Students easy targets for banking B.S.

big-bank-buildingIn a few short weeks, millions of the nation’s young adults will load up the car, drive down the street and off to colleges across the U.S.A. (with a stop at In ‘n’ Out Burger).  

Students are looking forward to it so they can meet up with their friends and live away from the watchful eye of Mom and Dad. Mom and Dad (and Home Depot) are looking forward to it so the mass conversion of bedrooms into home theaters can begin.

Do you know who else is looking forward to it? If you answer the keg beer industry, you are 100% correct, but the response we were looking for is the Big Banks (after all we are not called Beerless Times).  

Students are big business. Away from home for the first time, most have not formed many brand loyalties yet, and probably not with banks much at all.

Those in higher education are statistically more likely to get better-paying jobs, which equates to larger mortgages and car loans, along with other products that are part of many a portfolio. Get them now and they could be (profitable) customers for life.

How do banks and other financial companies do this? It is a lot more than setting up a stand and offering a cheap T-shirt with the college logo on it, though they still do that. Banks and other financial institutions are aiming much, much higher.

Many of these institutions are entering into exclusive agreements with colleges and universities across America, where they offer a host of services, some where they pay the school and some where the school pays them to take a cumbersome role off their hands.

A place of higher learning is the perfect incubator for generating brand loyalty. You have a person guaranteed to be in one compact geographic location for the better part of four years, or more. They spend many of their waking hours in its classes, libraries, restaurants and social and sporting venues. Their friends, who are just like them, do the same.

Take a group of people, many of whom are financially unsophisticated, and plunk them in a set location for a number of years and you’ve made a banker’s day. Heck, if you’re a banker and you’re reading this you have probably ordered a round for the house to celebrate.

How does it start? In many cases, it begins before the budding frosh has even finished high school. Once a student has been accepted into a school and they confirm they will go there, they appear on the student registry. That means they will start receiving correspondence from the school and, if they are getting student aid, more mail about their loan.

Often these loans come on pre-paid debit cards, which can be used to pay tuition, but also buy books, groceries and anything else the student purchases.

In many cases these cards also double as the student ID card, which is required for pretty much everything the student does that is school related. Should the student be awaiting a refund for a dropped course, it can also go on this card.

And what happens every time a student uses this card, whether it be at the bookstore, movie theater or grocery store? Swipe fees. Millions of times per day, financial institutions collect a fee on every transaction involving one of these cards.

The fun doesn’t end with the swipe fees. Has Junior hit overdraft? The banks have a fee for that. Need to write a check? There’s often a fee for that too.

Graduated and in the hullaballoo forgot that account with fifty bucks in it?  Be prepared to pay up to get that back. Need money quick but are nowhere near the official bank ATM? Pay non-user fees.

How widespread are these exclusive relationships between financial institutions and schools?  In 2012 there were nearly 900 such partnerships across the U.S.

The schools involved represent nine million students, 42 percent of the national total. Many of the big schools are involved, as PIRG reports 32 of the 50 largest four-year public universities, 26 out of the 50 largest community colleges and six of the top 20 private, not-for-profit schools have contracts with different financial institutions.

Many of the big names are involved. U.S. Bank has partnered with 52 schools with 1.7 million total students while Wells Fargo has entered into 43 such agreements covering more than two million people.

There are a host of issues with these types of agreements. A significant one is that the student can logically assume because the school has entered into an agreement with a certain institution that they are endorsing that company and the products and services they offer. In most cases the school has done no such thing.

How does this affect perceived choice? The banking industry makes no bones about sharing the fact that after having such access to the students on a regular basis for several years that after just two some 70 to 80 percent of the student body will become clients.

These agreements have attracted the gaze of lawmakers for several years. In 2007, New York’s Attorney General Andrew Cuomo directed an investigation into campus lending practices.

His team found numerous instances of financial companies providing kickbacks to specific school officials and schools as a whole for preferential treatment.  In some cases, colleges received bonuses for directing student borrowers to the bank’s products through the implementation of “preferred lending lists”.

Preferred by corporate but not by student as many ended up paying higher than necessary interest rates.

