Chasing Higher One

Banks and former loan providers are entering the market for student aid refunds on debit cards, hoping to challenge the market leader by offering lower fees.
September 2, 2011

For several years, Higher One dominated the market for colleges and universities issuing student loan refunds by debit card. Their cards, often branded with the university's logo and sometimes doubling as student IDs, became the currency of choice at community colleges and many small state institutions, and the company maintained big profit margins -- despite complaints from students and advocates about some of its business practices.

Now it has new competition. Banks, former student loan originators and credit card companies have entered the market, offering prepaid debit cards and (in some cases) checking accounts where students can store refunds from student loans and Pell Grants. Many of the competitors are undercutting Higher One’s more controversial fees and charges, which attracted protests as the company gained prominence.

The newcomers, which include Sallie Mae, Nelnet and Blackboard, are drawn in by a multitude of factors: the need to find new areas of business after the end of bank-based student lending, the income from interchange fees that merchants pay when students use debit cards for payment, or simply the desire for a piece of the growing pie of student loans and grants. But just how much they will influence the market remains to be seen.

“There certainly is an opportunity to grow,” said Michael Taiano, a managing director in the research department at Sandler O’Neill & Partners, who tracks the stocks of both Higher One and Sallie Mae. But he said he doubts many institutions will break away from Higher One to join with a competitor, even if the fees for students are lower. “Schools are struggling with their budgets, looking for ways to become more efficient and cut costs, and this is probably one way that they can do it. I think there’s opportunity there, but I don’t know that the market is as big as it appears.”

Financial aid reimbursements are issued when the total of a student’s grants or loans paid to an institution exceeds the cost of tuition and fees. The remainder, which many students apply to textbooks, rent or other associated costs of living, traditionally was issued by paper check.

Debit cards, including those offered by Higher One, offered institutions several advantages: they required less staff time than processing paper refund checks, essentially outsourcing part of the functions of the bursar's or financial aid offices. They cost relatively little for colleges and universities; many of the fees are paid by students who use the service. Proponents say they save money for colleges and are safer for students without bank accounts, who otherwise might be paying check-cashing fees and carrying large sums of money, and more convenient for students who are used to relying on plastic.

Higher One's detractors cite fees they say are exorbitant: a 50-cent charge for using the card for a transaction with a personal identification number, as well as ATM charges (Higher One ATMs are located almost exclusively on campuses) and a fee of up to $19 for inactive accounts. Although students were not forced to accept the debit card, critics said institutions offered students little choice, in some cases requiring students to go through Higher One to receive the refund as a direct deposit.

The new options in the debit card market include a checking account by Sallie Mae and prepaid debit cards from Nelnet (in partnership with Citibank), PNC and Blackboard, the educational technology company. Most are relative newcomers -- although Sallie Mae previously offered a prepaid debit card, the majority of banks introduced their programs in the past 18 months. So far, few have gained traction or are willing to publicly say how many schools are affiliates. Some appear to have only one or two associated institutions; Sallie Mae, which appears to have the most, still has fewer than 50, Taiano said.

Many of the newcomers undercut Higher One on a contentious point: the 50-cent fee the company charged students who swiped their debit card and paid with a PIN, rather than a signature. Some also offer more free ATM transactions through national networks, or a monthly maintenance fee for inactive accounts lower than the fee Higher One charges.

Sallie Mae’s No Fee Student Checking, structured as a checking account that includes a debit card rather than a prepaid card, has no fee for PIN transactions or ATM withdrawals within the Allpoint network. PNC Bank, which offers a prepaid Visa debit card, includes free withdrawals only at PNC ATMs. Blackboard in March 2010 introduced Blackboard Pay, a preloaded debit card with free ATM withdrawals at Allpoint or STAR networks and no PIN transaction fees. Three colleges began using the system in November.

“I think it’s a very significant difference from the students’ perspective,” Mark Kantrowitz, publisher of, said of the lower fees. But whether that factor makes a difference for colleges is unclear, he added: institutions opt to use an outside vendor (rather than issuing their own checks or direct deposits) to save money for themselves, even if some costs are eventually passed along to students. So far, the new services have not promoted themselves as cheaper options for the colleges themselves. “What you essentially have here is a trade-off between the institution’s pecuniary interest and the best interest of the student.”

A New Direction

When bank-based student lending ended, Sallie Mae and Nelnet had to reinvent themselves to make up for the business lost in loan origination. The companies, already used to transferring funds, managing loans and maintaining student records, are seeking to expand the services they provide to financial aid officers, including billing and tuition payment plans as well as the refund cards.

