One day after a national report trashed the fees New Haven’s hottest young company collects from college students on financial aid, Higher One COO Miles Lasater called the attacks a baseless misunderstanding of his mission.
Lasater found his company under fire after a report came out Wednesday from the U.S. Public Interest Research Group Education Fund. The report, “The Campus Debit Card Trap,” targeted the New Haven-based company as the biggest player in a new field of financial middlemen it accused of “skimming millions in fees from student aid using debit-card-linked student IDs.”
The report triggered a national story in the Associated Press, followed by a New York Times report Thursday featuring a photo of Higher One co-founders Lasater (the company’s chief operating officer) and Mark Volchek.
“I would hope that people would take the time to learn more about us before writing articles,” Lasater lamented in an Independent interview Thursday as the Times and Associated Press stories continued to spread on the web.
He said that rather than rip off students, Higher One has been saving them money they otherwise would be paying banks.
Higher One has emerged as New Haven’s Google, the city’s and state’s pet new-economy tech company and jobs generator (240 local employees at last count)). Just moved into a spiffy new headquarters on Winchester Avenue at Science Park, paid for in part with public money. The brainchild of Yale undergraduates, the company now handles financial aid disbursement for 520 colleges campuses, serving 4.3 million students. The company keeps adding new jobs for people of varying skill levels, so the city and state both worked hard to keep it in town.
The US PIRG report cited students’ and regulators’ complaints about the fees Higher One charges students in connection to accounts that hold student aid money.
“Campus debit cards are wolves in sheep’s clothing,” said Rich Williams, U.S. PIRG Higher Education Advocate and report co-author, in a press statement accompanying the report. “Students think they can access their dollars freely, but instead their aid is being eaten up in fees.”
Lasater said his company, which was hatched in 2000 in a college dorm room, has always aimed to provide students low-cost alternatives to other banking options. He said the company offers student accounts for no monthly fee and no minimum balance, never charges for the delivery of student aid money, and instructs students on how to maintain the account for free. In an effort to be transparent, company posts the fee schedule on its website and requires students to review the fees before signing up for an account.
Lasater said the PIRG report “misses the larger picture that we offer a good value for students, which is a good alternative compared to their other options.”
For example, the report highlights the hidden cost of students’ signing up for Higher One accounts. The “annual median cost of maintaining each of the 2 million OneAccounts is $49 per student,” the report states.
Lasater said that’s true—and it’s cheaper than competitors’ fees.
He pointed to a report Higher One commissioned by the financial services firm Bretton Woods, which compared the “median cost to students of using prepaid cards, regional and national checking accounts, paper checks and the OneAccount.” The report showed Higher One’s $49 far below the other averages: $240 to $464 for “national bank offerings,” $184 to $429 for “regional bank offerings,” and $98 to $239 for prepaid cards.
“We stack up very well” against the competition, Lasater said.
Higher One’s fees work out to $4 per month, Lasater said. Meanwhile, some experts predict monthly maintenance fees on basic checking accounts will rise to between $12 and $15 this year.
“It could actually be that Higher One’s checking account compared to other checking accounts might be a good option, but that’s not what students need,” replied Williams, the report’s author. He said students who are receiving financial aid should not be steered into opening a checking account, which comes with significant responsibilities.
Lasater said another passage in the PIRG report represents a misreading of Higher One’s financial report. Since it went public in June 2010, the company now makes its finances public in filings with the Securities and Exchange Commission.
Based on one of those filings, the US PIRG report said Higher One reaps 80 percent of its revenue from “fees.”
“These fees add up for students,” the report charges. “The financial results from Higher One provide only a window on the potential fee income firms can garner from partnering with universities, but the view it gives is clear: students pay a lot of money in fees when using these cards.”
Lasater called that “a misunderstanding of our financial statement.” A large chunk of that revenue comes from fees to merchants when students swipe their debit cards—at no cost to the student—to make purchases, he said. Higher One said that 50 percent of its revenue—not 80—comes from student account fees.
“Even with 50 percent,” Williams replied, “that’s still quite a lot of money.”
That’s “$88 million dollars scored on financial aid money,” Williams calculated, based on the firm’s 2011 SEC filing. “It’s a taxpayer investment that’s aimed at the purpose of paying for education costs—not to be siphoned off for bank fees.”
Williams said Higher One does not score well on “best practices” of campus banking, especially in regards to the fees it charges.
The fees—$29 for the first overdraft, $38 for subsequent overdrafts, 50 cents for a debit transaction with a PIN, and $2.50 for withdrawing money from a non-Higher One A.T.M.—are “market-based fees,” Lasater replied.
Lasater said at every campus where Higher One does business, the company delivers student aid money from the university to the students for free. Students can choose to receive a check by mail, put the money in a non-Higher One bank account, or open a Higher One bank account and receive the money online. After that stage, he argued, no matter what banking option students choose, they may face some fees.
