Mar 14, 2014
08:53 AMConnecticut Today
Higher One's Future Cloudy as Fees Investigated, Stock Price Drops, Executives Depart
A dozen years after its founding by three Yale University students, Higher One, the financial services company, was opening a 150,000-square-foot headquarters in the old Winchester factory complex in New Haven. On hand to help cut the ribbon that day in March 2012 were Gov. Dannel P. Malloy and then-New Haven Mayor John DeStefano Jr., both champions of the company dubbed “New Haven’s Google” by the New Haven Independent.
“Higher One is an example of how New Haven still makes things, but it makes things with powerful ideas,” DeStefano said that day.
The powerful idea that fueled Higher One’s meteoric rise: rather than use paper checks, electronically distribute college financial aid “refunds”—money remaining after tuition and fees are paid that students are entitled to and may use for personal living expenses. That saved schools millions and got students their money faster. An added bonus: Higher One offered bank accounts in which to deposit the cash.
After the 2008 recession, cash-strapped schools stampeded to sign up. By 2012, Higher One dominated its niche market, serving about four million students at more than 500 schools. Its profits grew at an annual rate of 37 percent.
In Higher One’s telling, everyone won. Schools saved money, students received funds faster and New Haven got investment, revitalization and jobs—240 at its new headquarters.
But almost from its inception, Higher One has sparked controversy. As early as 2004, articles appeared in student newspapers complaining of abusive fees on its bank accounts. The following year, Oregon state lawmakers tried unsuccessfully to ban a Higher One bank fee following protests at Portland State University.
The company brushed aside the criticisms. In a 2009 interview, co-founder Sean Glass dismissed Portland State protestors as “anti-corporate activists.” Higher One was founded by and for students to help them better manage their money, Glass said, along with co-founders Mark Volchek and Miles Lasater.
“We’re not a big, stodgy financial services company,” Glass said in a company video. “We’re much more about communicating with our customers and providing something that really meets the needs of students.”
Elected officials, meanwhile, showered Higher One with money and praise. Gov. M. Jodi Rell kicked in more than $20 million in tax credits and grants for Higher One’s new headquarters. Yale University, though never bringing Higher One on campus, has been an especially enthusiastic backer. From the start, Yale officials have provided encouragement, cash and advice, including the key insight that created the company.
It was all heady stuff for Volchek, Lasater and Glass (who left Higher One in 2008)—“an American Dream story,” as one admiring interviewer put it. In a dozen years, they had gone from Yale undergrads to millionaires, creating a nearly $200 million company from scratch.
As Volchek and Lasater sliced the ribbon alongside the mayor and governor that March day, the future looked limitless.
“Students Have Been Taken Advantage Of”
Two years later, Higher One has fallen back to earth. The company is under legal attack and growing regulatory scrutiny. Its business model and leadership are in flux—Lasater has withdrawn from day-to-day operations and Volchek is on his way out as CEO.
The company’s detractors have expanded from student activists to the consumer interest group U.S. PIRG, which issued a report critical of the company in the spring of 2012, and U.S. Sen. Sherrod Brown (D-Ohio), who has publicly urged students in his state to be wary of the company’s bank accounts. “This company called Higher One (has) frankly I think been abusing these students’ interests,” Brown, a Senate Banking Committee member, told an Ohio TV station in September 2012. “They found all kinds of ways to deduct fees and other charges against these students. Students have been taken advantage of.”
At the time, Lasater called the attacks a baseless misunderstanding of his mission, according to a New Haven Indpendent story.
Six class action lawsuits filed in 2012 on behalf of students in Alabama, Missouri, Illinois, Kentucky, Connecticut and Mississippi flesh out complaints against Higher One. The firm, the litigation alleges, misleads students into thinking schools endorse Higher One to steer them into its bank accounts. It then gouges them with abusive and poorly disclosed fees, the lawsuits charged.
After promising to “vigorously” fight the lawsuits, the company settled in December 2013 for $15 million. The final terms of the settlement are still being negotiated.
