Jackson Hewitt customers, the company reported, earned under $30,000 and well over half of its customers chose its “instant refund” program. Those participating, the prospectus revealed, paid a $24 application fee, a $25 “document processing fee,” a $2 electronic filing fee, plus 4 percent of the refund. Someone who wanted her $2,000 in one or two or three days rather than waiting two or three weeks would pay $131 for the privilege. When Jackson Hewitt started peddling the refund loans, the company was operating fifty offices in just three states. Five years later, John Hewitt was boasting of nine hundred offices in thirty-seven states.
Still, the refund anticipation loan has never been Jackson Hewitt’s main source of revenue. Nor has it ever been Ogbazion’s. Jackson Hewitt’s prospectus showed that its RALs accounted for around 30 percent of the $31 million in revenues it collected in 1997. But the RAL is also the primary reason these stores exist, if not the only reason. “Obviously that’s why people come to us: because we can get them their money quickly, usually within twenty-four hours,” Ogbazion said. The RAL brings people in the door but it’s the $300 or so the chains typically charge a customer to prepare their taxes that account for the lion’s share of revenues. Still, the fees harvested from these short-term, tax-time loans are pure profit. The good news for Instant Tax Service, Ogbazion says, is that 80 percent of the people who have their taxes done at one of his stores end up taking out a tax loan. Competitors like Jackson Hewitt and Liberty, he said, post similar numbers in the 70 to 80 percent range. “The instant refund is the key to our business model,” Ogbazion said. “Just like it’s been the key to the success of Jackson Hewitt and Liberty.” Avoid neighborhoods with a large concentration of higher-income individuals, the company’s 2008 franchise manual counsels, because those people tend either to hire professional tax preparers or use a software program to do it themselves. “We recommend that you locate your office where the household income is $30,000 or less,” the manual advises.
Instant Tax was John Hewitt’s kind of company and he met with Ogbazion when his young counterpart neared fifteen stores. But Hewitt would be pushed out of his eponymous company in 1996, several years before Jackson Hewitt would again approach Ogbazion. Hewitt wasn’t ready to sell but his investors were and so he was
