Higher One Swings Back

Melissa Bailey PhotoOne 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.”

Paul Bass PhotoLasater 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.

“Guidance Letter”

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.

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posted by: anonymous on May 31, 2012  5:21pm

It’s great that there is a watchdog organization like PIRG investigating this industry. It would be better if they confirmed their facts before publishing a report, but nonetheless their work is very helpful.

That said, Higher One seems to have more ethical business practices than most of the banks that are operating on or near campuses. 

It is true that, if the banks weren’t in the picture, fees might actually be higher, because they would be paid for by the universities and colleges themselves. 

However, that might be an argument for more State and Federal funding of universities than it is an argument for levying fees on students.

Hopefully Higher One and the banks can continue to work with regulators and move towards better practices.

And hopefully groups like PIRG will continue to investigate our nation’s war on the middle class.

posted by: davilajl on May 31, 2012  7:16pm

As a student who was coerced into a using Higher One, my issue is that it was basically forced upon us with no real training. I went from receiving a fin-aid check which could be immediately deposited into my personal checking account, to being forced to sign up with some new company that I have no interest in being involved with. I already have a bank account, why would I want another vendor? Better yet, why would I want a vendor with a 3-page fee schedule? The options are reduced to: either waiting longer to receive money or signing up with the company who has now weaseled its way into my educational experience. The new program was on-boarded much in the same manner as a new nuclear program, pretty much a secret until it’s time to launch. Students are being told that it is a good option for them, and they get their money faster. What students should be told is that they have the option to receive their money faster (which may only be a few days at most) if they choose to elect Higher One as a vendor.  Because I opted to not get involved with Higher One at all, I have to wait an additional 3 weeks after my school releases money to receive my check. My personal opinion is that it’s completely ridiculous that any federal aid money goes to a for profit company, the 50+ million dollars only makes it harder to swallow.  It may not be illegal, but it’s still garbage. Many of the 18 and 19 year old students are not ready for a banking account of any kind, and now we are forcing them into a fee-riddled account that absolutely unclear about fees and access to money. I believe Higher One knows this and has made it the basis for a stream of revenue. They know young and inexperienced students will mess up financially because let’s face it, most people in general mess up financially in their earlier years. Instead of helping them, Higher One takes advantage of that knowledge in order to turn a profit. In regards to Higher One’s response: telling everyone that all these issues are “misunderstandings” is in itself admission that their processes and procedures are understandable. It’s Mr. Lasater’s job as C.O.O. to make sure people understand, not to inform us that his company’s procedures are misunderstood.

posted by: Gretchen Pritchard on May 31, 2012  11:18pm

“being forced to sign up with some new company that I have no interest in being involved with”

davilajl, this is just the way stuff goes in the Information Age.  Very few businesses, whether for-profit or non-profit (or government for that matter), can afford to handle most of their information and financial transactions strictly in-house.  One way or another, they outsource them to a specialist, which means a revenue stream shows up somewhere to pay the specialist.  But if there were no specialist, some—probably more—of that same money would be going to pay some nice old-fashioned pink-collar worker in an office somewhere onsite who was doing the same stuff.  When you opt to have your check sent through the mail, you pay for that too, though it might just show up in the company’s financial reports as on-site overhead.  Eventually, you can bet, that option will no longer even be available, because it has become functionally unfeasible—it involves each organization reinventing far too many wheels.

The good news in the case of Higher One is that these folks seem (despite the conclusions jumped to by PIRG) to be smart, honest ... and also, for their part, keeping the jobs here in the USA.

posted by: disconnect on June 1, 2012  10:11am

“Eventually, you can bet, that option will no longer even be available, because it has become functionally unfeasible—it involves each organization reinventing far too many wheels.”

What, we don’t have the infrastructure to handle printing a check, mailing that check to a student, and having that student deposit it in hir bank account?

posted by: DingDong on June 1, 2012  10:26am

I don’t really know enough about this to comment.  But I was really annoyed that Connecticut sent its tax refunds on a special Chase debit card and not by check, so I had to pay fees to withdraw the money from an ATM (and also could only withdraw the money in $20 increments, meaning that it was hard to get all of the money off the card).

posted by: anonymous on June 1, 2012  10:43am

Disconnect: Many higher education systems have hundreds of thousands of students. Maintaining a disbursement office and related overhead (e.g. facilities) is a significant expense. 