Federal regulatory agencies have also found fault with Higher One.
In the summer of 2012, the company paid $11 million in restitution to 60,000 students and a $110,000 fine to the Federal Deposit Insurance Corporation (FDIC). The FDIC found that the company repeatedly charged students for the same overdraft and allowed accounts to remain overdrawn for extended periods to collect charges.
About six months later, the federal Financial Consumer Protection Bureau opened an ongoing inquiry into Higher One and other providers of student debit and prepaid cards. At an October forum, the agency made public comments from some students and school financial aid officials praising the company. But other students and student government representatives complained of abusive and poorly disclosed fees, bad service and delayed paper checks. “Higher One has been a major struggle when it comes to my student finances,” Colorado Tech online student Amy R. Harris wrote the agency. “They charge a fee on EVERY transaction I do. They have made so much money off of me!”
In February, the federal General Accountability Office (GAO) weighed in, issuing a report calling for tighter rules on student debit cards. Among its findings was an affirmation of a longstanding criticism of Higher One: the company’s most controversial fee—a 50-cent charge to use its ATM card as a debit instead of charge card—is highly unusual, confusing and at times hard to avoid. “No basic or student account that we reviewed for comparison purposes charged a transaction fee for using the account’s debit card,” the report said.
The company, meanwhile, faces continuing attempts by some student governments to kick it off campus, including at the University of Houston, which signed up as its first client in 2002.
Most ominous of all for Higher One, the U.S. Department of Education began in February to review rules governing electronic distribution of federal financial aid. Changes to those rules, especially regarding fees charged on student accounts and debit cards, could seriously threaten Higher One’s business model.
Higher One has reacted to the tsunami of criticism, investigation and litigation with pushback, but also accommodation. Communications Director Shoba Lemoine dismisses the class action lawsuits as “without merit,” saying the company only settled “to avoid a lengthy and costly litigation process and to minimize business disruption.”
The U.S. PIRG report, Lemoine says, is deeply flawed, and she accuses the organization of misinterpreting Higher One’s financial statements to imply 80 percent of its revenue comes from student fees. In reality, it’s 50 to 60 percent, with the remainder paid by merchants to process transactions, according to the GAO report and statements made by company executives.
And what of the company’s student critics? Lemoine describes them as “a vocal minority.” “Students love us,” she says. “We have two million account holders. They are choosing to open accounts with us. We provide more student-friendly services all the time.”
Lemoine touts the GAO’s finding that Higher One’s fees, with the exception of its controversial debit card use fee, are comparable to competitors’, disputing claims they are excessive. But she also acknowledges significant changes in response to complaints. Higher One has eliminated some of its most-criticized fees—including a $19 inactive account charge—more aggressively marketed its flat-fee accounts with no or fewer extra charges, and improved disclosure of its charges.
“We’re listening,” Lemoine says. “In the last two years, we’ve dropped 10 different fees.”
The controversies and reduced fees, however, have taken their toll. Higher One continues to grow and remains profitable, but its 2013 fourth-quarter earnings were down compared to the previous year. During the same period, cash generated by its bank accounts dropped from 76 to 58 percent of revenue, a direct result of the elimination of certain fees charged students, according to its financial statements.
Wall Street has taken notice. As of February, its stock was hovering around $8 a share, compared to a one-time high of $20 per share.
Meanwhile, complaints continue—students at two California community colleges last fall complained of abusive fees and marketing that they say led them to believe they had to open Higher One accounts.
“I’ve Got to Do as Much as I Can as Soon as Possible”
The story of Higher One begins with a tragedy. Around 10 p.m. on Dec. 4, 1998, Yale University senior Suzanne Jovin was found stabbed to death in New Haven. The brutal crime, which remains unsolved, deeply affected her friend, Yale freshman Sean Glass, who recalled Jovin in a recent email as “a really sweet person who cared greatly about others.”
