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What ethical Issues should the senior management team of our financial company address relative to the marketing of credit cards to college-aged consumers, and what processes should senior management use to address those issues? The increased use of credit cards among college-aged students has become a concern as credit card debt continues to grow.
While credit card usage has Its advantages, we are concerned that credit card solicitors unfairly exploit inexperienced young adults into adopting excessive spending habits when they may to understand the long-term implications of their credit card spending and payment practices. This paper will Investigate the ethical Issues that the senior management team of your financial company should address relative to the marketing of credit cards to college-aged consumers, and the processes that should be used to address those issues.
Situation Banks target college-aged consumers because they are the only adult demographic – with abundant purchasing power – primarily made up of non-credit card holders. Banks attempt to provide students with credit cards and bank accounts because onus adults do not have many established financial relationships and have a long credit life head of them. Secondly, many students tend to be loyal users of their first credit card for many years.
The brand loyalty of first-time credit card users may translate to greater returns over time as these consumers grow in age and affluence, and seek additional services such as car loans, mortgages, and investment accounts. Major credit card companies have been accused of targeting young adults, many of whom have accumulated debt with college tuition fees and loans and are generally informed on the potential dangers associated with mismanaging their assets.
For college students who accumulate a significant amount of credit card debt, the stress associated with the debt may negatively Impact their academic performance, as they are more likely to seek employment to pay off their debt. In addition, young adults who accumulate large sums of debt may also experience overwhelming amounts of guilt and emotional distress. Although it may seem like a simple case of “Caveat Emptor when it comes to students’ signing up for cards, wave identified a number of stakeholders who have n interest In this process.
The primary stakeholders in this situation are the credit card companies, credit card company employees, credit card company shareholders, banks, bank employees, bank shareholders, college students, students’ families, and colleges. Wave identified the secondary stakeholders as the local businesses in collegiate towns, debt collectors, credit bureaus, and the community. The Credit Card Accountability, Responsibility and Disclosure act of 2009. Also known as the Credit CARD Act, has mandated reforms for the credit card industry to protect 1 OFF hen banks and other issuers can increase annual percentage rates and allowing credit card holders more time to pay bills. Analysis College students make up a unique demographic of individuals and have a great deal of spending power. Students’ discretionary spending reached $76 billion in 2010 – up $2 billion from 2009, according to Alloy Media + Marketing projects (The Project on Student Debt 2011).
Credit card companies compete to be the first credit card that the student owns, in an effort to build customer loyalty. Students, during their first extended stretch outside the home, are developing brand preferences that can last wrought their adulthood. However, we have found that an increasing number of students charge more than they can pay, beginning their adult lives in debt before they begin their working lives. As of 2008, 84 percent of college students had at least one credit card.
A 2009 study conducted by Sallies Mae suggests that 50 percent of college undergraduates had four or more credit cards. Additionally, college seniors graduated with an average credit card debt of more than $4,100 – an increase of $1 ,200 when compared with the average student credit card debt in 2004, which was $2,900. Moreover, only 17 recent of undergraduates reported that they regularly paid off their balance each month. One percent relied on parents, a spouse, or other family members to pay the bill.
The remaining 82 percent carried balances and consequently incurred finance charges each month. (Sallies Mae 2009) Credit card companies have been accused of targeting young and chronically late bill-payers who may not have the means to pay their credit card bills on time. When payments are past due, the lenders then charge the credit card owner a much higher interest rate and assess additional late fees. Such credit card practices may lead to increasing levels of financial burden within the uninformed and disadvantaged segment of the population.
Often times, students who have accumulated large sums of debt often need to seek additional employment to make payments on their balances. Student credit card owners have the right to fair treatment and transparency on the terms and conditions of their credit card. We are concerned that marketing strategies of credit card companies, such as your firm, have a tendency to treat college-aged consumers as a means to an end. Even though Congress passed the Credit CARD Act in 2009, banks in the credit industry antique to carry out marginally legal practices and exploit loopholes in the laws set up to protect college students.
For example, the law prevents issuers from setting up solicitation tables on campus; however, to circumvent this rule, companies continue to campaign in high traffic areas Just outside campus limits. Additionally, the law prohibits issuers from providing any tangible item as a gift to induce enrollment (e. G. Frisbee, t-shirts, etc. ); instead, companies bypass this stipulation by offering online coupons or bonuses credited to accounts. Some banks even evade the on-campus reedit card to the student at a future time. Many colleges and alumni groups have a stake in marketing to students.
One would like to think that colleges operate solely under the best interest of their students. For the first time in U. S. History, student debt has surprised credit card debt; the amount of outstanding student loans is expected to exceed $1 trillion in 2011, according to the Project on Student Debt (Successors 2011). With the growth in number of college applicants over the past decade, universities and colleges seem to be capitalizing on market principles by charging what the market will bear. This brings satisfaction to university presidents and leaders and allows for additional school expenditures.
Many students would not be able to afford their college expenses without the use of student loans and credit cards. In addition, many institutions negotiate deals with credit card companies to have their school logo appear on the card. Prior to the Credit CARD Act, the terms of the contracts were kept secret and no affiliation disclosure was required. For example, in 2007, the University of Iowa made $1 million from their relationship with Visa (Kauffman 2007) and Florida State University brought in $1. Million in revenue from their contract with Mastered*.
