Making Banking Partnerships Work
Until a few years ago, a visitor to a college campus might have thought credit card vendors operated branch offices there, so pervasive was their marketing. For many students, getting their first credit card was a step toward adulthood. In the best of circumstances, students began lifelong associations with a particular bank or financial institution, and established their all-important credit history.
On the other end of the scale, low introductory rates too often gave way to skyrocketing interest. The result was students racking up thousands of dollars in credit card debt, on top of student loans and fees.
But then Congress stepped in to regulate an industry that legislators believed had grown out of control. The Credit Card Accountability Responsibility and Disclosure Act of 2009 established “fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes.”
As a result, it became tougher for credit card vendors to market their cards to college students and alumni. According to a recent report by The U.S. Consumer Financial Protection Bureau, the number of agreements giving credit-card issuers the right to market their cards to students and graduates of U.S. universities fell 21 percent to 798 in 2011. At the same time, however, the revenue that colleges and alumni associations had previously received from these companies also dropped.
But students still needed access to funds, schools still needed revenue, and banks still wanted new customers. The solution was in debit and prepaid bank cards, financial products that, so far anyway, are subject to less regulation.
Done right, these bank card partnerships are a win-win. For students and families, the cards are a simple way to make sure that cash is available when needed. Schools continue to earn revenue from banks and, in some cases, receive incentives to outsource various financial and administrative functions, saving operating costs.
But, as the saying goes, with any contract, the devil can be in the details.
When considering best practices, who better to turn to for advice than a school that went through the arduous process of finding a new student banking partner just last fall? Curt Sawyer, associate vice president for university services at the University of Central Florida, says the contract with a previous partner had run its course, and there was mutual agreement to not renew.
Opening the bidding process brought interest from banks, financial service companies, and even regional credit unions, he says. “Several of them self-selected and dropped out, once they saw the full scale of the process and the relationship we were looking for.”
UCF had three main requirements a partner would have to meet, Sawyer notes. “The financial aspect was obviously important to us. Budgets are tight so—make no bones about it—the financial component is crucial. However, equally important was the customer service aspect and the breadth of services offered. Finally, how seamless would the transition be for our parents and our students?”
Here are five key areas for any institution’s leadership to keep in mind.
Students typically access funds with a bank card and the standard, ubiquitous ATM. As is the case in the consumer market, if the ATM is owned and operated by the firm issuing the card, there is no fee associated with accessing funds. However, when a “foreign ATM” owned by another bank is used, the picture changes. In addition to the fee (sometimes as much as $3) charged by the issuing bank, a surcharge (often $2) is often imposed by the other bank. For students using the cards off campus in a local college town, these fees can add up quickly.
“I don’t think it’s terribly obvious to students what all the fees are,” says Christine Lindstrom, higher education program director for the U.S. Public Interest Research Group student chapters. “Fee disclosures and fee schedules should be made clearer. That is something that the universities, in negotiating these partnerships, can make happen. They can see that all the different fees that a student might be charged are easily understood.”
Sawyer agrees. “To put a fee on a monthly student checking account doesn’t make sense to us,” he says. “So when we had that conversation with our partners, we wanted them to tell us quickly that they could or couldn’t do that. We didn’t want to have to go through five layers of bureaucracy at the top and wait a month to get a simple answer.”
The world of finance is confusing and fraught with hidden consequences. Sawyer says financial literacy was a crucial component in UCF’s deal. “We needed a partner that would recognize that a good portion of our students that graduate are going to live in this community, so the better job we do of educating them now, the better citizens and the better leadership they will provide in the future.”
“It was important to us to have our banking partner come in and educate our students. That means actual classes that teach them how to balance a checkbook, manage credit card debt, and learn wealth management.”
Young people come to college eager to show their school spirit with mugs, caps, sweatshirts, and the like. Why not a branded debit card? On the face of it, there’s nothing wrong with that. As long as the partnership works well, the payoff to the school and the community is substantial.
For example, Huntington Bank recently paid $25 million to co-brand and link its checking accounts with student IDs at The Ohio State University for a period of 15 years, a deal that includes an additional $100 million in lending and investment to neighborhoods surrounding campus.
However, some school-branded bank cards may give the impression that the college or university endorses the product, when it doesn’t. A bad experience with a financial institution can have a carryover effect to the associated college or university long after graduation.
“There is an innate trust that the student and the family have toward the college that they don’t necessarily have toward the bank or financial firm,” says Lindstrom. “So allowing the co-branding to happen could signal to the student that they don’t have to be as vigilant around the account and the product. While we would encourage colleges and universities not to co-brand, if they do they should make it abundantly clear that they are not endorsing the product.”
Advocating for Students
Lindstrom says that, as with credit cards, some banking partnerships sound good at first but have hidden fees that add up quickly for students. “Sadly, the best deal for the college is not always the best deal for the students.” The problem, she says, is in the research and proposal stage. “No one is saying that college bursars or business officers are knowingly negotiating contracts that take advantage of students,” she explains. “But we believe that, because of the budgetary
pressures that colleges are under to do more with less, they are out there looking for new revenue sources in any way shape or form. The financial firms have this program or that product, and these administrators are thinking about getting the best deal for the college coffers.”
Administrators (and sometimes students) who sit on the committees that oversee those contracts should be asking in-depth questions about how the deals impact the students themselves and not just the revenue stream.
UCF approached the bidding process with this very point in mind, says Sawyer. “We really went to bat for our students. We made it very clear to potential partners right from the start that they couldn’t come in here and think they were going to make a fast buck on our students.”
The key to making it work was getting the fine details spelled out in the contract, he says.
“We were very upfront about transparency of the deal, because it was all going to be in the contract. For example, we said, ‘You can’t charge a monthly service fee on a checking account to our students.’ At first they agreed, but then wanted to make that conditional to students under the age of 25. Well, we have quite a few students who are much older than that, and we insisted they waive the fee on them as well,” Sawyer says. “It’s a process of going back and forth so the key items we agree to are in writing, and there are no surprises. It holds them accountable to what we agreed.”
Unlike credit cards, prepaid cards and debit cards exist in a grey regulatory area, and have fewer rules overall. Lindstrom believes that colleges, using their leveraging power, can ensure that their bank partnership continues to benefit everyone, and doesn’t veer off course. That desire isn’t just a protection for students, but for schools and financial firms, as well.
“It was highly unusual for Congress to get in the weeds on minute aspects of credit policy as it relates to consumers a few years ago,” Lindstrom says. “It isn’t a good deal for anyone when that happens, so I think everyone would like to try to avoid another attempt by Congress to try to step in.”