Is the Secret Deal Between Your College & Your Bank Costing You?

It’s not all that hard to figure out: When your argument hits too close to home, the other side starts calling you names.

So when a vice president for government affairs of payments for the Financial Services Roundtable — the industry’s leading legislative advocate — calls the Consumer Financial Protection Bureau a “school yard bully” and accuses it of being “engaged in a shakedown” of colleges and universities for “being in cahoots” with banks and other financial services providers, my guess is that he’s less concerned about “students’ access to mainstream banking products” than he is about what the industry stands to lose if the regulatory and consumer-advocacy groups have their way.

The conflict has to do with the Obama administration’s plan to extend the U.S. Department of Education’s authority to regulate the use of a little piece of plastic known as a campus card.

The administration is doing that with good reason.

Campus cards are an affinity product, similar to Visa cards embossed with an airline’s logo or prepaid debit cards emblazoned with a famous athlete’s portrait. These campus cards, however, represent quite a bit more than a modest line of credit or the contents of a student’s bank account: It’s also used to conduit potentially significant sums of federal financial aid.

The issue isn’t so much the float that favors financial services institutions for as long as the money remains on deposit (undoubtedly in non-interest-bearing accounts). Nor does it really have to do with the bounty that the schools are paid for access to its captive audience of consumers. Rather, the scuffle has to do with the myriad fees the millions of students who use these cards every day might end up paying. We’re talking about swipe (per use), overdraft, inactivity and foreign-ATM fees, to name a few — a veritable jackpot of cash for institutions lucky enough to win an exclusive agreement with the college or university.

What I find especially interesting, however, is how the FSR has latched on to the CFPB’s call for greater transparency as yet another example of regulatory overreach. In fact, the assertion is as offensive as it is absurd, particularly when it frames it around a conjured image of a “…college freshman…reading stacks of contracts and legalese.”

What Students Stand to Gain

Transparency isn’t about chapter and verse, although access to that does indeed have value. It’s about disclosure: one of the many ethical practices that higher education institutions are supposed to be teaching our children. But disclosure aside, the meatier matters in this food fight really have to do with blended products and limited choice.

On the surface, campus cards make sense as a means for enhancing a school’s brand. Financial aid, however, is ultimately derived from taxpayer-backed government financing; while credit, debit, checking and prepaid accounts flow from the consumer. Why, then, are these two disparately funded account relationships combined into one? Is it because of ease and convenience? Or, perhaps, it’s the fee income? Moreover, if the students are responsible for every penny they borrow, is it right for them to also pay for the dollars that are subtracted from the very accounts into which the loan proceeds are deposited just because they exist?

It seems to me that a better course of action would be to separate the accounts that convey federal aid from those that facilitate the student’s day-to-day economic life. The government, financial services provider and school can decide how to share the economic benefits that accrue on the federally funded account, and the banks and schools can decide how to trade access for compensation with regard to the private accounts.

That brings me to my final point: consumer choice.

It’s less a matter of how much the schools stand to earn — a disclosure the schools should suck it up and make — than it is that the students are unable to reasonably compare products, services and costs when all they’re given is access to a sole provider. So what if their school earns a bounty when the products and services are competitively priced?

This closed system should be opened, if only because the schools shouldn’t try to teach students how to make informed decisions without empowering them to put that important knowledge to practical use.