Higher One's Future Cloudy as Fees Investigated, Stock Price Drops, Executives Depart
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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.