Glass suddenly grasped the fragility and shortness of life. By the next summer, that realization had led the then-19-year-old Glass to seriously consider dropping out of Yale to start an Internet company. “She [Jovin] could have done so much,” Glass told a Wall Street Journal reporter who chronicled his dilemma. “I’ve got to do as much as I can as soon as possible. I don’t know how much time I have to get the things done that I want to get done.”
To help his son decide, Peter Glass, a wealthy anesthesiologist, arranged that summer for a series of meetings with successful entrepreneurs. The reporter tagged along. By day’s end, Glass had decided to stay at Yale and start an entrepreneurial society. The subsequent Wall Street Journal article caught the attention of Yale Vice President of New Haven Bruce Alexander. “This is one student we don’t want to lose,” Alexander told Yale Alumni Magazine in 2002.
A successful real estate developer, Alexander was interested in promoting student entrepreneurship to spark economic development in New Haven. He took a shine to Glass and threw his support behind his effort to found the Yale Entrepreneurial Society and later, Higher One. Alexander would later call Higher One “our best result to date” from the effort to help New Haven’s economy through student startups.
Through the society, Glass met junior Miles Lasater and senior Mark Volchek.
The trio had an inspiration: Link banking services to student ID cards. They approached then-Yale CFO Joseph Mullinix for advice. Mullinix liked their idea, but told them the money would be in managing college financial aid, especially refunds distributed to students, Glass said in a lengthy 2009 interview with the website Mixergy and a 2006 Entrepreneur magazine profile. “[Mulinix said] ‘You could save us money and make the whole thing work better, particularly the process of getting money from schools to students,’” said Glass.
“As he started teaching us about that and the fact that there was really no payment solution for it, we said, ‘OK, that’s really where the opportunity is.’”
In March 2000, the undergraduates founded Higher One—“Higher” for higher education, “One” for one card. Wealthy friends and relatives as well as the Yale community provided early financial support. In October, a venture capital firm that invested in student start-ups with two Yale alumni on its board provided $1 million. The next year, Yale School of Management professor David Cromwell arranged for the student-run Sachem Ventures venture capital fund (which he managed) to invest another $1.5 million.
Sachem Ventures’ investment represented 133,000 shares as of 2013, and Cromwell, a former head of JP Morgan’s private equity investment group, has served on the company’s board of directors since the investment. He declined through a Yale spokesman to be interviewed, as did Alexander.
“They Thought it Was Required”
The business model Higher One developed was simple: Partner with banks to offer student accounts. The banks invest the money. Higher One offers schools bargain-basement prices to distribute refunds and collects fees in the process. Those fees, which include foreign ATM, PIN, overdraft and interchange charges paid by merchants, are Higher One’s cash cow. As previously mentioned, until recently fees accounted for 70 to 80 percent of the company’s income, peaking at 88 percent in 2009, Securities and Exchange Commission filings show.
To make money, Higher One must convince as many students as possible to open its bank accounts. The company does so through emails, mailings, posters, websites, social media and word of mouth. For every school, it creates a “co-branded” debit card students must use to claim their refunds. The cards sometimes double as student IDs.
The strategy is successful. Almost 2.2 million students have accounts with the company.
But critics charge that students are “captive customers.” Higher One’s relentless marketing and co-branding leads students to believe their schools endorse the company or opening a Higher One account is required to collect refunds.
William Campbell, a student at Western Washington State, said that happened at his school where 80 percent of students signed up for Higher One accounts. “The number one reason they gave why was because they thought it was required,” Campbell told the Consumer Financial Protection Bureau last fall.
According to Higher One’s Lemoine, that co-branding and aggressive marketing are necessary to ensure that students don’t throw away the card.
Once students have their cards, the company’s website gives them three refund options: open a Higher One account and get money that day; send the refund to an existing account and be able to access the funds in two to three business days; or request a paper check and wait five to seven business days.
Some students and litigation against the company charge Higher One erects obstacles to refund options other than its accounts. Students sending refunds to an existing account, for example, must mail, fax or scan and send bank information. Litigation charges that the two- to three-day delay for a bank transfer is artificial.
Lemoine says the company does not delay refunds and needs the paperwork because of “the importance of having a hard signature” if a student makes a mistake.
