UPromise brings marketing ploy to college savings plans

When it comes to socking away money for a child’s college education, many parents have to beg, borrow or steal.

Soon, shopping will be an option.

Starting April 24, consumers who buy clothes, cars, computers and other items from companies that partner with UPromise Inc. will be offered rebates.

But they won’t get the cash directly. Instead, it will go into a state-sponsored 529 college savings plan.

“This is going to be one of the biggest concepts to hit the consumer market in many years,” says Jeff Bussgang, co-founder of UPromise. “Our hope is that we have millions of families saving tens of thousands of dollars for college.”

exploding market

If successful, UPromise could draw billions of dollars into the 529-plan market, which is expected to explode to $100 billion within the next 10 years.

But if it flops, UPromise will go down in history as just another expensive marketing gimmick – the financial equivalent of snake oil.

And that’s how some already view it.

“I wouldn’t trust them with 2 cents of my money,” says Dennis A. Doyle, chief executive of Savor Inc., a marketing company in Plymouth, Mich., that is suing UPromise for allegedly stealing its idea for a college savings plan funded by rebates on purchases of consumer goods.

“I think [UPromise] is going to become a giant dot-com flameout before it becomes a dot-com.”

Indeed, one credit card partner caps contributions at $300 a year and charges $24.95 annually for the benefit.

But a lot of people are betting that Mr. Doyle is wrong.

Founded 15 months ago by Mr. Bussgang, 31, and Michael Bronner, 43, former CEO of marketer and web service provider Digitas, UPromise has raised more than $90 million in venture capital – an impressive feat considering the market conditions over the past year.

The company, which employs 100 people at its headquarters in Brookline, Mass., has struck deals with Citigroup Inc., AT&T Corp., General Motors Corp. and dozens of others to redirect a percentage of participants’ spending to a 529 plan. Rebates range from 1% to 10%.

Citigroup’s Salomon Smith Barney and Fidelity Investments are the only two money managers that have signed deals with UPromise to manage the 529 assets. “There will be others in the future, but those are the only two out there now,” Mr. Bussgang says.

Citing Citigroup’s involvement with UPromise through both its credit card and money management operations, Andrea Feirstein, director of college savings plans at Citigroup Asset Management in New York, says, “We’ve obviously bought into the whole model.”

Just as impressive is the management team that Mr. Bronner and Mr. Bussgang have assembled. In February, June Blocklin quit as co-president of Hill Holliday Connors Cosmopulos, a top advertising company in Boston, to become president of UPromise’s partner services group.

The company’s chief technology officer is David Andre, former vice president of engineering at Lycos Inc., and its chief brand architect is Gordon Bowen, a well-known advertising executive who has held lofty creative positions at Ogilvy & Mather, Y&R Advertising and McCann-Erickson Worldwide, all in New York.

Bill Bradley, the former senator, presidential candidate and basketball player, is a UPromise board member as well as one of its advisers.

source of money

UPromise will make money by charging its consumer goods partners an unspecified fee based on the level of spending by UPromise account holders.

UPromise also stands to benefit by collecting interest income on deposits made by investors, or by its partners, before the deposits are swept from a UPromise escrow account to the 529-plan manager.

While a spokeswoman dismisses the interest income as “pennies,” those pennies could amount to quite a bounty – provided, of course, UPromise reaches the millions of customers it is targeting.

UPromise is off to a good start, but success is anything but guaranteed. First, it remains to be seen whether investors will embrace a model that essentially asks them to spend now and wait years for their financial payoff.

Also, like many rewards programs, UPromise runs the risk of delivering less than what consumers expect.

For example, UPromise’s website touts that Citibank credit cardholders may receive a 529-plan contribution of 1% of their monthly credit card purchases. But a closer look at the benefit agreement shows that the contribution is capped at $300 a year and that it costs $24.95 a year to receive the benefit.

Brian S. Orol, president of Strategic Financial Planning Group in Raleigh, N.C., says his initial reaction to UPromise’s program is “to throw up a yellow caution sign.”

“I think it’s a great marketing idea,” says Mr. Orol, who specializes in 529 plans. “But I don’t think investors should look at it as a valid criterion when trying to decide which plan is best for their family’s needs.”

Another financial adviser, Gary M. Samela at Boston’s Cantella & Co., says UPromise’s program is likely to appeal to investors who are sitting on the fence when it comes to opening a 529 plan. “It’s kind of like the employer’s match on a 401(k) plan,” he says of the rebate strategy. “It will draw people in.”

In the meantime, UPromise must contend with Mr. Doyle’s lawsuit. In the complaint filed last fall in state court in Dover, Del., Mr. Doyle asserted that the strategy pushed by UPromise was similar to one he had developed three years earlier.

Mr. Doyle contends that he had presented such a plan to Fidelity in 1997 and 1998, but had been turned away by the Boston fund giant. Mr. Doyle says UPromise learned of his idea from Fidelity.

“To this day, UPromise has not come up with one thing that I didn’t do in 1997,” he says. “There is not a shred of originality in UPromise’s program.”

Neal Winneg, general counsel for UPromise, describes the charges as “completely without merit” and says UPromise will vigorously defend itself.