The latest Consumer Financial Protection Bureau’s report HERE sends a message to banks and highlights the current status of credit marketing in partnership with educational organizations. In this space FIA (the old MBNA), Capital One and UMB are the three largest. While the trend towards more reasonably based bank products and fee disclosures have been changing for a while, we now can get to see the outcome.
The number of agreements between schools and card issues are decreasing due to both parties being more reluctant to enter into agreements with each other. According to the CFPB, credit card agreements between colleges and financial institutions dropped 70% from 2009.
Most of these changes are the result of the CARD act which required issuers to disclose the terms and conditions of any college credit card agreement including compensation and statistics on production.
No surprise, while card activity is down, less regulated debit and prepaid card activity is up. 11% of schools now have contracts with financial institutions up from an estimated 3% in 2009.
Banks have also wised up and found that alumni cards are lucrative. In 2009, alumni associates accounted for 33% of all credit marketing agreements, a number that is now up to 50%.
This relationship between banks and schools can be both lucrative and helpful for the consumers. Even if banks go above and beyond the intent of the CARD Act, colleges represent a tremendously profitable customer segment with an average risk-adjusted ROE estimated at greater than 45%. However, banks need to do a better job at making sure students and families know their full payment options and not just present options that generate the most fees. Banks need to own their agreements with the colleges and not just hide behind the school. This means that the disclosure agreements need to be easily discernable and on the payment website and not buried or “available upon request” (most with no help on how to do this). Only 20% of banks/schools fully comply with the current CARD act.
Further banks need to treat debit and prepaid cards in the same manner as credit cards even though it is not required under the CARD Act. Banks need to make sure alternatives are known, fees are clear (and reasonable) and that marketing agreements with the respective schools are disclosed.
While we are at it, many of the payment options at schools that we tested were woefully out of date (not necessarily the bank’s fault) and could use improvement and bank support to enhance the user experience.
Remember too that many community banks can be successful at providing cash management and payment services to smaller institutions and private high schools. While scalability isn’t as great and profitability lower, this segment still averages a 20% or better ROE and is in the top 10 of profitable customer types.
While the cards and payment platforms provide a convenient way for schools and universities to outsource the process of tuition collection, financial aid distribution and fee payment, banks need to be proactive to improve our operations in order to keep the public happy and the regulators at bay.
Submitted by Chris Nichols on December 23, 2014