Credit-Card Cos' Push Into Social Media Draws Criticism

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; [e-mail]