Fewer than 5% of all checking accounts charge a fee for PIN-based transactions at places like coffee shops and supermarkets — the payment method most commonly used among debit card holders — and Higher One falls into the minority that does impose a fee.
That’s because the company, which has faced intense public criticism for other practices, appears to be running out of ways to make a profit off its role in distributing federal student loans.
Higher One, which provides universities with campus payment services and student debit cards for spending financial aid, charges a 50 cent fee on debit transactions that utilize a pin number instead of a signature for its basic “OneAccount” checking account. This fee, which William Blair analyst Christopher Shutler describes as an “outlier,” is particularly controversial since it discourages students from using pin numbers when making purchases and encourages them to use “credit” and sign a receipt like they would if they were using a credit card. This is despite the fact that Higher One is very clear that they don’t offer credit products, including overdraft protection for debit card payments.
The reason Higher One encourages students to make credit rather than pin-based transactions is because of the difference in fees merchants have to pay for each transaction: about 24 cents more for signature transactions than pin-based ones.
When a student uses a Higher One card to make a payment, the merchant has to pay a fee for use of either the debit or signature credit network that transmits the payment from the bank that issues the card. The networks are different and the companies that operate them charge different fees.
“It is more profitable to the card issuer if the transaction was routed through their network done by a signature debit than by a pin debit,” says Greg McBride, a senior financial analyst at Bankrate.com.
According to the Federal Reserve, the average signature interchange fee for so-called “exempt” issuers, meaning banks with under $10 billion in assets, which includes all of Higher One’s partner banks, is 51 cents across all the signature networks (including Visa and Discover) and 57 cents on the MasterCard network, which Higher One uses. For PIN transactions, the average interchange fee is 30 cents for exempt banks, and 33 cents on the Maestro network, operated by MasterCard. Thus, it’s more profitable for Higher One to have its customers swipe and sign instead of entering in a pin.
“It’s still pretty rare to charge a fee, fewer than five percent of checking accounts charge a PIN on any type of point of sale fee,” McBride says.
The PIN fee is one of the subjects of a class action lawsuit against Higher One that claims, among other things, that it “deceives students about, and does not adequately disclose, PIN Transaction Fees by…labeling the Higher One access device a “debit card” even though a student must use it as a “credit” card to avoid the fee.”
Essentially, what the lawsuit is claiming is that students who are enrolled in schools contracted with Higher One to disburse financial aid refunds — the left over amount of financial aid that doesn’t go to tuition — receive a card that explicitly says “DEBIT” that is administered by Higher One and issued by one of its partner banks. This card accepts financial aid deposits, can be used to withdraw cash from ATMs, and swipe to pay.
But, the lawsuit charges that the pin fee is both onerous and deceptive. Often, when users pay with it they are forced to cancel out of a debit transaction, press “credit” and proceed from there. Students at Western Washington, which contracts with Higher One for aid refunds, managed to get the PIN fee waived for the first four transactions following a wave of complaints.
The class action lawsuit is the latest in a long line of charges leveled against Higher One related to its fee charges. A spate of bad press and a $11 million settlement with the FDIC compelled the company to significantly simplify its fee structure and eliminated some of the fees that came under the most criticism. This includes fees on inactive accounts, insufficient fund fees, and some ATM fees.
Higher One is contesting the class action lawsuit. The company also has an education effort around encouraging students to sign for purchases. It says that over half of its account holders have never paid the pin-based transaction fee.
Still, critics of Higher One and the plaintiffs in the class action lawsuit claim that there is confusion baked into the system. A report issued by the U.S. Public Interest Research Group last year described the fee as “particularly outrageous.”
To cite one example, Higher One CEO Mark Volchek said at a conference last year that encouraging signature transactions were safer for students because they fell under a MasterCard zero liability policy for dealing with fraudulent transactions. While it may be easier for students to deal with MasterCard for fraudulent signature transactions, PIN transactions are of course far more secure — quite simply, it’s easier to forge a signature than learn someone’s PIN. According to one study of the debit market, the losses on signature debit transactions were eight times greater than the losses on PIN transactions.
“The fraud numbers show that a pin debit fraud is less frequent than signature debit fraud,” says McBride.
Higher One only charges the PIN fee on one of its accounts, the OneAccount. There is no fee for pin-based transactions for its “Edge” and “Premier” accounts.
Not coincidentally, Volchek said at the conference that “80% of our revenue comes from students who actually choose to actively use the OneAccount.” This means the fees Higher One charges, like monthly fees charged to some accounts, and then fees for services Volchek called “a la carte” fees — like using a non-Higher One ATM ($2.50), making a wire transfer ($25), or stopping a payment ($24). And then there are the payments from merchants for using the card — known as interchange fees, or as Volchek put it, fees that are “essentially paid by the merchant when the student makes a transaction.” (i.e., either the debit or signature card network fees)
Before Higher One eliminated some account fees and took down their fee revenue, these interchange payments were still “the largest portion” of their fee revenue, according to Volchek’s statement at the conference. The company told the New Haven Independent last year that about 30 percent of its revenue comes from these merchant swipe fees, a proportion that has probably gone higher as account fees have gone down. Higher One did not break out its fee makeup specifically in its most recent earnings report and wouldn’t answer specific questions from analysts about revenue from service fees and revenue from merchants.
In its most recent fiscal quarter, Higher One’s revenue from accounts has slid both in absolute terms and as a proportion of all revenue, which puts more pressure on the rest of the company’s income streams, like when the company handles tuition payments for schools.