Students who opt for paper checks, meanwhile, complain of waits up to a month or more. In 2012, a nearly month-long wait for a check almost cost University of Montana student David Schaad the opportunity to study in Vietnam. “I almost didn’t go,” Schaad said in an interview. “I felt, to be honest, very angry.”
Lemoine said in a separate statement that Higher One “regret(s) the inconvenience that Mr. Schaad experienced.” “Checks getting lost in the mail is the exact problem that Higher One’s system solves and a reason why schools recommend that students choose to receive their refund electronically,” she added.
The GAO’s report, meanwhile, concluded that debit card providers and schools fail to adequately disclose refund options to students. It recommended that federal officials write new rules requiring “objective and neutral information on options.”
Southern Connecticut State University Silent on Higher One
It’s indisputable that Higher One saves schools money. Financial aid officials rave about the company. Higher One brags that 98 percent of schools renew their contracts.
But critics say schools are selling out their students to save a few bucks. Victor Mendoza, former student trustee of De Anza College in California, who tried unsuccessfully to get his college to dump Higher One, said schools have a conflict of interest. “What sticks with me from that experience is that the board of trustees has a vastly different point of view on what constitutes a good deal for our students,” Mendoza told the Consumer Financial Protection Bureau last October. “What may be a good deal for a governing board is not necessarily one that’s good for the students, and the administration has more power than we do.”
Southern Connecticut State University is the only state public institution in Connecticut that uses Higher One. Its contract obligates it to “promote and encourage use of” the company’s accounts even though it has an existing agreement with Wepawaug-Flagg Credit Union to provide student accounts.
The credit union offers services that are very competitive with Higher One’s. It does not, for example, charge Higher One’s much-maligned 50-cent fee to use its card for debit transactions, and has nine ATMs on campus compared to Higher One’s one ATM, which is in a building closed weekends, nights and school holidays. Southern’s student brochure, meanwhile, lists the company’s controversial debit card fee as a PIN charge, but does not explain it.
Southern officials have declined an interview request and asked for questions in writing, but only answered a handful that sought statistical information.
“Other than that, we have no further comment on this issue,” spokesman Patrick Dilger wrote in an email.
“Charged to Use a Debit Card as a Debit Card”
Since 2012, the company has abolished some of its most controversial fees, and has also more heavily marketed an account that charges $4.95 per month with no fees and one at $5.95 per month with fewer fees but more services.
But a majority of its customers, Lemoine says, still use the OneAccount, which includes Higher One’s most unusual and controversial fee. The so-called “PIN” fee charges students 50 cents when they make a purchase with their debit card unless they tell the merchant to make the transaction credit. In short, they get charged for using a debit card as a debit card.
Critics say the fee is deceptive and unfair. Higher One adds to the confusion by constantly reminding students theirs is a debit not credit card. “They call it a debit card, but you would assume there’s no fees if you have a debit card,” said Tanner Kelly, student trustee at Coast Community College in Orange County, Cal. “If you swipe your card four times a day, that’s $2 a day and $700 a year. It’s deceptive.”
The fee is among the most common complaints about Higher One, and the company has abolished it at some schools after protests. This year, the Oregon state legislature is again considering a bill to outlaw the charge.
In addition to 50-cent fees paid by students, the charge fattens Higher One’s bottom line because merchants generally pay more for credit card transactions—a percentage versus a flat fee for debit cards.
Lemoine acknowledges that the fee is “not common,” but added it was more common a decade ago. “We’ve dropped this fee on two of our accounts,” she says. “The charge still exists on the basic OneAccount because there’s a cost structure on the back end. This PIN fee is avoidable. All you have to do is swipe and choose credit.”
But the GAO concluded that doesn’t always work because some merchants make credit more difficult to save on interchange fees.
A Shortage of ATMs?
Another longstanding complaint against Higher One is the number and location of its ATMs. The company has 870 ATMs at its approximately 600 schools, an average of 1.45 per campus, Lemoine says.
