Broke, USA

by Gary Rivlin

  Ogbazion still has the fax from 1992 that Bank One sent to a Mail Boxes, Etc. near his parents’ home, laying out the steps he would need to take to offer customers a refund anticipation loan underwritten by the bank. But he got cold feet that first year and almost postponed his plunge the next year as well. That’s when he wrote in his diary that he was depressed. “Bill Gates and Michael Dell had started a company at nineteen and I hadn’t,” he explained. It never seemed to dawn on him to do any research into the pros and cons of the business, as if starting a business required nothing more than nerve. He was probably right.

  Ogbazion tells the story of finding his courage, in a hushed voice, as if sharing a moment of divine fortune. “I can still picture it,” he said. “I’m driving along and just happened to look to my left. I think about that sometimes. What if I hadn’t happened to look to the left at that moment?” He was driving to school and he noticed a FOR RENT sign in the window of the very office where he had gone to have his taxes done in high school. The landlord told him H&R Block had moved to a larger office a few miles away and it would cost $3,000 to rent the office for six months.

  At that point Ogbazion had saved around $10,000. He had a Sears card and a Discover card that combined carried a cash limit of $5,000. He secured another $5,000 through a low-interest student loan. He re-contacted Bank One, where somebody told him he needed to select a software maker from the vendor list the bank provided. He randomly chose a Columbia, South Carolina, company and spoke to someone there. “They tell me, ‘You don’t need to know anything about the tax business; the software will walk you through everything; you hook up with Bank One and, congratulations, you’re in the RAL business,’” Ogbazion said. But he was also risking everything on this one idea. They offered a two-day tax preparation workshop and Ogbazion elected to pay for a trip to South Carolina.

  Ogbazion gets dreamy as he describes those first few months he was in the tax refund business. He was carrying a full load at school and overseeing a staff of five or six he was paying $8 an hour apiece. He was a twenty-year-old African-American running his own business, but the only weirdness he felt was the age gap between him and his employees, one of whom was a retiree in his sixties. “The age thing was something I was much more self-conscious of than race,” he said. He named his new business Instant Refund Tax Service.

  Ogbazion doubts he would have survived that first year if he hadn’t had the good fortune to take the place of an established giant like H&R Block. He stretched a cheap sign inside the store’s plate-glass window and distributed some door hangers around the neighborhood but other than that he did nothing to advertise. “I was blessed that six hundred people came back to that spot looking for H&R Block,” he said. “If I had located anywhere else I would have been out of business my first year.” He was fortunate as well that the great majority of his customers also opted for a quick payout that put extra money in his pocket.

  Making it through that first year seems to have emboldened Ogbazion. He knew he would have to advertise and recognized that telling people about his one store would cost nearly as much as telling people about four stores. Ogbazion didn’t bother approaching any banks. He knew that he would need to find an alternative funding source.

  Once again Ogbazion was fortunate. The credit card industry was also undergoing sweeping changes in the second half of the 1980s, among them the spreading popularity of the subprime credit card. There was no single creator of the subprime credit card (which could be said to have been invented the first time a bank decided to charge some of its customers 19 percent interest instead of 12 percent) but one early innovator and its most avid early champion was Andrew Kahr. An eccentric man with long, stringy hair and a generally antisocial personality, Kahr had earned his Ph.D. from the Massachusetts Institute of Technology when he was twenty years old and spent the next several decades striving to strike it rich. Earlier in his career he had even done some work for Associates, where he created a credit card product aimed at those with a taste for debt. This was in the late 1970s, when around half the people holding a credit card typically carried a debt. That figure was closer to 90 percent for those 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 American Banker reported that subprime credit card lenders were posting profit rates two or three times greater than those booked by more risk-averse lenders.

  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 additio
nal 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 American Banker, “[but] customers always take that option.”

