'Plain Vanilla' Student Account Plan Limits Choice, Innovation

The Bureau of Consumer Financial Protection made its latest bid for in loco parentis status with its recently announced "Safe Student Banking" initiative. The initiative favors "plain vanilla" bank accounts for young scholars, with a pronounced bias toward free features. The plan would be likely to encourage uniformity across student bank accounts. While that may be intentional, it would be unfortunate for banks and the students they serve.

Banks currently offer student accounts with a variety of services at no additional charge. Since there are costs to providing those services, however, there are limits to what can be provided gratis. Banks approach this trade-off in diverse ways. But the Bureau is proposing one template for all students and their banks. (I make a point of calling the agency by the name it was given under Title X of the Dodd-Frank Act, as opposed to the "CFPB." The agency appears to be wary of being called a bureau, so it tries to hide that part of its name and go by its initials as much as it can.)

For example, the Bureau's plain vanilla account would preclude student overdrafts. If somehow an overdraft occurs — which can happen for several reasons — there must be no charge for it. The plan also has a clear preference for online banking, no charges if the account is a card-based electronic account, and mobile banking andpayments. Students are alsoto be allowed two free money orders per month and 24 per year. This last add-on is curious, as I have not noticed rampant student interest in sending money orders.

The proposal has been advertised as a "tool" for school administrators contemplating partnership with a bank to ensure that these are "accounts that the college or university deems safe and affordable" — or, more precisely, that the Bureau deems are safe and affordable.  Apparently, college administrators are thought no more financially capable than their scholars. 

To be fair to the Bureau, the proposal is offered as a tool that colleges "can voluntarily use." But to be fair to the institutions within the Bureau's expansive and expanding reach, disregarding advice from the agency may not be safe or affordable. Dodd-Frank endowed the Bureau with powerful enforcement weapons, including the ability to take action against practices it deems "abusive" even if the disfavored activity does not qualify as unfair or deceptive under previously existing law. It's unlikely that many institutions will be lining up to test on their backs what "abusive" means to Bureau enforcers.

After all, under the terms of the proposed scorecard that is part of the Bureau plan, a bank that offers anything that differs from the plain vanilla student account "must explain the features they offer and the fees they charge." Any bank compliance officer, of course, will caution bank leadership that it's safer to ensure that their student accounts conform with the Bureau's approved model.  And the Bureau expects that "responsible" colleges will adopt its new scorecard.

Such regulatory guidance can be a powerful driver of national uniformity.  Moreover, prescriptive regulation can curb innovation (witness the Federal Communication Commission's struggle with how to regulate cellphones). Student account holders may have to wait while friends not in college get access to features made possible by new technologies. 

Unless you share the view that colleges and their students should be limited to an agency-designed national bank account, the Bureau's proposal — which picks up from an effort tried and abandoned by the Department of Education — goes too far.

When the blueprint for a financial consumer agency was first published as Dodd-Frank was under construction, it included a plank directing the new agency to devise "plain vanilla" products that firms would be required to offer. The legislative architects of Dodd-Frank wasted no time in striking that from the design. It was all too obvious that financial services customers were not plain vanilla, and neither were their financial services preferences. Moreover, the stultifying impact of carved-in-stone, plain-vanilla mandates was too hard to ignore.

In Washington, no bad idea stays dead. The Bureau's latest proposal — to pressure students' educational and financial institutions into offering young people narrow options — deserves the same treatment given to other zombies.

Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. Previously he served as assistant secretary of the Treasury for financial institutions and as staff director of the Senate Banking Committee.