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Higher One grows to dominate college debit card market

Little-known company outmuscles big banks, draws criticism of students, regulators

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It's not a bank, and it has only been around since 2000, but Higher One is -- by far -- the largest provider of campus debit cards for college students.

If you're not connected with higher education you might never have heard of the Connecticut-based company, which was founded by a trio of Yale undergrads in 2000. But its campus card business is bigger than all its rivals -- which include Wells Fargo, U.S. Bank and Citibank -- combined, according to the Government Accountability Office. (See graphic: "Higher One dominates campus debit market".)

Debit cards on campus under scrutiny

Its debit cards, emblazoned with school insignia, have the advantage of being students' quickest route to getting their financial aid. The company is the school-approved distributor of financial aid at more than 600 campuses, its annual report states, giving it a head start on rival banks and card issuers. One of every eight federal financial aid recipients get their funds loaded on a Higher One card, according to an analysis by the U.S. Public Interest Research Group.  

But as concerns about student debt grow, the company's role as a middleman for student aid puts it in the crosshairs of criticism. Already penalized by the FDIC for excessive overdraft fees, the company now faces a fine from the Federal Reserve, restrictions from the Education Department, lawsuits from customers and shareholders, and possibly even a new law aimed at protecting its on-campus customers.

Student financial aid "should go toward the cost of college, not to banks through unjust and often hidden fees," said a statement by Sen. Tom Harkin (D-Iowa) introducing the Senate version of a bill to rein in campus debit cards.

Colleges say Higher One does a good job of distributing financial aid, shouldering a costly chore they are glad to outsource. But critics charge that schools are entering cozy deals with card issuers, which then rake excessive fees from financially inexperienced students.

Colleges "are essentially throwing students under the bus," said Christine Lindstrom, program director for higher education at U.S. PIRG, "and in some cases sharing revenue from really terrible deals."

Higher One's start
How did a 14-year old upstart grow to dominate the campus debit card market, outpacing much-larger banks?

Higher One's founders were college students themselves when they launched the venture during the tail end of the dot-com boom in 2000. Miles Lasater, Sean Glass and Mark Volchek were studying at Yale when they had the idea of creating a college ID card that was also a debit card. But the breakthrough idea was to contract with schools to distribute student aid electronically via the campus cards.

Higher One founders The December 2002 cover of the Yale alumni magazine featured Higher One founders (from left) Mark Volchek, Miles Lasater and Sean Glass.
Credit: Brennan Cavanaugh.

"Looking at the refund process, we noticed how frustrating it was for students to wait in line for their money," Lasater wrote in a post on the company's website. "In addition, the cost of issuing checks was costly for the school."

"Refund" is the term for student aid money that is left over after tuition and fees are paid. It is supposed to be available to the student for other college costs and living expenses. In order to hand out refund money, Higher One gets students' information from their colleges and sets up accounts for them, working through bank partners that provide service in the background. Students are told their aid is waiting for them in the Higher One account -- sometimes on a same-day basis -- if they accept the card.

Colleges flocked to the service, seeing the solution to a nagging administrative problem.

"Undelivered refund checks were a continuous source of headaches for our staff and grievances for the student body," Texas Woman's University Controller Kelly McCullar said in written comments to the Consumer Financial Protection Bureau in May 2013. Students move frequently, so mailing checks to them was a hit-or-miss process. "Transitioning from mailing paper checks to electronic funds transmission has saved many thousands of dollars," she said, while it also eliminated thousands of complaints.

It wasn't as though the school was handing students over to the company, she said. "The fact that students have options regarding which financial institution their refund is directed to have resulted in a high level of acceptance," McCullar wrote.

Students always have a choice to reject the card and have their aid sent by check instead, the company says. But many students say they feel muscled into the card and the associated account -- the use of which is the company's primary source of revenue.

