In the wake of controversy over its fees, the campus card provider Higher One is launching a flat-fee checking account with few ancillary costs.
Under its new offering, Higher One will charge customers $4.95 a month, with no fees for bounced checks, account inactivity or out-of-network ATM use, according to a press release issued Thursday. Nor will it require a minimum balance, though customers could still incur fees for international transactions, wire transfers, and cash advances.
The company concluded that account holders "are looking for a simpler experience without a la carte or transactional fees," Higher One spokeswoman Shoba Lemoine wrote to American Banker. The product will roll out later this year and will add to, instead of replacing, Higher One's existing suite of checking options.
"We feel we made the right decision in creating an account from scratch for students that, to date, we haven't even seen in the broader marketplace," Lemoine says.
Higher One provides aid distribution services to colleges and financial services to students. It has tangled with the Federal Deposit Insurance Corp. and consumer advocates over its fees in the past.
"The rationale seems political," says Andrew Jeffrey, an analyst for SunTrust Robinson Humphrey who follows the company. "If you're perceived to be gouging, you have a real PR and potentially customer relations challenge on your hands."
According to a report by a consultant for Higher One, the company's existing checking account options run up a median of $49 a year in costs for students. But even at around $60 a year for the flat-fee account, that likely wouldn't be a profitable business by itself, said Mike Moebs, a retail banking consultant who has studied checking accounts.
"It's an interesting concept, but the basic direct cost of a checking account is between $80 and $100, and that doesn't include overhead," Moebs said. Higher One "could be doing this as a loss leader to do the aid disbursement portion, where they're making some good money."
Jeffrey says that, along with interchange fee income and other sources of revenue, the accounts are profitable in their current form. Around 40% of the company's account revenue has traditionally come from interchange, with ATM fees and a list of account fees accounting for the other 60%.
Higher One could not provide the formal account disclosure it will present to customers because the company is still drafting the document, Lemoine said. But the terms as outlined by the company differentiate the account from those offered by most banks and credit unions, which rarely offer to waive ATM fees and insufficient fund fees across the board.
The Higher One offering is also notable given the company's history. In June the U.S. Public Interest Research Group had branded it the "biggest player" in a market that improperly fed on student aid payments. Earlier this month Higher One paid $11 million to settle an FDIC lawsuit alleging that it and Bancorp Bank had engaged in unfair and deceptive practices by running up fees for overdrafts and maintaining a negative balance.
Higher One admitted no wrongdoing in the agreement. In a statement Chief Executive Mark Volchek said the settlement "reflects how seriously we take our commitment to our customers, the degree of the issue and our swift resolution of it."
After the company's announcement of its flat-fee account option, Rich Williams, who headed the U.S. PIRG review of campus cards, said that it's better for financial services providers to charge clear set prices instead of earning fees on the back end of an account.
"Consumers' groups do endorse this type of model," he said of the flat-fee structure.
But U.S. PIRG argues that companies like Higher One should not be allowed to profit from exclusive aid distribution pacts with schools. Although students have the option of receiving their aid in the form of a check, Williams argues, the distribution companies steer them into products that are not a good value and provide few good options for accessing their money.
"Higher One still exists in this broken marketplace," he said.