NEW YORK (Dow Jones) -- The use of social media by credit-card
companies has some consumer advocates looking for a "dislike"
button.
Credit-card lenders are mining "likes" on Facebook and scouring
tweets on Twitter as they look for new ways to entice existing
customers to use their cards more frequently and raise their appeal
among younger consumers.
But experts worry these platforms may give lenders another door
around rules that took effect two years ago aimed at protecting
young consumers. The rules, part of the Credit Card Accountability,
Responsibility and Disclosure Act, were meant to curb aggressive
tactics by lenders to sign young customers up for credit cards. The
provisions limited certain marketing tactics on college campuses
and required issuers to consider an applicant's ability to pay.
"The Credit CARD Act took the first steps toward protecting
young people from unfair marketing by credit-card companies that
often led them into excessive, overpriced credit-card debt," said
Ed Mierzwinski, consumer program director at the U.S. Public
Interest Research Group. "We need more study of other marketing
channels to see whether or not ... social media in particular is
being used by the credit-card companies to get around the limits of
the Credit CARD Act."
American Express Co. (AXP) has been among the most aggressive
credit-card lenders in tapping social media to promote its cards.
The New York-based company has rolled out deals with Facebook,
Twitter and social check-in service Foursquare that allow
cardholders to earn discounts at merchants by syncing their cards
with their social media accounts.
For example, participating cardholders can receive deals to
specific retailers based on brands and activities they have liked
on Facebook. On Twitter, they can have deals automatically loaded
to their card accounts by tweeting messages with special
"hashtags," or identifiers used to categorize tweets.
J.P. Morgan Chase & Co. (JPM), Discover Financial Services
(DFS), Capital One Financial Corp. (COF) and other lenders have
also tested Facebook tie-ins or online games.
American Express does not target the marketing of its credit and
charge cards "via social media specifically to undergraduate
students," a spokeswoman said. "As a rule of thumb, we don't target
our marketing of charge/credit products to undergrads or anyone
under the age of 21."
None of the activities represent a violation of the CARD Act,
experts say. However, they point to such services as another
potential deficiency in the rules, which critics argue did little
in general to address risks posed to young consumers.
"The basic issue is that the regulation ... is really geared
toward marketing on campus or direct mail," said Eboni Nelson, an
associate professor of law at the University of South Carolina who
has studied the issue. "There leaves a wide gap ... for credit-card
companies and marketers to solicit new consumers ... via email, via
social media like Facebook and Twitter."
Credit-card companies have long marketed to college students and
recent graduates in hopes of grabbing customers early. Many lenders
have lucrative contracts with colleges that give them access to
mailing lists and permission to set up booths at on-campus
locations and school-sponsored events. Those contracts must now be
disclosed annually to the Federal Reserve as part of the CARD
Act.
"The kid who signs up today is the credit-card user of
tomorrow," said John Ulzheimer, president of consumer education for
SmartCredit.com, a website that markets credit-scoring tools. "Many
banks are racing to be the first card in a college student's
wallet."
Banks have dialed down their involvement in so-called college
affinity deals since the CARD Act took effect. While the number of
banks that disclosed contracts to the Fed rose to 21 in 2010 from
18 in 2009, the number of contracts fell to 1,004 from 1,045,
according to a report released last year by the Fed.
In addition, the amount of payments banks made to their college
partners fell to $73.3 million in 2010 from $84.5 million in 2009.
Banks also opened 46,360 new credit-card accounts as a result of
the contracts, down from 55,747 in 2009.
Among the banks with the largest number of deals were Bank of
America Corp. (BAC), J.P. Morgan Chase and U.S. Bancorp (USB).
Bank of America says the target market for its college affinity
cards are non-students, including alumni and team fans. A
spokeswoman said the Charlotte, N.C.-based bank has been amending
agreements with colleges over the last several years to exclude
student names from marketing lists.
J.P. Morgan Chase has not used student mailing lists obtained
from colleges since 2006, a spokesman said. It ended
"student-focused campus marketing" for credit cards in 2007 and
alumni-focused marketing at athletic events in 2008, the spokesman
said.
The CARD Act states issuers can't offer "tangible" gifts like
T-shirts and pizza on or near college campuses in exchange for
students filling out an application. However, they can offer such
gifts as long as they are not given out on the condition that a
recipient fills out an application.
The rules also require that consumers under 21 have sufficient
income to repay their loans or have a co-signer in order to be
approved for a card. But lenders have leeway in how they define
income, which can include savings accounts, student loans and other
money not derived from employment.
Some lenders, including Discover and Bank of America, say they
do not include student loans in their evaluations.
Ulzheimer said he supports efforts to promote responsible
borrowing but questions whether rules aimed at restricting access
to credit for younger consumers are necessary.
"The vast majority of consumers are going to eventually use
credit cards," Ulzheimer said. "It seems to me the best way to
teach people how to use credit is to actually allow them to have
access to credit cards in a controlled environment. I would like to
suggest that it happens at home before someone escapes to college
when they don't have that supervision."
The Consumer Financial Protection Bureau, which is responsible
for monitoring practices in the credit-card industry, could include
social media in its review of lenders, experts said.
"We have been very careful to advise our clients to the reach of
the CFPB," said Kevin Petrasic, a partner with the Paul Hastings
LLP law firm who previously worked for the former Office of Thrift
Supervision. He said he expects that if the CFPB sees strategies
"they view as an end run on" rules around marketing to college
students, "they would get involved."
A CFPB spokeswoman declined to comment specifically on whether
it will review the use of social media by credit-card lenders.
"We do have responsibilities under the CARD Act and we are
staying informed about the marketplace to ensure that all
consumers, including students, have the information they need to
make informed decisions about financial products and services," the
spokeswoman said.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214;
andrew.r.johnson@dowjones.com
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