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An Attuned Pitch to GenY

Over the past five years, student loan debt in the United States has nearly doubled to more than $1 trillion. It now exceeds the nation's credit card debt.

The staggering growth-attributable partly to higher tuition costs-is particularly worrisome with the unemployment rate for Generation Y well over the national average.

Analysts say that a product to help struggling students and graduates with their debt could be a winner for banks, potentially enabling them to establish long-term ties with a customer base that's generally underserved by the industry.

A startup called SmarterBank already is on the case, going after young consumers with a new checking account that helps put a dent in their college loans.

Customers can sign up to earn rewards, called SmarterBucks, through signature-based transactions with a Visa debit card. Each purchase for up to $100 earns 0.5 percent of the amount spent, and larger purchases earn 1 percent. When a customer accrues at least $15 worth of SmarterBucks in a month, the amount automatically gets applied to the principal of a designated student loan. Lesser amounts roll over to the next month. There's no limit on how much can be earned.

The checking account-which does not pay interest-has no minimum balance requirement and no fees, as long as customers conduct at least one transaction a month, including a deposit, withdrawal or debit card purchase. Cardholders can use 40,000 of the ATMs in the Star network without incurring charges.

SmarterBank was started by SimpleTuition, an online comparison shopping service for private and federal student loans. It does not have a bank charter; rather, it offers the account through The Bancorp Bank in Wilmington, Del.

Doug Lowenstein, executive vice president of banking and rewards at SimpleTuition, says the product is timely. "Perhaps the single largest pain point for young adults these days is managing that student loan debt," he says.

The checking account is prominently promoted on SimpleTuition's website, targeting a built-in audience of college students. About 6 million visitors used its online loan marketplace and other tools last year, Lowenstein says.

The SmarterBucks rewards program has its own website, with a large diagram on the "How it Works" page that illustrates how paying off a loan early saves on interest and has a multiplier effect on reducing debt. "Chip in $25 per month. Repay 16 months faster! And save up to $3,150!" it says, using a 10-year, $8,500 loan with a 6.8 percent interest rate for the calculation.

SmarterBank is working on a way for family and friends to open their own checking accounts and apply their rewards to the borrower of their choice-allowing a parent to help a child repay a student loan, for example. This feature, says Scott Strumello, a consultant with Auriemma Consulting Group in New York, is the most intriguing part of the SmarterBucks concept.

Lowenstein could not say when the extension to family and friends would be available. But in the meantime, students can invite others by email to register on the SmarterBucks website and make cash contributions toward the paydown of their student loans.

Also in the works is an online mall where customers can earn additional rewards on special offers by participating merchants. Select offline purchases made directly from stores also will be eligible for extra rewards.

Strumello says new limits on debit interchange fees could complicate SmarterBank's path to profitability. Many banks have abandoned free checking and debit rewards programs as a result of the new regulations.

But an interchange exception was carved out for banks with less than $10 billion of assets, and SmarterBank's partner is well under that threshold, Lowenstein says. Also, the SmarterBucks rewards are only for signature-based transactions, which yield a higher interchange rate from merchants than PIN-based ones.

Brad Strothkamp, vice president and principal analyst at Forrester Research in Cambridge, Mass., says a rewards program tied to student loans is on target in that Gen Xers and Gen Yers make up the majority of new checking accounts opened each year. However, Forrester surveys indicate that rewards programs rate low in importance for consumers choosing a checking account. "A lot of the choice is actually based on factors like ATM and branch locations, fees and customer service," Strothkamp says.

SmarterBank has most of those covered, but suffers from one glaring flaw. "They don't have mobile deposit," Strothkamp says. "You have to mail in a check, which is a complete pain in the butt."

Lowenstein says the Bancorp Bank is working on a mobile deposit option, but has no timetable for rolling it out.

Ultimately, Lowenstein sees the SmarterBucks program as a way for banks to establish a rapport with young customers. "Many banks offer a student-oriented checking account," he says, "but most of those are fairly plain-vanilla products just with the label 'student' on it, where they may waive the fees for some period of time while people are in school, but don't really address any of the particular needs of students."

SmarterBank isn't seeking bank partners at the moment, but the rewards program is constructed to be a standalone platform that can be integrated into other banks. "So we certainly are open to the idea of other banks talking to us about how this may fit into their plans," Lowenstein says.




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