“We are in the consumer banking business now,” said Kelly Christiano, vice president of savings and rewards with Sallie Mae.

The amount of federal financial aid distributed has also increased during the recession, leading to a larger market of recipients. An institution facing budget cuts might be more likely to consider outsourcing some services, including refund disbursement, from its financial aid office to a third-party company. And when Higher One made an initial public offering in 2010, other companies saw the profits that could be made, Taiano said. The company reported $35.1 million in revenue in the second quarter of 2011.

Sallie Mae and Blackboard are pitching their lower fees as an advantage over Higher One. “Charging students fees to get access to the refunds they’re getting from the school does not fit with providing a responsible product,” Christiano said. But all the companies still make money through interchange fees, which banks charge retailers who accept debit or credit cards, as well as the fees for lost cards and other costs that students pay.

“It allows the banking industry to skim revenue off of financial aid disbursement,” said Richard Hershman, director of government relations for the National Association of College Stores. “For every dollar that flows out in financial aid, if the student doesn’t take it out as cash, the banks are able to collect anywhere from a percent to in some cases 2 percent in interchange fees and processing fees.”

The new entrants to the market have their advantages: Blackboard, Nelnet and Sallie Mae already have business relationships with institutions that might be interested in transitioning to debit cards, and their diversified businesses mean that they can afford to charge lower fees to students than Higher One does. But Higher One is in a strong position: in addition to its presence on more than 700 campuses, it holds several patents that could make it difficult for other companies to offer a combined student ID and debit card, Kantrowitz said.

Challenges on all sides

“A year ago, our biggest competitor was ‘do nothing,’ ” said Dean Hatton, the president and CEO of Higher One, during a recorded investment Web seminar in June. “The addition of more competition in the space has had a very interesting effect: it actually has raised awareness among schools that there are things that they can do to improve things in the business office.” The competition could be beneficial to the company, he added, because it creates “more active buyers” in the market.

Still, Higher One faces challenges of its own. Several analysts raised concerns about a conflict of interest, in part because the customer -- the college -- pays relatively little compared to the students, who bear the brunt of fees and charges. The company’s banking partner, The Bancorp Bank, recently terminated its relationship with Higher One, despite the fact that Higher One deposits made up as much as 15 percent of its deposits, and estimated that the move would cost little, Taiano said. Since students withdraw the funds quickly, there’s limited opportunity for the bank to invest the deposits and make a profit.

Higher One has advertised that it is looking for a new banking partner and has changed such relationships in the past, Miles Lasater, the company’s chief operating officer, said in an e-mailed statement. “In our history we’ve had partnerships with several banking institutions,” Lasater said. “In past transitions there has been little change for students and administrations and we’ll work towards that end in this transition, too.”

The newer entrants also struggle with some of the same issues that drew scrutiny at Higher One: the bank still manages all of a university’s financial aid reimbursement, and many of them push debit cards heavily. (While PNC notes that an electronic funds transfer to a checking account is faster than mailing a card, Nelnet presents a chart that makes the prepaid cards seem vastly superior on every front: they make funds available immediately, allow for one free foreign ATM withdrawal, offer “mobile messaging alerts,” and are managed by a third party, which the company says promotes safety and security.)

Students still pay out-of-network ATM fees as well as other common charges. “All that money should be going to the educational purpose, which is the college costs,” Kantrowitz said. “The purpose is not to enrich some bank somewhere that wants to earn.”

But perhaps the biggest challenge -- for both Higher One and its would-be competitors -- is how many more institutions they can attract. Though almost all institutions issue refunds, they are far more common at colleges where the average financial aid exceeds the cost of tuition, a market that includes more community colleges than expensive private colleges or public flagships.

While paper checks presented problems for colleges and students, including slow processing time, higher costs and risks for students without bank accounts, many colleges have used electronic transfers as the solution, said Anne Gross, vice president for regulatory affairs with the National Association of College and University Business Officers.

In a recent NACUBO survey of 300 institutions, fewer than 5 percent were using preloaded debit cards to issue refunds, she said. Even at community colleges, which have been the most enthusiastic adopters, just over one-tenth relied on stored-value cards.

“Most schools would prefer that most students have bank accounts and checking accounts and kind of come into the mainstream” rather than rely on a pre-loaded debit card, Gross said. Many colleges also want to retain more control over reimbursements, whether to prevent fraud or to advise students on spending the money.

“You hear more about it, when it really isn't the biggest thing out there,” Gross said of the stored-value cards. “I think it’s likely to remain a niche product.”


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