Losing a T1 provider

First lets explore that question as it relates to T1.

Under the proposed regulation, many T1 entities would see much of their current revenue sources dry up. There would be pressure to redefine their business models to identify new sources not prohibited by the new regulations. For most T1 entities, this process likely started a year or more ago when the direction of these regulations became clear.

For companies that have other offerings separate from the outsourced credit balance disbursement service, the option to simply shut down the service would certainly be explored. A host of variables beyond just lost revenues would also be considered –reputation risk, shrinking market potential and general headaches from continuation all come to mind. Some would likely exit as gracefully as possible.

Other companies rely on the T1 service for a substantial portion of their business. They will not have the luxury of simply cutting bait and focusing on their other product offerings. These companies will be forced to make more radical changes.

[pullquote]The regs prohibit T1 providers from charging a list of fees to the student, gutting the core of many of these providers’ business models.[/pullquote]

The worst-case scenario for campuses that use these providers is that they go out of business leaving campus clients in the lurch. This seems unlikely, as seldom do companies with substantial assets simply close their doors. Regulation may gut revenues and profitability, but things like existing client relationships, staff expertise, technology and brand awareness are valuable assets as well.

More likely than shutting down, these companies would reorganize, be acquired, merge with another entity or sell assets to an organization that would continue the service in some altered manner.

A key to remember is that the new regulations, even if passed as they are proposed today, do not prohibit a campus from outsourcing disbursement functions. They don’t outlaw T1 providers or the services they provide. What they do is prohibit T1 providers from charging a list of specific account and payment card fees to the student, gutting the core of many of these providers’ business models.

The rules also prohibit T1 providers from interacting with students prior to the student making a choice on how they want to receive a disbursement, thus making the provision of an access tool – such as a prepaid card – problematic and likely too slow to meet allowable disbursement timelines.

An outright ban on fees is also specified for a period of 30 days following a disbursement. This could be a killer for T1 providers as it opens two very real possibilities. First, students could incur large numbers of fee-supported services such as ATM withdraws or bad behaviors like overdrafts, and the provider would have to absorb the costs. Second, many campuses deliver financial aid on a rolling basis rather than at the start of two semesters. This could, in effect, restart a perpetual 30-day fee-free cycle, something no provider could support.

If a Tier 1 provider determines that they can generate sufficient revenue from the remaining, non-prohibited account and card fees, business could continue in much the same manner for campus clients. But this is unlikely. More likely they will move to institute one or a combination of: (1) new fees to student users and (2) new or increased service charges to campus clients. Without such new sources of revenue, the T1 service would not generate enough money to make it attractive to the T1 provider.

Still, because we are contemplating worst-case scenarios, it is not outside the realm of possibility that a T1 provider, serving one or 1,000 campuses, could stop providing service on or before July 2016.

So what should a campus with a Tier 1 provider do now?

[pullquote]Likely the regs will force T1 providers to institute new student fees and increase service charges to campus clients.[/pullquote]

The outlying possibility of a cessation of service, coupled with a myriad of other factors, will almost certainly drive some campuses to make changes prior to any potential mandated deadline.

Reasons -- or justifications -- could range from a desire to rise above any reproach to a fear of missing a window and lining up behind hundreds of others campuses forced to change as regulations take effect. Only time will tell if this proves to be a wise decision for these early movers.

Still, amidst the uncertainty, most will wait.

Losing a T2 provider

Next, lets explore what might happen if a T2 provider goes away.

Because of the seemingly loose – or perhaps overly broad -- definition applied to T2 in the proposed regulation, this situation could take numerous directions.

To begin, it is important to affirm that many of the T1 providers also provide an account or payment card to students as a part of their service. This would seem to make them a T2 provider, but because T1 status carries all the requirements of T2 status in addition to further marketing restrictions and the 30-day fee-free period, there is no need to label them both T1 and T2.