In Depth July 17, 2008, 5:00PM EST

The College Credit-Card Hustle

(page 4 of 4)

CHANGE OF HEART

Schools or alumni groups inclined to curtail their relationships with credit-card issuers may pay a price. That's what happened at Washington State University last year. The alumni group had a contract with MBNA from 1997 to 2007 under which it provided the card company with student contact data. The bank was allowed to conduct at least four direct mailings a year, three telemarketing campaigns, and five on-campus marketing events. On top of payments for alumni accounts, the contract promised the group $3 a year for each student account and 0.4% of all sales charged to student cards. The association stood to earn annual bonuses of $50,000 to $100,000, depending on the number of new accounts opened and the average outstanding balance held on the high-interest cards: The more debt, the more the alumni group stood to gain.

All told, the contract guaranteed the Washington State Alumni Assn. $5 million over 10 years, or $500,000 per year. That's no small amount for a nonprofit whose 2006 revenues totaled $2.4 million.

In 2006, however, state legislators in Washington began grumbling about credit-card marketing to college students. "We realized that this thing was littered with potential issues," says Jud Preece, the alumni association's marketing director. "We were being compensated for student accounts. It could be damaging to the university as a whole."

When it came time to discuss renewing the deal, the group told MBNA's owner, BofA, to remove students from the contract and stopped providing any information on undergrads. Credit-card marketing on campus ended, and the alumni association stopped receiving compensation for student accounts. A new five-year contract assures Washington State alumni only $1.6 million, or $320,000 per year--a 36% cut.

As with all specific contracts, BofA declined to discuss its relationship with Washington State. But two former bank executives say that the contracts become much less valuable without undergraduates. "Banks want the students," says Kerry Policy, who worked on college deals as an assistant vice-president at MBNA from 1998 to 2005. "People usually hold on to their first credit card for a long time."

Silver-Greenberg is a reporter for BusinessWeek.com. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau .

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