Discover Targets College Students in Search for New Customers

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As credit-card companies tire of scratching and clawing for the same customers, Discover Financial Services is eyeing a fresh target: the nation's college students.

Discover has recently made several moves designed to burnish its brand on campus. In May the company announced that its private-student-loan borrowers who earn a 3.0 grade point average can get cash back equal to 1% of their loan amounts.

The $75 billion-asset company also rolled out a new version of its flagship credit card that's specifically aimed at college students. The card offers 2% cash back on purchases at gas stations and restaurants, spending categories that appeal to many undergraduates.

"We've always had a certain portion of our card base that was students. It's a relatively small part, but it's important, because these are first-time customers," Discover Chief Executive David Nelms said in an interview. "They're going to grow into more substantial relationships over time. And so we've launched now a product that is a little more targeted toward them."

In 2010 the Credit Card Accountability Responsibility and Disclosure Act placed restrictions on the ability of credit card issuers to market to people under age 21. Between 2009 and 2012, the number of credit card accounts that were sponsored by colleges and universities dropped by 40%, according to a report in December from the Consumer Financial Protection Bureau.

But the market for consumer financial services on campus is likely to be shaken up again by new federal rules on college-affiliated debit cards. The rules, which may go into effect as early as July 2015, are expected to cut sharply into the revenue that companies such as Higher One, Wells Fargo, PNC Financial Services Group and U.S. Bancorp derive from campus debit cards.

Riverwoods, Ill.-based Discover is not expected to be directly impacted by the new rules from the U.S. Department of Education.

Michael Tarkan, an analyst at Compass Point Research & Trading, said it's unclear how the financial industry will adapt to the Education Department's rules, which have yet to be finalized. But he added:  "The bottom line is, the industry is going to change significantly."

Discover, which reported quarterly earnings of $644 million on July 22, is among the credit card industry's leaders in loan growth.

The company's portfolio of card loans grew by 6% in the second quarter, which Nelms attributed to numerous factors, including relatively low attrition rates, existing customers who are putting more of their spending on a Discover card and the addition of new account holders.

Discover is also looking to build its base of checking account deposits, after launching a checking account early last year. College students seem likely to be part of that strategy, too.

Nelms said that Discover has yet to take advantage of the opportunity to cross-sell credit cards and checking accounts to its student loan borrowers, but it plans to do more in that regard.

"We do have some plans to do some more integrated marketing. When students go off to college, they need to establish a checking account, they need a card of some sort, either debit or credit or both, and a lot of them need a student loan," Nelms said.

He argued that college students are a particularly good audience for Discover, which doesn't have a branch network. "These are people that don't have established banking relationships. They're used to doing everything in mobile," Nelms said.

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