Debit Card Arbitrage: $4.7M Tax Payment Results in $47,000 Cash Back

An under-the-radar loophole is now out in the open, thanks to fintech app Jiko* publishing a PR release bragging about their $4.7 million debit card charge, which led to Axios writing about it as quite likely the “largest consumer debit transaction ever”. In a nutshell: Someone made a $4.7 million tax payment to the IRS using a Jiko debit card, paying less than $4 in fees while earning $47,000 in cash back!

As noted in my post on How Fintech Bank Apps like Chime Make Money, a significant portion of fintech revenue comes from debit card fees. Large banks have their debit card interchange fees regulated, as Durbin fee limits only apply to large banks with $10 billion in assets and above. But smaller banks are classified as exempt, and the Federal Reserve shows the average intercharge fee is 1.4% for exempt transactions. This is why small fintech banks can offer 1% cash back on debit card purchases.

Meanwhile, it appears that the fee that the IRS payment processors charge is based on the regulated interchange fee of 0.05% (yes, 1/20th of 1%!) plus 21 cents per debit card transaction. That means even a $10,000 tax payment would result in a regulated interchange fee of $5.21, and the vast majority of tax payments are much less than $10,000. Perhaps they have some sort of special agreement? Either way, they all charge a flat fee ranging from $2.55 to $3.95 on any payment amount.

This creates an arbitrage opportunity between the fees paid and cash back earned for those can that justify really large tax payments (usually those with really large incomes). On a $10,000 payment, your net profit would be about $96. Meanwhile, making an unnecessarily high payment might encourage an audit or raise other flags. You’ll also need to fund and use an appropriate fintech bank that offers 1% cash back with no limits. I’m not sure if this was a smart move by Jiko, as the added spotlight may also end this important source of revenue for all fintech banks.

* The Jiko app doesn’t act as a bank as they hold your money in a brokerage account and invest your money in US Treasury bills (essentially equally safe, but not the same). However, they do have their own bank charter, apparently to process debit card charges – Jiko Bank, a division of Mid-Central National Bank, Member FDIC. I’m confused too! But interestingly since funds are backed by T-Bills, it made it safer to hold $4.7 million at Jiko, as that huge balance would have exceeded the FDIC insurance limits.