An offer they couldn't refuse?
Marc Bechtol, a student at Catawba Valley Community College in North Carolina in 2011, received an email with the subject line "Want your refund? Activate your CVCC Onecard today." He also started getting spam from banks at the email address he had supplied the college. After making critical posts on the school's Facebook site, he was expelled.

"I pointed out the high fees, the inconvenience of the service and I tried to warn the younger students who might lack financial experience; fast money isn't always good money," he wrote in his appeal.

Catawba reversed Bechtol's explusion after a rights organization took up his cause, but his criticism of pushy tactics echoed on other Higher One campuses.

"They made the process of opting out so difficult you couldn't even submit the form online, you had to mail or fax the form to say you didn't want to use the card, " Western Washington University student Neil Baunsgard wrote in a comment to regulators in March 2013.

Oregon community college student Mario Parker-Milligan said he signed up for the debit card after seeing posters -- with the college logo -- saying Higher One card was an easier way to get his financial aid. When he realized the fees involved, he transferred the money to his account in a credit union, and thought he was done with the Higher One account.

Mario Parker-MilliganMario Parker-Milligan tried unsuccessfully to escape Higher One fees.

"A few months later I got an email from Higher One saying I had an overdraft on the account," Parker-Milligan said during a regulatory hearing in September 2013. When the student leader at Lane Community College in Eugene logged into the account, he saw the overdraft had been caused by inactivity fees. "I couldn't believe it," he said. "I had chosen not to use the account, and I was getting penalized for it."

Higher One has dropped the inactive account fee, officials said during a May 8 conference call with analysts. Greater revenue from other fees has helped make up the lost income, they added.

Colleges lured by payments
Colleges say that efficiency and better service for students are the reasons for contracting with card companies, including Higher One. But there are other incentives. Banks and card companies make payments to schools based on the number of students who sign up for accounts. Such deals can result in steering students to cards that are not in the students' interest, the Education Department's Inspector General said in a report released in March.

The report studied a contract between Portland State University and Higher One, among other agreements. The deal included payments for the Oregon school based on the number of students who signed up for accounts, generating $30,000 for the school in the 2011-2012 academic year. Portland State also paid Higher One $113,000 for services that year. Higher One told investigators that 71 of its 367 active contracts had a revenue-sharing provision as of September 2012, the report said. The company stopped offering per-student payments to new client colleges in 2007.

According to Higher One, the average annual cost for a student to use a basic account is $49, less than most commercial banks. But the GAO report found that the company's fees were higher than industry norms. It and one other campus card provider charged 50 cents for swiping a debit card to make a retail purchase, while the norm for the banking industry is fee-free debit transactions. In addition, Higher One had more barriers to free ATM use than other campus financial service providers, GAO said in its February 2014 report. The company charges $2.50 for using a foreign ATM, in addition to charges from the ATM owner.

In 2012, before the GAO report, the FDIC cracked down on the company and bank partner The Bancorp Bank for charging nonsufficient funds fees from a single transaction and "allowing these accounts to remain in overdrawn status over long periods of time, thus allowing NSF fees to continue accruing." Higher One agreed to stop the practice and refund about $11 million to 60,000 students. Its current bank partners are Customers Bank in Pennsylvania, WEX Bank in Utah and Urban Trust Bank, a federal savings bank. Bank partners hold deposits, fill ATMs with cash, complete wire transfers and provide other bank services on behalf of Higher One.

Lindstrom, who has followed the campus card issue for years and testified about it before Congress, said she thinks Higher One's business model will have to change, given the phalanx of pressures surrounding the company . "It would be bad business at this point not to make some holistic changes," she said, "just to right the ship and win back some public trust."

Higher One dominates campus debit card market

Congress, regulators propose new rules
Much of Higher One's rapid growth occurred in a market disruption created by the 2009 Credit CARD Act. The consumer protection law restricted credit card offers to students and required issuers to disclose their agreements with colleges -- including the compensation paid to the school for access to its students. As a result, deals between card issuers and colleges withered-- leaving room for the campus debit card business to expand. Higher One's annual sales shot up from $44 million in 2008 to about $200 million in 2013.

