When The University of Minnesota's 52,000 students arrived in early September, they received new "U Cards," a multi-purpose ID that doubles as a library and security card. But the new IDs also have debit and ATM features for students who open a checking account with TCF Financial Corp. (TCB). It was all part of a deal the school struck in exchange for the bank footing the bill and other hefty payments.
What's this relationship worth to TCF? The $15 billion regional bank doesn't disclose many financial details. But already some 80% of students at Minnesota and its sister campus in Duluth have signed up, pumping $50 million into TCF accounts. And it's lucrative enough for TCF to pony up roughly $40 million to the school to extend the deal through 2030. TCF has inked similar arrangements with nine other schools, including the University of Michigan. Those contracts give the bank exclusive entrée to the next generation of potential customers, as well as a nice profit stream today, thanks to ATM surcharges and overdraft fees that run up to $33 a pop. "[Campus services] are a huge marketing arm for us that, quite frankly, makes money," TCF President Neil Brown told institutional investors last year.
In an industry known for its controversial move to push plastic on campuses, it turns out that credit cards were only the start. TCF and other financial-services giants like US Bancorp (USB), Bank of America (BAC), and Wells Fargo (WFC) are finding new ways to profit in the student market. What's more, it's an increasingly symbiotic relationship that benefits colleges as well. Banks and university administrators have become quiet partners in an array of financial arrangements that generate millions for both parties, from ID debit cards to co-branded credit cards.
But critics contend these types of deals are fraught with potential conflicts. It's a sentiment underscored by the recent scandals in which financial aid officers were caught accepting junkets, free meals, and shares of company stock for steering students to certain lenders. "Schools have become too vested in the finances of their students," says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers. "It's unfortunate that there are colleges that have begun to view every point of contact with students as a potential profit center."
Officials at state-supported universities, at least, defend these moves, arguing that at a time of reduced funding from local legislators, the revenue boost and cost savings enable them to preserve academic programs and generate much needed funds for financial aid. For example, the cost of providing student IDs can run as high as $200,000 a year at large public universities. When banks cough up the cash, it spares colleges from making cuts elsewhere. "It's a mutually beneficial relationship," says University of Minnesota spokesman Daniel Wolter of its deal with TCF.
Administrators also point out that financial firms provide services that universities can't handle efficiently. One such area: student payments and reimbursements, which can cost as much as $11 for each old-fashioned paper check that a school issues. That need has created a nice niche for financial firms like Higher One Inc. Founded seven years ago by three Yale University undergrads, the company electronically disburses financial aid and other payments from schools to students, charging schools as little as 10¢ per transaction. It now serves 84 universities.
But it's not Higher One's only function. Like TCF, Higher One has deals with schools to put ATM and debit features on ID cards. The firm sweetens the pot by sharing the profits. In a contract proposal accepted by some schools and reviewed by BusinessWeek, Higher One offered in early 2006 to pay the 36 schools within the University System of Georgia 0.08% of all off-campus purchases made by students using Higher One's debit card. The firm also proposed to give schools 10% of the interest income it earned from investing the funds deposited by students into Higher One's accounts. Some 17 schools now have an agreement with Higher One.
The company says it works hard to provide students with quality service. And it notes that on average more than 50% of students sign up for a debit card at the schools it serves. "If we had a really bad product, we wouldn't have that kind of acceptance," says Sean Glass, co-founder of Higher One.
But some students claim that it was easy to enroll inadvertently in Higher One's program. Ryan Klute, a 24-year-old graduate student at Oregon's Portland State University, recalls that when he went to activate his student ID online, which was necessary to check out library books, he had to wade through "eight or nine different pages," each containing an "itty-bitty box that you had to 'uncheck' again and again to decline the debit service. That was pretty deceptive," says Klute. Glass say Higher One subsequently revamped its activation process in late 2005.
For many students, however, the convenience offered by these banks makes it hard to say no. Minnesota junior Julia Krieger says that TCF's combination ID-debit card is safer than carrying cash, and it's easy to check balances at the 12 TCF branches across campus.
But the high fees these banks often charge is a sore spot, especially given the propensity of students to bounce checks or make other financial faux pas. Emma Carew, also a junior at Minnesota, racked up $99 in fees after making three purchases that exceeded the funds in her TCF student account. "It's not like I bought a car," says Carew. "It was $6.99 at iTunes."
Citing high fees, some prominent schools have rebuffed overtures from financial outfits. Ohio State University decided to develop its own ID with debit features, after getting wooed by banks. The in-house card, which is accepted at 200 merchants off campus, simply declines a purchase if students don't have enough money in their account. "We're dealing with students who may have had no prior banking experience," says David Anthony, director of Ohio State's student ID program. "To see them hit with fees of $30 to $35 is not something we want to do."