In addition, like at Southern, Higher One ATMs are typically located in buildings closed on weekends, nights, holidays and school vacations. To access their money during those times, students must pay the company $2.50 to use a foreign ATM. Students can pay up to $4.50 or more per transaction when the foreign ATM owner’s fees are added, according to U.S. PIRG. U.S. PIRG also claims Higher One ATMs sometimes run out of cash, especially early in the semester when students line up to access newly deposited funds.
Lemoine says that it is often colleges and universities that want the ATMs inside and closed after hours for security reasons or because of restrictive agreements with other institutions. “Wells Fargo or a very large bank may have an exclusive contract. In other instances, the college may say that the ATM is not in a secure location,” she says, adding that the company refunds up to $5 a day if machines go down and students access foreign ATMs. Its ATMs operate 98 percent of the time, the industry standard.
Lemoine also notes that two of the company’s three accounts allow students to use certain foreign ATMs some or all of the time.
The GAO report found that eight of nine schools it consulted did not report problems with students having to use foreign ATMs. It nonetheless recommended federal officials tighten and clarify rules to assure students have easy access to ATMs.
Co-founder Sean Glass Speaks
Lemoine declined to make Lasater or Volchek available for interviews. Glass, who left the company in early 2008 but is still a small stockholder, strongly defended Higher One in several emails.
“Criticisms of Higher One have centered around the fact that the company charges fees to its student checking account customers,” Glass wrote. “This is somewhat baffling as I have yet to find a checking account that doesn’t have either per service fees or a monthly account fee.”
Glass accused “politicians” “and “administrators in certain agencies” of making questionable accusations against Higher One for their own gain. Any company with 2 million customers will have complaints, he said. “It’s absurd because without Higher One, schools would spend more money, students would get slower access to funds and students would spend more on banking and debit card services,” he said.
Glass also urged Connecticut Magazine to “dig into the background, connections and intentions” of the author of the U.S. PIRG report.
Christine Lindstrom, U.S. PIRG’s higher education program director, said that one of the report’s authors later went to work for U.S. Rep. George Miller (D-Cal.), a Higher One critic. She added that U.S. PIRG investigated Higher One because of growing complaints—15 to 20 a year.
No Bulldog One Card
One place you won’t find Higher One is Yale. There is a Bulldog One card.
In spite of its longstanding support of Higher One, Yale has never hired the firm. University spokesman Tom Conroy did not respond when asked why.
One reason may be that not enough Yale students receive refunds. Higher One serves many two-year and community colleges whose students rely heavily on federal financial aid. Those schools charge less, so their students are therefore more likely to receive refunds, according to the GAO.
The criticisms against Higher One, meanwhile, have not dampened Yale’s enthusiasm for the company. Twice since taking office last fall, new President Peter Salovey or his representative have praised the company as a role model.
“Yale has no concerns about Higher One,” Conroy said in an email. “Yale is proud of its entrepreneurial graduates.”
Lasater and Volchek are leaving Higher One because “the time was right,” company spokeswoman Lemoine says. They remain on its board of directors.
Only in their mid-30s, both exit the company rich men. Each earned more than $2.5 million in total salary, bonuses and benefits between 2010 and 2012, according to SEC filings. They also sold large blocks of stock last year—Volchek almost $2 million worth, Lasater about $1.2 million. They both still own shares worth millions more.
According to his blog, Lasater plans to “take this year to look around and explore the world.” On the agenda: reading 100 books a year, taking online courses and dabbling in a variety of causes and interests, including money in politics, art promotion and New Haven start-ups.
Meanwhile, the company Lasater and Volchek started continues to face big challenges: legislation to curb its fees, continued campus backlash, an ongoing Consumer Financial Protection Bureau inquiry and possible federal rule changes that could threaten its business model.
Higher One is striving hard to diversify that business model. In a February earnings call, executives indicated that the firm is reducing its dependence on bank fees, a tacit concession to its critics. The company is also endeavoring to build up payment and other services it offers schools and students.
Whether all those efforts are enough to get Higher One riding high once again remains to be seen.