Banking partnerships and financial aid delivery under scrutiny
In February 2014, the General Accountability Office released a report on debit and prepaid card programs on college campuses, urging the U.S. Congress and Department of Education to take action.
Campus banking relationships have been under fire for two years since the Public Research Interest Group (PIRG) released a critical report claiming that the programs take advantage of students. The GAO report examines the fees that the programs charge students, ATM accessibility and the programs’ transparency–or lack thereof.
Industry experts were not surprised by the report’s recommendations, and most reaction has been largely positive citing the GAO report as a significant improvement over the highly judgmental, and many say flawed, PIRG report.
Still an issue, however, is the problem or confusion differentiating student banking and financial aid dispersal. While the accounts used are sometimes the same, frequently they are not. The majority of federal official’s concerns revolve around student access to federal financial aid dollars and have–or at least should have–little do with a student bank account, whether tied to the campus ID card or not.
The GAO has two recommendations for the Department of Education. First, it should specify what constitutes convenient access to ATMs or bank branch offices for students receiving federal student aid funds. Second, it should develop requirements for schools and card providers to present neutral information to students about their options for receiving federal student aid funds.
The Education Department agreed with GAO’s recommendations, claiming it will address these issues via its current Negotiated Rulemaking process.
In February, the Department selected a committee and initiated the process to consider regulations addressing campus banking and financial aid dispersal.
In a separate recommendation, the GAO suggests that Congress should require financial firms that provide debit and prepaid card services to colleges to file their agreements for public review.
Defining the issues
According to the report, at least 852 schools–or 11% of the U.S.’s 7600 colleges and universities–had agreements to provide debit or prepaid card services to their students as of July 2013, with most offering students the ability to receive federal student aid and other payments on a card. Though just 11% of all institutions, the list includes many of the largest in the U.S., with a combined 10 million students in attendance or 40% of the total student population.
Exactly how many students choose to enroll in these programs, however, remains unknown. The GAO found a range of adoption rates and was unable to put a number to the total participation.
“For example, the largest provider reported that overall, 43% of students receiving financial aid payments at its client schools opened debit accounts. However, the adoption rate varied considerably by school. For example, 20% of participating students at one school with which we spoke opted to open accounts, compared with 75% at another school,” the report states.
While there has been a sense that these cards have high fees, the GAO report found that most were not higher, or in some cases were actually lower, than those associated with a selection of basic or student checking accounts at national banks. Generally, college card accounts did not have monthly maintenance fees, while the basic checking accounts often did.
College card fees for out-of-network ATM use, wire transfers and overdrafts were generally comparable with those of banks’ basic and student checking accounts. However, fees charged by credit unions were typically the same or lower than college cards. In addition, the report notes that college card fees are likely lower than other alternatives, for example check-cashing services.
One area where college card fees can exceed those of traditional bank accounts is for purchases made using a PIN. Two college card providers–Higher One and Citibank, which together represent about 60% of the market–charge $0.50 for transactions that use PINs rather than signatures. None of the basic or student accounts reviewed charged a transaction fee for using the account’s debit card. Higher One and Citibank receive higher interchange fees when students use signature debit rather than PIN-debit, hence the $.50 charge. Higher One has 57% of the market and Citi 3%.
“Approximately one-third of all PIN transactions are for less than $15, according to the Federal Reserve, which can make a $0.50 fee a significant cost relative to the amount of the transaction,” the GAO report states. “While students can avoid the fee by authorizing their purchase using a signature rather than a PIN, the signature option involves using a keypad option labeled ‘credit,’ which may be confusing because the card is a debit card and not a credit card. In addition, some merchants make selecting the credit option more difficult, because debit transactions offer them more favorable interchange fees.”
The GAO looked at the availability of ATMs where students can make fee-free withdrawals.
Title IV, the regulation governing federal financial aid, requires that schools ensure “convenient access” to fee-free ATMs or bank branches for students receiving federal student aid payments. The Department of Education, however, has not specified what constitutes this level of access leaving vagaries that can be exploited.
Providers surveyed by the GAO don’t charge fees when cash is taken out of ATMs from their own network, but the availability of these locations varies from provider to provider and campus to campus.