Not only are many universities benefiting from students financing their college expenses, but they are also profiting from the number of students that sign up for a certain type of card. Colleges and universities have the right to profit from their trademarked logos, but at what cost to their students? College town businesses have great potential for profit because of the nature of college campuses. College campuses contain a high population of people within a small space with similar interests, needs, and wants. Many businesses cater to college students and tailor their products and services to campus communities.
Businesses increase the impact of their marketing efforts by posting on college bulletin boards, placing ads in the campus paper, and setting up booths at school events. Many college town businesses have an interest in students owning credit cards because students make up a large segment of their market. Without credit cards to finance their purchases, many students would not have the financial flexibility to support the local businesses. As a result, many businesses would lose UT on the potential to generate a steady stream of profit from their student customers.
What’s more, they would have to expend more marketing dollars advertising to individuals outside the college-based community. Restricting student credit availability could result in profit loss for local restaurants, bars, and apparel shops. Whether directly or indirectly, student spending keeps many people employed within a community. Many of our examples serve as evidence that many companies in this industry tend to operate under the Economic Model of Corporate Social Responsibility as discussed y Disregards*. Issuers realize the untapped potential in the college-aged consumer this manner in an effort to maximize shareholder value.
Employees of the lenders have a stake in this modus operandi because, in many cases, their performance and corresponding profit margins are tied to compensation. This means that, in some instances, employees could act in their own self-interest instead of keeping the well- being of the student customer at heart. The Citibank@ Platinum Select@ Visa@ Card advertisement reads, “Why Just graduate with good grades, when you can graduate with good credit. Citibank awards students with bonus Thankful Points for achieving good grades at college, and these Thankful Points can then be redeemed for cash.
While this strategy has its merits, it doesn’t provide students with the skills necessary to graduate with good credit. The program rewards students who perform well in school with cash incentives, so that they are more inclined to make additional purchases. Some credit card companies claim to award students for using credit wisely. For example, the Cit Forward@ Card advertises that students can reduce their PAR up to % when they make a purchase, stay under their credit limit, and pay on time 3 billing periods in a row.
The fine print states that students can reduce their PAR by . 25%, and are able to reduce their PAR 8 times per year, up to a total of 2%. While a step in the right direction, this strategy is also misleading in that it overprices reductions in PAR and promotes additional spending for students who might not have the means to pay off their balance in a timely manner. Credit card companies should not allow the desire to maximize profits fuel the need to deplete students’ capital.
Some credit card companies use tactics that exploit young adults’ naivet?? and collective sense of entitlement, while benefiting from excessive profits in late fees and interest. After helping to feed the growth of consumer debt in recent years, credit card companies may need to realize that many student credit card owners will be unable to pay their bills as the economy continues to decline, and many will have difficulty finding full time employment as they enter the workforce. Many debt collectors make their money by contacting students guilty of financial mismanagement.
However, in our economic decline, many lenders and their collectors have been forced to make concessions on some borrowers’ debts, hoping to collect as much money as possible before market conditions potentially get worse. Credit bureaus are notified of delinquent payments. And in some cases, debt consolidators and intermediaries are called upon to act on consumer’s behalf in getting the credit card companies to settle. Bad debt is getting harder to collect. As a credit card company, you have the power to control who gains access to credit. Having access to credit certainly has its benefits.
Credit provides young adults with the opportunity to make investments on valuable commodities such as education. Young adults agree that college is becoming more and more unaffordable in today’s economy while the importance of education continues to grow, according to a recent poll released by Demos and Young Invincibleness, two research and advocacy groups many students require a means to finance these education expenses so that they can pay them off over time. Many students are responsible enough to gain part-time employment to make the required payments on their debt.
As adults, it would seem that students should have the right to sign up for credit cards and be held responsible for managing their finances. However, 60 percent of undergraduates experience surprise at how high their balance has reached, and 40 percent have knowingly charged items to their card without having the money to pay the bill (Sale Mae 2009). With such static, we must not overlook the importance for students to learn about personal financial management. Students who learned about personal finances before they received a credit card had dramatically more responsible behavior than dents who had no education (Alderman 2010).
Students who went through a financial literacy program (such as the ones found on whatsoever. Org) had 42% fewer late fees on their credit cards and had revolving balances that were 26% lower. Once students are educated, they will be able to protect themselves from the dangers of credit card misuse. Students need to be informed consumers when it comes to selecting a credit card by familiarizing themselves with the terms and conditions before completing an application. The key in students navigating credit-card territory is in having a strategy in place fore setting foot on campus.
Students will need to determine what type of credit product they want, and compare potential offers with the help of supportive and responsible role models. Some students may even want to try out a card before leaving for college, so they can learn how the card works with the support of an adult. Meanwhile, parents and guardians should understand the implications if the students mismanage an account due to overspending or missed payments. Secured credit cards, by requiring deposits on the account, may help students establish credit hill minimizing their risk of incurring debt.