Perhaps refunds should be handled in the way you suggest.  However, doing so would involve increase costs to those universities, which they would have to pass on to students or to taxpayers (some universities already do this - Harvard and Yale for example, have finance offices and their own loan programs, but they also have billions of dollars in endowment). 

Personally, I would support eliminating our nation’s extremely regressive tax system and using the revenue to better support our not-for-profit colleges and universities, so that they could have their own finance offices and support the necessary overhead.  But with the GOP in power and Democrats unwilling to take any serious steps to combat rising inequality, that seems unlikely in the near future.

posted by: Gretchen Pritchard on June 1, 2012  11:52am

“What, we don’t have the infrastructure to handle printing a check, mailing that check to a student, and having that student deposit it in hir bank account?”

Disconnect, that kind of stuff isn’t done with a typewriter and a ledger book.  It’s done with computers, remember?  Computer means software:  a customized database to deal with the processing required for the particular institution’s needs.  Somebody has to write that database, trouble-shoot it, train staff on how to use it, enter the data on it, maintain it, back it up, keep it protected against security lapses, and actually report out the transactions, including the various accounting and tax-compliance aspects. 

To repeat, this is not simple.  Increasingly, organizations that are not gargantuan contract this stuff out.  Realistically, the issue is not whether it’s contracted out, it’s who gets the contract—mega-bank, mega-for-profit with its fingers in all kinds of pies and a lot of its jobs in data centers in the Philippines or Bangalore, or somebody like Higher One.

posted by: Alex Hoffnung on June 1, 2012  2:16pm

Just some thoughts on this passage:

“He said students who are receiving financial aid should not be steered into opening a checking account, which comes with significant responsibilities.”

This comment struck me as odd.  Maybe this was taken out of context, but I don’t understand if it was meant to suggest that financial aid students are less capable of handling “significant responsibilities” or if he meant “fees” rather than “responsibilities”.

Just based on average age I would guess (and maybe I am wrong) that financial aid students are for the most part without much credit history, so it would seem more reasonable to classify them as less wealthy than as less fiscally responsible.

It would be interesting to see a study (and I would be grateful if someone could point one out) on levels of fiscal responsibility amongst young adults of differing economic classes, but it would seem that ALL college students could benefit from some basic financial and legal instruction.

posted by: Noteworthy on June 1, 2012  2:29pm

Higher One is the Toast of the Town not for what it does, but because of the jobs it has created by becoming an educational bank tied to colleges and universities. Of course, a great many of those jobs have nothing to do with New Haveners, but hey, in this economy, anybody growing jobs for anybody is good news.

That said, however, their multi-page fee schedule is much like any regular bank and I’m sure that if you monitor and use your student account carefully, it provides a value. But reality is, most kids do not and without their parents hovering, likely find their accounts tapped religiously for fees that go to Higher One.

According to Gretchen - the real choice is between Higher One and a mega-bank. With so little difference outside of call centers in India, that’s not much of a choice.

One might add a credit union too which beats both the aforementioned options. And you can get your hometown money at ATMs in a lot more locations across the country than just one per campus.

posted by: William Kurtz on June 4, 2012  2:54pm

A bank is a bank and it’s going to do what banks do. It’s unrealistic to expect otherwise. Higher One shouldn’t be subject to extra scorn because their target market is [supposedly] vulnerable and naive college students but nor should they get a pass for exploitative fees and practices just because their founders are hometown heroes.

Case in point: overdraft fees that grow after the first overdraft and pay-to-swipe fees attached to debit cards.

In the first instance, the bank’s computers typically approve the transaction, even if it overdraws the account, and then assess the fee to the customer without warning. An account-holder can overdraw his or her account and rack up a hundred dollars or more in fees before he even realizes it. The systems should be changed so that the transaction is denied, or at least so that the customer has the option to overdraw the account, knowing that a fee will be charged.

The second fee to use a debit card and PIN at the point-of-sale (POS), puts the bank and the account holder in direct conflict with the interests of the retailer. Use your debit card at most major retailers’ POS systems and you’re first asked to choose ‘Credit or Debit’. Pick ‘Credit’, and typically you’re still prompted to enter your PIN anyway, because the retailer is trying to avoid the fee that they pay to the credit card company.