US-based education loan management company Sallie Mae
has ramped up its retail banking operations. The holder of a
banking charter since 2005, Sallie Mae has started a mobile banking
service to complement its no-fee student current account,
certificates of deposit and savings products. Charles Davis
reports.
Go deeper with GlobalData
The most powerful and controversial titan in the burgeoning US
student loan business is pivoting toward retail banking, as it
seeks new revenue streams tapping its substantial customer base of
current and former pupils.
Sallie Mae has in recent months
launched a no-fee student current account to accompany its online
savings product and certificates of deposit as part of a suite of
products tailored to schools that elect to offer it to their
students. The package also includes traditional loans, but also
offers electronic tuition refund disbursements, tuition payment
plans and electronic billing and payment processing services.
This places Sallie Mae in an
interesting competitive position, as it also works with a large
number of US banks and credit unions to market loans for students.
Its Smart Option Student Loan programme works on a referral basis
with more than 100 credit unions, with Sallie Mae providing the
funding, underwriting and servicing of the loans on behalf of the
institutions.
Sallie Mae’s branchless banking
concept, originating from a single bank charter in Utah, has raised
little commotion among bankers, but it is easy to see that a lender
with such a massive lending portfolio – it has 23m loan customers –
could cross-sell retail financial services products in ways that
could make it a significant competitor down the road.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThe current account product is only
available to students attending colleges and universities that
elect to offer it to their students, but there is always the
possibility that graduates will keep the accounts, posing a
potential competitor to banks.
For Sallie Mae, the drying up of
the securitisation market left it with little choice but to
diversify into retail banking to generate new revenue. Now, with a
rapidly growing consumer banking business, the question may very
well be why the company did not utilise its industrial bank charter
sooner.
Passage by Congress of the Health
Care and Education Reconciliation Act certainly forced Sallie Mae’s
hand, as the legislation took a huge chunk of the student loan
market away by mandating that any loans subsidised by the federal
government be made directly by the government. This means lenders
like Sallie Mae can only market private loans, a much smaller slice
of the overall student loan market.
Sallie Mae spokeswoman Debby Hohler
said the changes in the student lending market spurred the company
to action, but noted it had been moving in that direction for some
time.
“Our relationship with Upromise
makes us the leading provider of 529 college savings plans for
kids, and we have been in that market for years now, so this was a
direction we were always moving towards,” Hohler said, referring to
the rewards programme it acquired in 2006.
Then a start-up, Upromise today is
a popular service that allows enrollees to receive rewards in the
form of micro-deposits into a 529 college savings fund. Upromise
has generated $23 billion in 529 deposits, and has gained a high
profile in the rewards business.
Members have earned $525m through
its free rewards programme. The lender has linked Upromise to its
savings and CD products, and the potential to link rewards to the
current product is obvious.
The new Sallie Mae current account
is quite an attractive product, allowing customers to use ATMs
nationwide with no surcharges on a MasterCard debit card issued
with the account, as well as a full online banking service.
Student current account customers
also can track their tuition refunds, pay bills online and link
their account to any other account at another bank to transfer
funds. There are no fees or minimum balances.
With college costs skyrocketing,
private loans are likely to grow in importance as students find
themselves having to fill gaps in their finances when government
loans aren’t big enough to pay the entire bill.
Mike Weber, vice-president for
marketing at Credit Union Student Choice, a service organisation
that provides private student lending products to about 180 credit
unions, said private student lending offers powerful relationships
for financial institutions.
“It is the sweet spot, really, when
you think about it,” Weber said. “The educational funding gap
between what government loans can handle and the personal finances
of the consumer.
“People have less equity in their
homes these days, lower incomes, and the result is that the gap
becomes a real issue. It was around an $8.5 billion market in 2010,
and it’s likely to grow.”
Changes in the regulatory landscape
mean that private student lenders now have to keep these loans on
their balance sheets, Weber said.
“Many institutions see this as a
non-core business and yet they have people coming in to the branch
and seeking information on student loans, and they feel it’s their
duty as a full-service provider to have an answer,” Weber
added.
“For others, it’s a way to grow
loans and deepen relationships with young customers, so they are
happy to provide student loans, but for many, it’s a referral
business case.”
Weber said it is too soon to tell
whether Sallie Mae will become a retail bank to be reckoned with,
but said that it has little choice but to move in that
direction.
“Obviously, Sallie Mae has had to
adjust their business model, pretty dramatically, as the regulatory
landscape has shifted.
“To survive and thrive, they had to
move in this direction. They are providing products and services
that compete with credit unions and banks, so sure, it’s
competition at the end of the day.”
With products ranging from
high-yield savings to CDs to a no-fee current account, it is clear
that Sallie Mae now is a diversified financial services company and
not just a student loan provider anymore.
And at the start of September,
Sallie Mae rolled out a mobile banking service via iPhone app and
mobile internet.
“Two or three years from now,
Sallie Mae could really be a force to be reckoned with on the
banking side,” Weber said.
“They are very good at what they do, and they have this powerful
co-borrower, student-parent partnership to sell to.”
