Higher One's Future Cloudy as Fees Investigated, Stock Price Drops, Executives Depart
At the ribbon-cutting of Higher One's new offices in New Haven: (L-r): Mark Volchek, chairman and CFO of Higher One Holdings; Gov. Dannel P. Malloy; Miles Lasater, COO of Higher One; and New Haven Mayor John DeStefano.
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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.