UBC - Do the Savings Really Add Up?

UBC recently announced that they would no long be accepting credit cards as a form of payment. This on the account that the University could save upwards of $2.5 Million dollars annually that they can redirect towards general revenue (originally believed to be towards teaching development that was later retracted as a place to direct the savings - Click the title link for the original statement). What follows is a brief analysis of the consolidated financial statements and a comparative of what students (particularly international students) will lose with this new initiative.

Universities are said to better operate as a business so as to understand and realize bigger profits. Revenue sources are generally believed to come from student fees offset by expenses including salary and benefits along with operational costs (maintenance, utilities, etc). However, looking at the consolidated financial statements you realize that student fees are only 17% of UBC's revenue. The commanding portion of revenue sources is formed through government grants and other contracts UBC solicits. Looking on the other side of the balance sheet you see that only 3% of the total expenses are associated with COGS (Cost of Goods Sold - where you would find processing payment expenses). Add to this the fact that UBC (given its volume and size of transactions) is most likely receiving a preferred rate on its processing fees and questions are abound. At $2.5 Million in savings and using 2006 counts for students of 37643 FTE's (Full Time Equivalents), you realize that the rate being charged by the credit card companies has to be around 0.94% on the dollar. Most companies are charged anywhere from 2.0-2.2%. Still, the University has decided that this is a way to save money and how can one really argue when their is no visible downside. You can still transfer funds, make debit payments, or right cheques; all potential expenses to students (not the university) and not to mention annual fees students may already be paying on their credit cards.

As with any comparison, I thought to myself what group is the most effected by the discontinuation of credits cards as a payment method. To understand this, you have to understand why many choose to pay their fees via credit card in the first place. I ignored the fact that this is simply because the funds don't currently exist and parents/students are looking for an additional 30 days. I base this on the following reasons: 1) you would have to pay these fees in 30 days anyways; 2) Tuition is a very large sum and you would incur a sizable penalty if you didn't pay it off; 3) Other forms of payments exists including debit, money transfer, and cheques. The reason most probably here is many realize that the fringe benefits of credit cards are quite enticing. Travel Rewards, points towards goods, and cash rebates are all strong ways in which credit card companies have encouraged consumers to sign up for large annual fees with the promise of sizable return on investment (ROI). This is most evident in Costco where an executive memberships is reimbursed if it doesn't pay for itself via the 2% cash rebate.

If the above is true (based on my assumptions) then the following exercise is quite fruitful in understanding the impact to international students. I use international students for the following reasons: 1) The most popular rewards involve those associated with travel (all major banks have at least one travel reward credit card); 2) International Students have the most to gain from these rewards given the expense of traveling home; 3) International Students was the easiest group to define for this analysis given the information available.

Assumptions:

-Tuition for FTE's is not widely dispersed in range (allows me to use a average).

-The figures represented by the travel reward companies are accurate

-Majority of students who have travel rewards with their credit card choose either aeroplan or airmiles.

-Student/Parents (based on the analysis) would choose a reward (aeroplan) that is faster to redeem

-Students/Parents are traveling home (Round Trip) on Christmas (High Season) between December 20th and January 2nd)

Hard to read so if you interested in a copy let me know. As you can see this group contributes close to $3.2 Million dollars to the UBC coffers (most likely more because international fees are represented in local dollars). If all undergraduate international students used credit cards with travel rewards for flights home on Christmas, close to 17% of them would be able to travel home for FREE (with other subsidizing a portion of their travel).

It begs the question on whether the fees that UBC is trying to save, are actually being more than paid for and allowing certain parents to have their children home for the holidays FREE of charge. It is not worth it to give the parents some breaks given that general revenues at UBC have increased by more than 25% since 2000 thanks to increasing tuition of 2% per year. UBC doesn't seem to think so. Instead they have focuse on a marginal part of their operations and transferred additional expenses to students. They don't see the downside, but that takes some creativity as I have shown above.

My 2 thoughts anyways...