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Banks Getting Around Campus Credit Card Restrictions With Prepaid Plastic

by Student Loan Daddy

Prepaid debit cards have traditionally been marketed by nonbank companies mainly to low-income consumers who can’t get a checking account or won’t get one because of high bank fees. But now they’re being marketed by mainstream banks to college students, in partnerships with schools, in what some consumer advocates are saying is a way to skirt a recent law that restricts banks’ marketing of credit cards on campus.

At North Carolina State University, for example, U.S. Bankcorp is partnering with the school to offer students the “Wolfpack One Card,” a MasterCard-branded prepaid card that doubles as a campus ID. Students and their parents can load funds onto the cards from other bank accounts and the card functions like a regular debit card.

The Wolfpack One Card will be offered to all incoming freshmen this summer. The university’s 34,000 current students and 7,700 faculty and staff will be allowed to upgrade their existing ID cards to the Wolfpack One Card for a $10 fee charged by the school.

NC State’s card doesn’t charge all of the typical fees associated with prepaid cards — for example, there are no fees for enrollment, monthly maintenance, point-of-sale purchases, or ATM withdrawals at approved locations — but it does come with a series of standard fees, including fees for withdrawals at non-approved ATMs, paper statement fees, and declined ATM transaction fees.

And there are also several dubious fees, such as an inactivity fee if the card isn’t used for six months, a $15 fee to close an account and receive remaining funds via paper check, and a $20 fee to receive a replacement card (“Banks Pitch Prepaid Cards on Campus,” The Wall Street Journal, April 18, 2012).

Banks Using Prepaid Cards to Make Up for Lost Credit Card Revenue on Campus

American Express and BB&T are joining U.S. Bancorp in a banking industry push for prepaid plastic on campus. Prepaid cards, some of which have sparked controversy among consumer groups for excessive fees, may be just the thing banks have been looking for to make up for revenue lost as a result of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, according to some consumer advocates.

The CARD Act limited a lender’s ability to market credit cards on campuses and at school-sanctioned events, and provided restrictions for lending to students under 21 years of age. The limitations were a blow to what was a lucrative market for the banks, paid for by students who racked up significant credit card debt (in addition to the debt they were taking on from student loans).

According to one study, credit card use on campus “snowballed” over the last decade, during a time of heavy credit card marketing on campus. In 2004, the average student credit card debt was $946. By 2009 it was $4,100. And in 2009, only 9.4 percent of students with credit card debt paid it in full each month, resulting in a steady stream of additional interest payments to credit card companies.

One of the reasons that banks may be turning to prepaid debt cards is that they are not subject to the same regulatory requirements that apply to regular debit cards (although U.S. Bancorp says it voluntarily applies those same rules to its prepaid cards). Prepaid cards can be marketed on campus, without restrictions, and the cards are not subject to the same regulations that limit the amount that issuing banks can change merchants to process debit card transactions.

Meanwhile, the Consumer Financial Protection Bureau has stated that prepaid cards are one of the financial products it will examine for possible abuses.

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

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