NEW YORK (MainStreet) — Are college students an untapped market for credit cards?
They may be now, but when Federal rules on college-branded cards take effect in July 2015, card issuer revenue is expected to take a hit.
That could be why Discover Financial Services is striking while the iron is still hot.
In an attempt to become a bigger brand on campus, Discover announced in May that its private-student-loan borrowers with a 3.0 GPA will get cash back equivalent to 1% of their loan amounts.
The company also unveiled a new version of the Discover Card, its flagship offering that specifically targets college students. The card offers 2% cash back on purchases at gas stations and restaurants.
Wells Fargo, PNC Bank, SunTrust and U.S. Bank are among Discover's card-issuing bank competitors in private student loans, along with non-bank issuer Higher One, which has faced Federal lawsuits alleging predatory marketing and lending practices.
"We've always had a certain portion of our card base that was students," Discover chief executive officer David Nelms said in an interview with American Banker earlier this month. "It's a relatively small part, but it's important, because these are first-time customers. They're going to grow into more substantial relationships over time. And so we've launched a product that is a little more targeted toward them."
But the 2010 Credit Card Accountability Responsibility and Disclosure Act — the CARD Act — will put restrictions a year from now on the ability of credit card issuers to market to anyone under age 21.
A report last year by the Consumer Financial Protection Bureau found that between 2009 and 2012, college- and university-sponsored credit cards decreased by 40%. That may not bode well for any of the campus card vendors, including Discover.
But Discover is also looking to expand its base of checking account deposits after launching a checking account early last year, which could enable them to sign up customers from the age group excluded by the CARD Act, then sell them credit cards once they reach 21.
"We do have some plans to do some more integrated marketing," Nelms told American Banker. "When students go off to college, they need to establish a checking account, they need a card of some sort, either debit or credit or both, and a lot of them need a student loan."
Discover does not have to manage a standard legacy infrastructure—bank branches, in this case—since they don't have a network of brick-and-mortar branches. Discover's not-you-father's-bank image could provide a draw for young customers in an increasingly bank-by-phone world.
"These are people that don't have established banking relationships," Nelms said. "They're used to doing everything in mobile."
--Written by John Sandman for MainStreet