Now it looks like it is debit cards' turn for reform. Sen. Harkin's measure, plus a companion bill in the House, puts the power of Congressional intent behind a Department of Education rule being crafted to rein in the campus card market. For debit cards used to distribute financial aid dollars, the rule would outlaw certain fees including ATM and overdraft fees. It would also block cards from carrying the school's logo or otherwise implying an affiliation with the school, according to a draft proposal. Moreover, universities would have to publish their agreements with card companies on the Internet, revealing the bounties they receive when students open accounts.

Regulators tried to negotiate the rule with schools and with industry representatives, including Higher One's chief operating officer Casey McGuane. But the effort fell through in May when negotiators hit an impasse over fee limits.

Based on a draft version of the rule, "We are concerned Higher One's swipe fee revenue could be at risk and more students may elect to receive their refund disbursements in an existing financial account or by paper check rather than on a OneAccount debit card," Raymond James analyst Wayne Johnson wrote in a May 8 research note.

Company expects to be fined
The Education Department rule wouldn't take effect until mid-2015, but the company is in hot water with other regulators now. In a regulatory filing in May, Higher One disclosed that the Federal Reserve is poised to levy a fine against it and force it to make "material" refunds and change its practices. The cost isn't known, but it might be large enough to trigger a default on Higher One's bank lending agreement, the company's filing said.

MacombOne CardAn example of a Higher One card, from Macomb Community College campuses in Southeast Michigan, where the cards double as debit cards and college IDs.

Although Higher One was already beset by class-action lawsuits from customers and state-level investigations, this announcement was treated as a bombshell. The news caused its already suffering stock to plunge and triggered more class-action lawsuits -- this time by stockholders claiming they were duped. The shares that had debuted on the New York Stock Exchange at $12 in June 2010 sold for less than $4 after the revelations last month.

In one recent move, Higher One hired a new chief compliance officer with extensive bank compliance experience, who will answer directly to the audit committee of the board of directors, the company announced June 17. Richard Howells will help the company navigate banking regulations and higher education rules, the announcement said.

The company did not respond to interview requests, but CEO Marc Sheinbaum said in a conference call with analysts May 11 that the regulatory situation facing the company is "clearly fluid and complex." He also said that the company has beefed up regulatory compliance efforts in the past year, and that its campus card business remains strong.

"I know that there are issues that face us, but I also know we have valuable assets that will help us face these challenges," Sheinbaum said.

Indeed, the company saw changes looming back in 2010, when it laid out its road map for investors. In a filing with the Securities and Exchange Commission, the company said that 88 percent of its revenue came from interchange fees, ATM fees, nonsufficient fund fees, other banking services fees and convenience fees. "These fees, as well as the financial services industry in general, is expected to undergo substantial change in the near future," the company said in its registration statement, noting the passage of Dodd-Frank and the creation of the Consumer Financial Protection Bureau.

New management
As for the old guard, the company's founders have mainly left active management roles with Higher One, marking a separation with the company's past. Of the three Yalies, Miles Lasater remains as Higher One's chairman, having left day-to-day management roles in January, and plans to give up the chairman role as well. Mark Volchek stepped down as CEO in April, to be replaced by Sheinbaum. Glass had left the company in 2008 and became a serial entrepreneur and venture capitalist.

The focus on campus cards comes as part of a larger outcry about student loans. About 40 million people owe a combined $1.2 trillion in student loans, and critics say the amount has been driven up partly by unfair card fees.

"Our nation's next generation of leaders is already burdened with excessive education debt, making it harder for them to contribute to our economy and society," U.S. Rep. Maxine Waters said in a May 27 announcement of a House bill to rein in campus debit cards. "Predatory practices that increase the already exorbitant cost of college are not reflective of our national priorities."

See related: Student ID/debit card combos bring high fees, controversy to colleges, GAO urges changes in college-provided debit cards

Published: June 30, 2014



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