As large US banks pull out of the student lending market,
SmarterBank, non-bank financial services subsidiary of
SimpleTuition, is pitching itself as a way for students to save on
college expenses. CEO of SimpleTuition, Kevin Walker, tells
Charles Davis how SmarterBank is a solution that
combines debt management, rewards and financial services products
for an otherwise one dimensional student financing business
Go deeper with GlobalData
As a couple of the largest names in the US
student lending market exit the business, an online startup aims to
fill the void with a current account product that pays rewards that
go toward reducing their debt when they use their debit cards and
helps them manage their educational debt.
SmarterBank, a non-bank financial services
subsidiary of SimpleTuition, a student loan service company,
pitches itself as a way for students and their families to save on
the expense of college.
It has no bank charter, but offers financial
services products through a relationship with Bancorp Bank, a
provider of bank products to online sites.
College graduates, current students or their
parents can apply online for a SmarterBank checking account, and
link it to a designated student loan. When account holders use
their debit cards to make a purchase, they accrue cash rewards
called SmarterBucks.
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By GlobalDataThe rewards are modest by industry standards –
.05% for amounts up to $100, and one percent for amounts over that
– but they go straight to the loan payment, so there is a powerful
multiplier effect.
Each month, SmarterBank sweeps accrued rewards
– as long as they total at least $15 – into an extra payment to the
designated student loan servicer, with instructions to apply the
funds to the loan principal.
Kevin Walker, CEO of SimpleTuition, says that
SmarterBank is a natural evolution from its core business model of
working with families to pick the right form of student financing
and helping them manage the debt accrued while sending kids to
college.
“Student loans are such a huge issue, and
we’ve been in the business of helping people pick loans that fit
their needs at SimpleTuition, so we began thinking about a way to
tie financial services offerings to debt management around student
loans,” he said.
“One sort of led to the other, and then we
immediately saw the potential for a rewards programme based on
paying down the loans.
“That was the obvious attraction here, because
as students leave college, many of them are confronting the issue
of student loan debt just as they begin forming relationships with
their financial services providers. The timing was perfect.”
Walker said that students end up borrowing
from multiple sources – “there is confusion even as to the amount
of debt they have and where it is” – so SimpleTuition has grown its
customer base by organising and helping students with consolidating
student loan debt.
Once the family has its student loan situation
in hand, Walker said, it can more easily structure payments to more
quickly erase the debt.
“That is what has become the driving force of
the rewards programme, the understanding that when it comes to
student loans, a little extra payment each month can make a huge
difference.
“If a borrower can find an extra $15 a month,
for the average undergraduate borrower, it saves them 4 years of
loan payments and about $6,000 in interest,” says Walker.
So, among other options, SmarterBank customers
can allow relatives to make monthly micropayments for any amount to
their student loan balance.
“Their grandmother might prefer helping them
pay down their student loan instead of buying them a birthday gift
the year after they graduate,” says Walker.
“So she puts $10 a month for a year on the
SmarterBank loan payment engine, and helps reduce the interest
expense of the loan. This allows more people to chip away at a loan
than ever before.”
Walker said that plans are underway for bonus
rewards of up to 5% to be offered by certain merchants for spending
on an affiliated online mall through a partnership with RewardsNow,
where purchases made with any registered credit or debit card can
earn rewards – not just the debit card associated with
the SmarterBank
bank account.
“This really broadens the marketplace for us
quite a bit, because RewardsNow has just about every major brand
online in its mall. We tough about 20% of the country’s college
students at the moment, and with the new partnerships emerging
through SmarterBank, we hope to increase that percentage very
quickly,” says Walker.
SmarterBank is intended to be a low-fee
account. There is no monthly maintenance fee, and there is no
charge for online bill payments or other basic functions, including
ATM transactions at a national network of machines, as long as the
account is active.
A $4.95 inactivity fee applies, if the account
holder does not conduct some sort of business each month.
There is no official limit on the amount of
rewards that can be accrued, either on a yearly or lifetime basis.
There is a daily cap on debit card spending, though, of $1,500,
which serves as an anti-fraud measure.
Walker said that now, more than ever, student
loans are a source of pain for US households. The federal
government has reasserted control over large swaths of the market,
replacing the old model in which the majority of student loans were
originated by private lenders but guaranteed by the government.
In recent weeks, two of the industry’s largest
players, JP Morgan Chase and US Bank, exited the business.
“Private student loans have changed a lot over
the past few years, and not necessarily for the worst from the
consumer side. From federal student loans that went through private
banks, to the feds guaranteeing and making the loans, which along
with the credit crisis, has a lot of lenders reassessing priorities
and consumers trying to figure it all out,” says Walker.
A $1trn market demands solutions that combine
debt management, rewards and financial services products, Walker
adds.
“It’s a natural extension of the business of
student financing, which up to now has been viewed as a standalone
line of business, but it’s becoming increasingly apparent that it
has to be viewed as part of a household’s overall financial
relationship.”