  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 pushed out. (The Cendant Corporation, a conglomerate that already owned Avis, Century 21, and several hotel chains, including Ramada and Days Inn, paid $483 million for Jackson Hewitt at the start of 1998. That translated into a return of $400,000 for every $1,000 invested, Hewitt said.) Hewitt thought about a business that specialized in cleaning carpets; he talked wistfully with a reporter about his desire to spend time feeding the hungry. But a year after leaving Jackson Hewitt, he founded Liberty, which Hewitt is always sure to describe as the “fastest growing retail tax preparation company in the industry’s history.”

  Our goal, he told me, “is nothing short of being the biggest tax service in the universe.” Hewitt’s successors at Jackson Hewitt seemed no less intent on growth than he was—maybe more so given the steep price Cendant had paid. Jackson Hewitt needed to “find ways of attacking entire metropolitan areas,” Keith Alessi, the company’s CEO, said shortly after its sale to Cendant. In 1999, that meant knocking on the door of a twenty-five-year-old who owned more than two dozen stores in working-class communities scattered around the great Cincinnati metro area. Ogbazion declined $2 million but couldn’t resist when Jackson Hewitt upped its offer to $3 million. Saying yes meant wiping out several hundred thousand dollars in credit card debt and still walking away with nearly $2 million in the bank after taxes.

  After the sale, Ogbazion applied to Harvard Business School and was surprised to be denied admission, despite his success and his grades. He hadn’t applied to any other schools and, not knowing what else to do with himself, he decided to get back into the tax game. The terms of his contract prohibited him from opening new stores within ten miles of Cincinnati, so he moved to Dayton, which allowed him to avoid any legal troubles but remain close enough so that he was only an hour’s drive from his family. He thought about buying a house but concluded that any money committed to a down payment was cash he wouldn’t have to open stores. He opened the first Instant Tax Service office in 2001.

  It was much harder this time than it had been in Cincinnati seven years earlier. All the best spots in Dayton had been taken and so Ogbazion needed to focus on the less obvious ones. He opened the downtown store but otherwise focused on white working-class neighborhoods and the area’s less prosperous suburbs. Instant Tax Service was up to seven hundred storefronts by the time of my visit but
Ogbazion had opened only seven in the Dayton area. With the exception of the downtown locale, all are in white working-class neighborhoods; several are located fifteen or more miles from downtown. “I moved to where opportunities were still available,” Ogbazion said with a shrug. He owned some stores himself, and he co-owned stores with friends and relatives he set up in the business (a cousin in D.C., a buddy who moved to Chicago, a friend living in Indianapolis eager to get in on the business), but mainly he has grown through franchise agreements.

  “These are people who have less than $50,000 in the bank and they want to get into business,” Ogbazion says of his franchisees. “They know a Subway franchise costs a quarter of a million dollars. They know a McDonald’s costs $1 million.” He requires a $14,000 down payment on the $34,000 he charges as a franchise fee; leasing and outfitting an office and hiring a part-time staff requires roughly another $10,000. All told, he has sold Instant Tax Service franchises to three hundred people. The average age of a new franchisee is thirty-six and more than a quarter are from Ethiopia or Eritrea. “What would you do with a nine-month vacation?” the company asks in an ad campaign it ran in Franchise Times, among other publications. In theory his is a business where you work your tail off for three or four months and then have most of the rest of the year off. But Ogbazion admits that plenty of people within his franchise family still work second jobs to make ends meet. “The money isn’t as great as sometimes our critics make out,” he says. Unless, of course, you’re collecting a 20 percent share of the gross revenues every year from hundreds of Instant Tax stores around the country.

  Tax preparers who cater to the professional classes typically don’t start feeling around-the-clock stressed-out until late February or March. In Ogbazion’s world, the tax season starts in mid-January. By mid-February, when many in the middle and upper classes are only starting to think about their taxes, Ogbazion has filled out more than 80 percent of his client’s tax returns. “People basically start bombarding us with calls at the end of December,” Ogbazion said. “Can I do my taxes with my pay stubs? Do I have to wait for the W-2? It’s nuts. Basically come the first of the year, people want their money.”