Providers have charged fees up to $3.00 for withdrawals from out-of-network ATMs, with the majority charging $2.50. Additionally, the ATM operators may impose a surcharge of their own, which typically runs about $2.00.
The GAO reviewed nine schools and the ATM situation. One large school had 16 in-network ATMs on one campus, while a smaller school had only one. Five of the providers also had contracts with ATM networks other than their own to provide additional fee-free access to students. “However, at least one of these providers – Higher One – only provides students access to its broader fee-free ATM network if they open an account with a monthly maintenance fee, potentially reducing any savings realized through the improved ATM access,” states the report.
While fee schedules generally were not higher than those of basic or student checking accounts, little information is available on the frequency with which students incur ATM, PIN and other fees. Additionally, the total amount of college card fees paid by students is unknown.
The financial service providers the GAO spoke with were unwilling or unable to provide details or breakout their fee revenue. “Although the Department of Education encourages schools to disclose an annual breakdown of the average yearly costs incurred by their students for using their college cards, none of the schools with which we spoke tracked such costs. According to FDIC staff, some students have complained of paying aggregate fees ranging from hundreds of dollars to more than $1,000, but it is unknown whether such fee amounts are typical.”
There are also questions surrounding the royalties that providers may pay institutions for striking a banking relationship. The report states that revenue sharing is on the decline, but schools may receive a fixed sum or a fee depending on the number of card accounts or the number of card transactions students make. Schools can receive other financial benefits from college card providers, such as rent for ATMs on campus, general marketing assistance for the school ID card program or savings on the administrative costs of disbursing financial aid.
Three of the providers that the GAO spoke with did not have revenue-sharing agreements with any institutions. But in the review of nine schools, three had agreements with card providers that included revenue sharing based in part on transaction activity or the number of students who open card accounts.
One school received $13,000 in 2012, based on $10 for each student who activated the college debit card. Another school received $137,000 in payments from the card provider in 2012, based on a formula that included the total balance of student card accounts and the volume of card transactions. That fee was partially offset by the $30,000 the school paid the provider for services. A third school reported receiving an average of about $400,000 annually over the life of its contract, which is based in part on the number of students who opened card accounts.
Department of Education staff and card providers concur that revenue-sharing agreements for college cards have been declining. Reasons for the decline include the negative public attention the practice has received and the reduced need for providers to offer revenue sharing as an inducement.
Detailed information about the terms between college card providers and schools was not available. Some providers that the GAO spoke with noted that they consider the contracts with schools to be proprietary or confidential.
Another issue the GAO explored was how these campus card offers were presented to students.
The GAO’s review of marketing materials and other information offered to students found variations in the type of information provided. “At some schools, students were presented with an unbiased presentation of these options. For example, one school emphasized that ‘you have the ability to select the option that is best for you,’ followed by a factual description of payment options. Some schools also recommended direct deposit over their campus card.”
But the opposite was also evident, where the options were less than clear and the school pushed college cards over other options. Several instances of students having to take additional measures to have funds direct deposited in existing accounts were cited. “One school directly recommended its college card over the direct deposit alternative and gave guidance to students who already had selected direct deposit on how to switch to the card option,” says the report.
With new regulations on the horizon, the campus banking market will continue to face turmoil for at least the 2014 calendar year. Changes will almost certainly have to be made, but how it will impact schools and providers remains be seen. Perhaps the first and potentially best indication will emerge from the current Negotiated Rulemaking process.
Industry generally supportive of the GAO Report
It’s been a rough couple of years for the campus banking and financial aid dispersal markets. While the report from the Public Interest Research Group two-years ago was roundly dismissed, reaction to the General Accountability Office report has been positive.
“We largely support the GAO’s findings and appreciate the goal of bringing transparency and choice to financial aid recipients,” says Jeff Staples, vice president of market development at Blackboad Transact.
“Students deserve an option that delivers the credit balance most quickly, and with the lowest fee impact possible while still delivering the access that the student needs. Choice is incredibly important, but it can be very difficult for students to understand how typical consumer banking options may impact them. While ACH should be an option and is with BlackboardPay, ACH disbursements can result in the student paying dramatically higher fees to access their financial aid credit balances,” Staples says.
