Financial institutions are increasingly entering into marketing agreements with colleges to provide checking accounts or prepaid cards to students to conduct routine financial transactions and to receive financial aid disbursements. These partnerships are typically exclusive in nature, with students offered a co-branded debit card that also serves as a student ID for their school.
In return for allowing financial institutions to offer these accounts to students, schools may receive a share of the revenue or in-kind benefits, such as assistance with federal financial aid disbursement. Such arrangements are lucrative to financial institutions not only because of the fee income and exclusivity, but because they are a very effective pipeline to new customers. Once a consumer chooses a bank, they are unlikely to switch, and reaching college students allows banks to attract a new, likely long-term, customer base.
But new limits on how banks can target Millennial students threaten to derail this gravy train stuffed with budding financial consumers.
The U.S. Department of Education just announced proposed regulations affecting as many as 9 million college students. They are rolling out a set of tougher standards that would mandate greater transparency surrounding agreements between colleges and financial institutions, specifically in the rapidly expanding college debit and prepaid marketplace.
The Department of Education singles out “a lack of transparency surrounding college card agreements” and “a lack of clear and neutral information for students considering account options” as two areas of concern regarding how financial services are marketed to college students.
In a report from the Center for Responsible Lending titled “Overdraft U,” co-branded bank cards — which are often used to distribute students student aid funds — were found to be more advantageous to the banks than to students.
“Students need objective, neutral information about their account options,” said U.S. Under Secretary of Education Ted Mitchell. “For example, students should be able to choose to receive deposits to their own checking accounts and not be forced to utilize debit cards with obscure and unreasonable fees.”
What Do The New Regs Say?
The Department of Education says it is trying to protect students from unreasonable account fees and provide greater transparency regarding accounts offered to students by requiring disclosure of the agreements between institutions and financial account providers.
About 40% of all postsecondary students are enrolled in institutions that have hammered out debit or prepaid card agreements with financial institutions, representing the disbursement of $25 billion in funds from federal student loan programs.
The Department of Education is proposing that the costs students incur be federally regulated, and that students’ personal information could not be shared with banks without their consent.
If enacted, the new regulations would specifically prohibit institutions from requiring students or their parents to open a certain account into which their credit balances are deposited. Financial institutions would also be required to provide a list of account options that a student may choose from to receive credit balance funds, and present each option in a neutral manner, where the student’s preexisting bank account is listed as the first, most prominent, and default option.
Financial institutions would also be required to ensure that students are not charged overdraft fees if they select an account offered directly or indirectly tied to federal student aid.
“When banks can get a captive audience they just go for the jugular and students on campus are exposed to tactics that don’t exist in the larger banking marketplace,” said Chris Lindstrom, higher education advocate for the U.S. Public Interest Research Group. “You’re not hit with a per swipe fee. You don’t experience an inactivity fee and all of these things have been happening on campus. And the Department of Education just drew a very clear line in the sand.”
The proposed rules are available for review and public comment until the end of June.
On-Campus Options Keep Shrinking for Banks
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 forced credit card companies to disclose contracts with colleges, but the law does not extend to checking account, debit and prepaid card agreements.
“What’s been banned for the financial aid disbursement channel is quite strong, but it’s not nearly as good and strong for other types of arrangements,” noted Chris Lindstrom, higher education advocate for the U.S. Public Interest Research Group.
So banks have generally pulled back from on-campus credit cards, shifting their attention to agreements focused on the erstwhile unregulated debit and prepaid card market.
“Students are an incredibly lucrative body of consumers for banks to be accessing,” said Maura Dendon, senior policy counsel at the Center for Responsible Lending. “Over half of all students come to campus without their own account yet and we know bank accounts are sticky — once you get someone in your account you will likely have them for a long time as a customer.”
In a May 2012 report, the U.S. Public Interest Research Group, an advocacy organization, counted almost 900 deals between colleges and banks or other financial institutions
Contracts on campus card deals are not public, and they’re hard to obtain. In December 2014, the CFPB released a report showing college credit card agreements are not readily assessable. In fact, 80% of schools studied did not put their agreements or any information about them on their websites. But in 2012, U.S. PIRG got hold of an agreement between Ohio State University and Huntington Bank, which gave the school $25 million in payments over 15 years.
Financial Marketers Face Uphill Regulatory Battle
The Department of Education’s proposed regulations are just one more shot fired by consumer advocacy groups at banks targeting college students.
Earlier this year, the CFPB proposed a “Safe Student Account Scorecard” intended to help colleges avoid partnering with financial institutions that “offer checking and prepaid accounts with tricks and traps.”
In December 2013, CFPB’s Richard Cordray alerted banks about the potentially risky practice of making “secret payments” to colleges to market their products to students, calling on financial institutions to disclose their agreements with colleges — including checking accounts and prepaid/debit cards.
Advocates for the banking industry are not happy with all the regulatory threats they face, including the U.S. Department of Education’s latest round of new proposed rules.
“Their proposal is based on little to no actual data,” said Richard Hunt, president of the Consumer Bankers Association, a trade group. “The burdensome cost of new regulatory requirements on schools will ultimately be paid for by students, increasing the cost of college at a time when the government should be trying to do the opposite.”
“It is hard to believe Congress ever intended the Department of Education to wield authority over financial services,” Hunt added.
David Pommerehn, senior counsel for the Consumer Bankers Association, suggests that banks might be better off severing their relationships with colleges altogether.
“There’s not a whole lot of financial incentive to stay in it anyway,” Pommerehn concludes.
Interest groups representing colleges and universities are unhappy as well. The National Association of College & University Business Officers, says the U.S. Department of Education doesn’t even have the regulatory authority to oversee how bank accounts are utilized and marketed to students.
“I don’t see the nexus with the Department of Education,” said Anne Gross, VP for regulatory affairs and the college trade group. “That is banking regulation.”