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Banks Pitch Prepaid Cards On College Campuses

04/18/2012 | 04:30pm US/Eastern
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--U.S. Bancorp offering prepaid card that doubles as campus ID card to North Carolina State University students

--American Express, SunTrust and other banks are offering similar cards

--Prepaid cards are exempt from some regulatory requirements

(Updates with details about Green Dot in paragraph 6 and market projections in paragraph 16)

 
   By Andrew R. Johnson 
   Of  
 

More banks are hawking prepaid cards as they try to win over the college crowd, a once lucrative market that analysts say is less profitable because of regulatory restrictions on credit and debit cards.

Several lenders have begun offering prepaid cards that double as a student's campus ID card. Students can use the cards to gain building access, check out library books and pay for printing or even beer. Because the plastic carries the logos of card networks like MasterCard Inc. (>> Mastercard Inc) and American Express Co. (>> American Express Company), students can use them to make purchases at off-campus merchants and online retailers that accept those brands.

U.S. Bancorp (>> U.S. Bancorp) said Wednesday it is partnering with North Carolina State University to offer students the "Wolfpack One Card," a MasterCard-branded prepaid card that is also a campus ID card. Students and their parents can load funds to the cards from existing bank accounts and use the card like a regular debit card.

North Carolina State, which has 34,000 students and 7,700 faculty and staff, will begin offering the cards to all incoming freshman this summer, and current students, faculty and staff can upgrade their existing ID cards to the new cards for a $10 fee charged by the school.

"We see the students as really the future customers of U.S. Bank," said Whitney Bright, vice president and market leader for campus banking for U.S. Bancorp (>> U.S. Bancorp). "They are the ones that we hope will bank with us while they are in college and look to us as they graduate."

Until recently, prepaid cards have been marketed mainly to low-income consumers by nonbank companies or alternative financial-services firms such as NetSpend Holdings Inc. (>> NetSpend Holdings Inc), Western Union Co. (WU) and Green Dot Corp. (>> Green Dot Corporation), which recently bought a bank. The cards function like a traditional debit card but lack a checking account. They also aren't subject to the same regulatory requirements that apply to debit cards, though many providers, including U.S. Bancorp, say they voluntarily apply those same rules to their prepaid cards.

Mainstream lenders including American Express, BB&T Corp. (>> BB&T Corporation) and U.S. Bancorp have begun offering them as new regulations reduce checking-account and debit-card revenue. Certain types of prepaid cards are exempt from the Durbin amendment, a provision in 2010's Dodd-Frank Act that limits how much big banks can charge merchants to accept debit cards.

Last year, 13% of U.S. consumers used a prepaid card, up from 11% in 2010, according to a recent study from Javelin Strategy and Research, which noted the cards were "one of the few major financial products that have grown in usage in the past year."

Campus ID cards are not entirely new for U.S. Bancorp. The Minneapolis-based bank currently offers similar cards through more than 50 colleges, though they include a traditional debit card tied to a U.S. Bank checking account, Bright said.

This is the first time the bank has offered a prepaid account on a campus ID card, she said.

American Express, which traditionally issues charge and credit cards to affluent customers, began offering a campus ID card with a prepaid account to students at the University of North Florida in November. The card, one of several prepaid cards the New York lender has rolled out, can be used at merchants that accept American Express.

SunTrust Banks Inc. (>> SunTrust Banks, Inc.) last year began partnering with MasterCard to offer the SunTrust Campus Card, also a prepaid card.

The prepaid push on campuses comes as new regulations have made it more difficult for banks to market credit cards to young consumers. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 included provisions limiting but not eliminating lender's ability to market credit cards on campuses and at school-sanctioned events. The regulation also included restrictions for lending to consumers under 21.

In addition, many banks have said the Durbin amendment will make it harder to profitably serve lower-income consumers.

"There are banks and card companies who have taken a look at that said, 'Well, we can't do credit cards on campus anymore, but we'd still like to develop a relationship with students,' so they offer prepaid cards as a way to do that," said Ben Jackson, a senior analyst in the prepaid advisory service at Mercator Advisory Group.

Mercator estimates that $2 billion will be loaded on to "open-loop" campus prepaid cards, which typically carry the logo of a card network like MasterCard or American Express, in 2012, up from $761 million in 2007. That projection could change, though, with the entrance of large banks like U.S. Bancorp, Jackson said.

Bright said U.S. Bancorp is not offering the campus prepaid card as a way around those rules. Rather, it is responding to what students want.

"They have an aversion to overdraft [fees], so having a prepaid card gives them a card that they can fund and it can not be overdrawn, so they don't get hit with overdraft fees," Bright said.

Mike Smith, director of Wolfpack One Card Services at North Carolina State, said by email that the new card will allow students to receive financial-aid disbursements electronically rather than a paper check.

Some prepaid cards have sparked controversy for having what consumer groups say are excessive fees. The Consumer Financial Protection Bureau has indicated prepaid cards are among the financial products it will look at for possible abuses.

The Wolfpack One Card lacks most of the fees that other prepaid cards carry. It does not have fees for enrollment, monthly maintenance, point-of-sale purchases or ATM withdrawals made at U.S. Bank or MoneyPass-branded ATMs.

Withdrawals at other ATMs cost $2, and there are also fees for receiving monthly paper statements, declined ATM transactions and inactivity if an account is dormant for six months. It also costs $15 to close an account and receive remaining funds via paper check, and $20 to receive a replacement card.

-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; andrew.r.johnson@dowjones.com

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