“The notion that financial aid money, or other money flowing from the school, goes to the student and after that is going to be free of all fees is unrealistic,” he said.
Lasater said his company offers guidance on how to use the account for free, and also offers free online bill pay, free withdrawal from ATMs on campus, and free spending through swipe & sign. Higher One, which has no physical bank branches, was designed to focus on technology and convenient, online delivery to students, he said. The company was ahead of the curve on offering text-message banking, he said; it now offers check deposits via mobile phone for all customers regardless of how much money they have—a service other banks reserve for higher net-worth customers.
Another passage of the PIRG report focuses on regulators’ interest in Higher One’s practices. Five states have issued letters of inquiry or subpoenas investigating Higher One’s practices. Last February, the New York Regional Ofﬁce of the Federal Deposit Insurance Corporation (FDIC) notiﬁed Higher One it was “prepared to recommend enforcement action be taken for violations of relating to compliance management system and policies and practices for past overdraft charging on persistently delinquent accounts, collection and transaction error resolution.” Higher One fixed the problem, refunded former customers about $4.7 million, and did not face enforcement, according to the report.
The report also cites “a guidance letter” released by the U.S. Department of Education in April, which “made clear that Higher One’s $50 fee for ‘lack of documentation’, a fee currently listed on its fee schedule, would violate federal rules if charged.”
Lasater explained Thursday that the fee is rarely charged. According to DOE regulations, students who sign up for cards need to verify their identity, which they can do online. Lasater said in cases where students open accounts and then fail to respond to requests to verify their ID, Higher One is “forced to close” the account, and charges a fee. He said Higher One believes that while it’s illegal to charge an opening fee for an account designed to receive federal aid, charging a fee is legal. He said the company is working with the DOE to “clarify” the rule and address other areas that the DOE is investigating.
“We’re certainly committed to compliance,” Lasater said.
A spokesperson from the Connecticut attorney general’s office said the state has received only three complaints about Higher One—two cases of identity theft and one of a consumer who was overcharged. All three cases were resolved. No investigations are pending.
Another concern raised in the PIRG report is the close relationship between financial middlemen like Higher One and the public institutions that contract with them.
Williams said even as credit card companies are barred from predatory practices, companies like Higher One are granted unprecedented access to student information to use for marketing. In some cases, students get a pre-approved Higher One debit card in the mail, which causes confusion from students, who think the university has endorsed the product.
“Higher One being the pioneer in this industry, they have mastered the art of aggressive marketing,” Williams said. He described how Higher One profits from a captive audience on college campuses.
To get their financial aid, students have to go to Higher One’s web site, where the company has full freedom to market other instruments, Williams said. He said while it’s great that Higher One does not offer credit cards, it does offer other checking accounts that students may be swayed into buying.
Once students get online, many are coerced into signing up for Higher One accounts because of time constraints, the report charges. Students who want financial aid immediately must sign up for a Higher One account; if they want a check mailed, or to set up disbursement to another bank account, they have to wait.
Once they have the card, students who want to withdraw the money without a fee have to use Higher One ATMs. There are only 600 of these on 520 campuses, according to the report. That’s within the legal requirement of one per campus, but it creates a major inconvenience, Williams argued. On the day that financial aid becomes available, students form lines 50 people long to withdraw money. In one case described in the report, the two ATM on campus ran out of money by lunchtime, forcing students to face a $2.50 fee at other ATMs.
The set-up leaves students “hamstrung,” Williams said. “Even if you play by all the rules, you can still get dinged by fees.”
Higher One spokesperson Shoba Lemoine replied Friday that Higher One has 700 ATMs in service—“at least one and in some cases three or four on a campus, depending on the student population.” Students can withdraw money from the Higher One ATMs for free.
She added that Higher One offers a solution to the problems Williams identified: “Should a campus’ Higher One ATM be unavailable for any reason at any time, Higher One will reimburse OneAccount holders up to $5 per day for fees charged at other ATMs ensuring fee-free access to ATMs.”
One Account holders can also access money by writing checks for free, making debit card purchases of up to $2,500 per day, and using a free online bill pay service online, she added.
Lasater said students always have the choice to bank with another institution. In cases where the company contracts with public institutions, it does so after a public bidding process that vets the fees and services, he added.
“We do provide students with choices, we are transparent about the accounts, and we are committed to complying with Dept of Ed regulations.”
Lasater said his company remains a “low-cost alternative.”
He said the company is always “reviewing feedback” from regulators, customers and campuses, but has no immediate plans to make specific changes as a result of this week’s report.
Williams said his criticisms hold not just of Higher One—the biggest player—but of others in the market.
“Things need to be done to fix this market,” he said. “We are not against the idea of a well-structured debit program on campus. Programs out there are providing no choice, or too little choice—and high fees eating up their financial aid money.”
Asked for her reaction to the latest news, city development chief Kelly Murphy said she hadn’t read the stories.