Heartland Campus Solutions ECSI praises the report and its research. “Our prepaid card fees are the lowest of any of the card providers, banks, credit unions and other financial institutions the GAO surveyed,” said a Heartland spokesperson. “Also, unlike other providers, Heartland’s CHOICE process lets students easily choose to have their refund placed on a prepaid card, transferred to a bank account or sent to them by check. And our contracts with our campus customers are completely transparent, with no fees paid to them that could impact their neutrality.”
Wells Fargo also values the GAO’s work on the report, according to a bank spokesperson. “We appreciate that the GAO reached out to learn more about our campus banking programs. The Wells Fargo Campus Card program is currently offered at 37 institutions across the country, providing students with the option of a convenient, ‘all in one’ campus ID card that is linked to a Wells Fargo checking account. Schools do not mandate the use of Wells Fargo accounts or services–students, faculty, and staff must opt-in to link their school ID cards to their Wells Fargo consumer deposit accounts.
“Wells Fargo also offers a separate student disbursement services program, which is currently used by two schools. This program relieves schools of tasks like processing and mailing checks. Students simply sign on to a secure bank-hosted web site to choose how they will receive funds from their schools: via direct deposit–to Wells Fargo or to any other domestic financial institution–or as a check. Check receipt is the default setting and accordingly, students who do not choose an option will automatically receive refunds via a check.”
Higher One in the cross hairs?
While many companies were mentioned in the General Accountability Office report on campus banking programs, Higher One gets special treatment.
The company does have 57% of the market but also seems to be specifically called out for what have been deemed questionable practices for financial aid dispersal around some of the fees charged. The report makes note of the August 2012 FDIC settlement for alleged unfair and deceptive practices related to how Higher One charged fees for its student debit card account program.
The settlement required Higher One to change its practices for charging fees and pay restitution of about $11 million to approximately 60,000 students. The FDIC also imposed civil penalties of $110,000 on Higher One. Neither Higher One nor The Bancorp Bank, Higher One’s banking partner, admitted to a violation of law in settling the charges.
In addition, Higher One announced in November 2013 that it reached an agreement in principle to settle a class action lawsuit for $15 million. The company and two of its business partners were named as defendants, with students alleging that Higher One misled students by marketing its debit card as universities’ preferred method for making financial aid and other payments, improperly steered them into depositing funds into Higher One accounts and charged excessive and inadequately disclosed ATM and PIN fees.
Higher One and the defendants denied that marketing of the account was deceptive and contended that fees were fully disclosed and agreed to by the plaintiffs.
The PIN-debit fee–charged by Higher One and also by Citibank–has been the most controversial when it comes to the financial aid dispersal accounts. Both institutions charge students $.50 when they make a transaction using a PIN instead of a signature, and the GAO report found that no other basic or student accounts charged such a fee.
The fee is charged because the PIN-enabled transactions result in lower returns for Higher One and Citibank. On all but small dollar value purchases, the merchant pays less for PIN than signature debit transactions.
Part of the problem, however, is that merchants know this too and some steer customers toward PIN debit. These merchants want to make it more difficult for signature-based transactions because they are charged a higher interchange rate versus PIN-debit.
The availability of ATMs was also a concern for the GAO when it came to Higher One. With the basic, free account students have access to one or more free ATMs on campus, but if they want access to a larger network they have to pay a monthly fee, which can reduce any savings they may obtain via access to a larger ATM network.
The company is on favorable ground when it comes to revenue sharing with its campus clients. Higher One discontinued revenue-sharing and incentives to new customers in November 2007 and has sought to terminate such provisions in existing agreements. As of March 2013, about 5% of Higher One’s card contracts with schools contained revenue-sharing provisions, which in 2012 paid an average of $12,000 per school, the company said.
“We actually think the GAO report presents the first research-based look at services provided to schools and students in a credible, fact-based way where the U.S. PIRG study and past media accounts absolutely missed the mark,” says a Higher One spokeswoman.