Thanks to Cuomo’s involvement, many schools changed their lending practices.  In 2008, federal lawmakers banned gifts and revenue sharing pacts. The 2009 Congressional Credit CARD Act enacted additional reforms, including restrictions on free gifts to encourage students to sign up for cards on campus, mandating people between the ages of 18 and 21 demonstrate an actual ability to pay or have a co-signer before getting a card, and increasing the transparency of college credit card contracts.

Banks were also capitalizing on their federal loan lenders designations given by the Federal Family Education Loan Program to push private loans that looked like federal loans but with higher costs. Congress put an end to that in 2010 by removing banks from the savings and loan system to protect students.

Financial services companies also want to get in on the action but have to go about it in a different way. Because they do not have the same potential for a long term relationship as do the banks, they have to concentrate their efforts in the years the student spends on campus. Step one is to partner with existing banks in order to access the federal financial aid programs that must be deposited into FDIC-insured bank accounts. These companies would then have the capacity to produce the coveted bank cards and can offer services like ATM’s.

The biggest of these companies is Higher One. Billed as a company “focused on helping college business offices manage operations and provide enhanced services to students,” Higher One’s reach extends to schools with a combined 20% of national enrollment. One in eight federal financial aid recipients keep their funds in a Higher One account.

How do they make their money? They generate 10 percent from the school administrations, 10 percent from payment transaction revenue and 80 percent from “account holder revenue,” which they told the SEC consisted of interchange fees, ATM fees, NSF fees, other banking service fees, and “convenience”.

How big is the pool financial institutions are drawing from? In 2013, the Department of Education is expected to disburse $160 billion in various forms of aid to 16 million people. Once the funds are released into accounts, they can be utilized by the particular financial institution for other higher revenue generating initiatives like mortgages, car loans and even private student loans.

So, banks and other institutions negotiate exclusive contracts with hundreds of schools across the U.S. Given the largest source of funds for student accounts is federal aid, many have an ethical issue with private corporations generating a significant portion of their income from a federal aid program.

Implied in these agreements with schools is a certain level of service in exchange for exclusivity, such as having ATM’s available at convenient locations on campus where 24 hour access is allowed.

How is that working out? In 2012 Higher One had agreements affecting 520 campuses. On those 520 campuses they had a total of 700 ATM’s, or roughly four ATM’s for every three campuses. Some of these were in buildings that were locked for a portion of the day. If Higher One’s ATM’s were located OUTSIDE closed buildings, higher fees were charged to the school. In some instances where the partnering school had an ATM agreement with a different financial institution, Higher One’s ATM’s were off campus.

Whether it be a company such as Higher One or a more traditional financial institution, sights on many college campuses during payment periods and other high use times are long lines at the few ATM’s of the “exclusive” campus financial partner.

The machines inevitably run out of money. This forces the unlucky legions to use a competing ATM and pay the fee or make other arrangements to have the bill paid on time. Many schools do not have mandatory replenishment clauses during these peak periods nor do they have a minimum number of 24 hour ATM’s that must be on campus.

This model may not work for students but it’s been great for Higher One. Every year since 2007 the percentage of students using Higher One’s accounts has grown by 43%, reaching a total of 4.3 million accounts in 2012. Between 2007 and 2011, Higher One’s revenue increased from $28 million to $176.3 million, a growth rate of 630 percent.

In Higher One’s case this may be too much of a good thing. Higher One has been investigated or contacted by the regulatory bodies representing the states of Washington, Texas, Oregon, Florida, and New York along with the New York office of the FDIC.

Allegations included unfair trade practices, violations of student aid provisions, and lack of access to fee-free ATM’s. The FDIC involvement, which requires a demonstrated pattern of malfeasance before action is taken, encouraged Higher One to amend some practices and to refund $4.7 million to past customers.

Following these actions Higher One chose a banking partner not supervised by the FDIC.

One of Higher One’s fees was determined to be in violation of federal law. A $50 “lack of documentation fee” charged to students who failed to submit correct paperwork was deemed in violation of federal law if charged and Higher One cancelled it last year.

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