With a new cohort of students about to start their tertiary studies, banks and finance providers who target this market are ramping up their marketing programmes. This is an annual event and the offers to students vary from the pragmatic - deals on a package of financial products (credit cards, overdrafts, etc) to pure sales promotions that try and win business by giving away things like iPods.
On the sensible side you have banks like Natwest who offer a sliding scale, interest-free overdraft starting at £1250. Royal Bank of Scotland offers a similar deal, although it starts at £2500 each year. Some also offer reasonable interest rates if you need to borrow extra, for example Halifax and HSBC (who are also giving away an MP3 Player and some free music). At the marketing end Lloyds TSB gives away iPods, but charge up to £90 per month, and eye-watering interest rates of 29.8% for customers who go over their credit limit. Even the Cooperative Bank, who claim their student accounts are ‘ethically sound’, seem to have few qualms about slugging students who can’t manage their finances with a scandalous interest rate of 32.9%!
Between fees and living expenses, few students will ever graduate without a sizeable debt. However, how attractive is this market and are banks simply making these offers in the hope of building a longer-term relationship?
Student finance, like many other finance sectors, is a highly competitive market, with significant customer turnover. Is the banks’ long game a smart bet? The largest player in this sector is likely to remain the Student Loans Company. With a loan book that already stands at £15bn, top-up-fees will see this skyrocket over the next few years. High street banks can’t compete for this business, but figure if they hang onto students after graduation they are in with a shout when they want to get into the housing and investment market.
It’s a reasonable gamble, except that they will have no idea whether students are actually paying the SLC back because it can’t pass the information onto credit reference agencies. So while banks are happy to invest in building loyalty amongst students while they are studying, the lucrative post-study market they are focusing on may be a chimera.
If the banks’ customer relationship models are built on shaky foundations, what about students? There is a huge amount of evidence to show that most students know very little about finance. Despite the protestations of Ministers that this is an important issue and despite the best efforts of organisations like the Personal Finance Education Group (PFEG) this is unlikely to change anytime soon. Therefore, banks offering poor deals but good promotions are just as likely to win student business as those with much better offers.
Whether student banking actually turns into profitable long-term relationships for banks is far from clear, but despite this and the growing level of personal bankruptcies amongst graduate students, banks keep throwing money at them and students keep on taking it. This may be a wonderful example of the free market in action but we think both sides should think more carefully about the idea of caveat emptor.
· www.co-operativebank.co.uk
· www.hsbc.com
· www.lloydstsb.com
· www.natwest.com
· www.pfeg.org
· www.rbs.co.uk
· www.slc.co.uk
