Some people go to college to prepare for their futures. Others go to party. This holds true for financial services companies as well as students.
Banks and non-banks alike are wooing colleges by offering financial aid disbursement services (think the checks from the administration your kids used to get in the mail for books and food). Such deals give financial institutions a foot in the door, allowing them to market a range of ancillary services, from dual function student ID debit cards to checking accounts.
School administrators benefit from such deals because they allow their colleges to cut back on back-office staffing costs. But the merits of such arrangements are under scrutiny following a U.S. Public Interest Research Group report implying that financial institutions are paying improper incentives to colleges in order to gain access to a captive student audience.
"While schools are obtaining revenues and reducing costs by outsourcing certain services, the relationships between schools and financial institutions have raised questions," the report states, a conclusion echoed by the Associated Press and the New York Times.
Consumer advocates and regulators would do well to consider differences between bank and non-bank business models before issuing blanket condemnations of campus partnerships, however. While non-bank providers tend to focus on fee income, at least some banks eschew such short-term gains in favor of a long-term customer loyalty play.
That may not be enough to satisfy everyone.
"It's a national taxpayer investment to make sure that students can pay for school, all that money should be used for educational expenses," says Rich Williams, one of the co-authors of the study, in an interview with American Banker. "So anyone who wants to disperse financial aid money to cards, there should be no fees period."
But the deals banks such as Citigroup (NYSE:C), Wells (WFC) and U.S. Bank (USB) offer students are just as good as those offered to graduates. And judged purely in terms of fees, they're cheaper than products offered by Higher One, the lead player in the industry.
Higher One's campus debit card business model is predicated on collecting fees from both university partners and students. Higher One also manages payments, and services aimed at colleges, through its processing unit CASHNet.
The New Haven, Conn. company, which was founded by three Yale University students at the beginning of the last decade, makes roughly an equal amount of money off both groups, a spokeswoman says. Universities pay subscription fees and per transaction fees. Higher One also collects cash from interchange and fees on student accounts.
Higher One has several fee schedules, some with monthly charges that carry fewer fees.
For the base plan, there is a $24 stop-payment fee, a $50 lack of documentation fee, a $20 card replacement fee and an insufficient or uncollected funds fee of $29 for the first item and $38 on additional purchases, among others. (Higher One's disclosures provide recommendations on how to avoid its debit card fees, as well as an explanation of its charges).
The company's emphasis on fee income has drawn scrutiny. A civil lawsuit filed in the United States District Court for the Central District of California has targeted the company for providing scant ATM coverage, excessive fees, and luring students to their cards by promising that they'll get money "immediately."
Higher One contends that its fees are justified given the service it provides, and notes that activating its debit card requires users to review a fee schedule and related disclosures.
"I certainly believe that this US PIRG report and some of the recent press has missed the big picture," says Miles Lasater, one of Higher-One's co-founders and the company's chief operations officer. "This lawsuit is without merit."
Some industry analysts came to the defense of Higher One, noting that the outfit's disclosures are clear.
"You don't need to be a finance or accounting major to understand Higher One's pricing," says Philip J. Philliou, a payments consultant. "In fact, Higher One goes the extra mile in educating its cardholders on how to avoid ATM fees."
Higher One has worked with regulators to resolve concerns, Lasater says. In 2010, the FDIC conducted a "routine evaluation" of one of the company's banking partners, says Lasater, and Higher One "voluntarily" agreed to refund roughly $4 million in insufficient fund fees to its customers and adopt other recommended practices.
Also, the US PIRG report says that "In a guidance letter released by the U.S. Department of Education in late April 2012, it made clear that Higher One's $50 fee for 'lack of documentation,' a fee currently listed on its fee schedule, would violate federal rules if charged."
The company used to operate revenue sharing agreements with a number of colleges before 2007. Some of those agreements still exist, but are no longer being offered.
There are likely limits to how much the company can do to appease its critics. Given that its relationship with students lasts only until graduation, HigherOne needs to earn a return while they're in school. And in some cases, it's abandoned tactics that consumer advocates oppose, such as offering colleges financial incentives in exchange for student access. Banks often do offer some of financial incentive.
"There is no question that state budget cuts have created incentives for schools to raise revenues through outsourcing," the report says.
Still, Banks do have more options. The bank's debit cards, at least those offered by US Bank and Wells Fargo to students, are mostly the same as they offer to the general population. In some cases, the banks waive fees they'd otherwise charge. Part of this approach may be due to the heightened regulatory scrutiny banks face on retail consumer finance products. But the banks most involved in the campus niche say they don't aim to maximize profit on student accounts. They're pursuing relationships they hope to maintain for decades, not simply a few semesters.
Citigroup, which does not offer a separately branded campus card, provides student financial aid disbursement services to nearly 700,000 students across 35 campuses at four colleges, says Gonca Latif-Schmitt, Citi's managing director of its treasury and trade solutions group.
The New York bank sets up a website for each college for students to visit. Students get to choose if they wish to receive their financial aid in the form of checks, direct deposits, or Citi's prepaid card. If students don't enroll through the website, they're sent a check by default. Students are only exposed to the possibility of replacement card fees, inactivity fees, and currency conversion fees if they opt into the prepaid card.
Like Higher One, Wells Fargo offers hybrid ID-debit cards to colleges, too. But, unlike Higher One, its cards come with no fees aside from those that are usually associated with a traditional bank account, says Wells spokeswoman Richele Messick.
Students have choice when it comes to activating those fee-free cards (the $3 monthly service fee is waived for students with a Wells account and using it as a debit card, she says.) And, in the one case where simply Wells handles financial aid disbursement services for a college, the bank does not push its accounts on users.
"We do this because we want to have these relationships, because we want to serve these customers, and we want to make them life -long customers," says Messick.
U.S. Bank, in a statement, says its cards carry more benefits — such as free ATM withdrawls, and free account access — than generic fees. Students also have to opt-in to activate the banking and payment capabilities of their student ID cards.
These features may not be enough to soothe absolutists who want to eradicate the possibility that financial institutions could profit off of financial aid.
But somebody has to do the work, says Beth Robertson, the director of payments research at Javelin Strategy & Research.
"I think it is becoming more popular for organizations to kind of combine the ID card with a multi-functioning purchasing card, and colleges are universities are one market for that sort of thing," says Robertson, "They have the need."