Terence Roche, Principal at Cornerstone Advisors

Health savings accounts are not new. Banks have been authorized to offer them since 2003. However, it seems that lately the topic has become hotter due to the convergence of two things: health care premium increases and banks' desires for deposits. An odd pairing, no? Well, let’s examine why.

First, the nickel summary of HSAs. Employees who participate in high-deductible health insurance plans ($1,000 for individuals, $2,000 for families) can make tax-free contributions to an account that can be used to pay for medical expenses (other than premiums). Annual contributions can total $2,600 for an individual and $5,150 for a family. Payments can be made with a debit card provided expressly for this purpose.

There are two major differences between traditional MSAs (medical savings accounts) and HSAs. One is that MSAs are restricted to self-employed individuals or small companies with fewer than 50 employees, whereas HSAs impart no income or size restrictions on employers. The second difference is that, with an HSA, either the employer or the employee, or a combination of both, can make the contributions. With an MSA, it's either/or.

The appeal of HSAs to employers is simple: the higher-deductible health plans that accompany them result in lower premiums. And, in fact, according to Milliman Global, 90% of employers have access to a high-deductible plan. For those that have seen significant year-over-year health care cost increases (and who hasn’t?), there’s no questioning the benefit. As a result, the estimates for HSA account growth are impressive. Forrester estimates that there may be as many as 17 million accounts, representing $35 billion in deposits, by 2012.

The appeal to banks is equally obvious: those deposits have to go somewhere, right? So, let’s see. Deposit growth is a key initiative at most banks… lots of employers moving toward HSA accounts… big future potential balances… still room, maybe, to be an early mover… processing… processing… ta dah!

In fact, many banks are in the HSA game, and there are two paths they seem to be taking. Larger banks (e.g., Chase, Wells) have already partnered with larger insurers (e.g., Cigna, Blue Cross) and act as the depository for their plan participants.

Small and mid-size banks have entered the HSA game as well. Some have pursued the same types of partnerships with smaller local insurers. However, many have taken the “grass roots” approach to HSAs by directly targeting their small business and corporate customers and the employees they cover in health plans directly. This product is a logical add-on to the overall package of banking services offered through the cash management groups.

For those that have not entered the HSA marketplace, there’s still time to get your share of the multi-billion dollar deposit pie. I’m going to suggest some ground rules for entry that will (hopefully) help:

1. Set high goals for deposit balances. There is no point in setting “me, too” types of goals for HSA deposit growth, because the effort isn’t justified by, say, 150 accounts and $1 million in balances in a couple of years. How about a goal of HSA market share of 50 to 100 percent of overall deposit market share? Or 25 to 50 percent of all business customers enrolled? These goals may not be exactly right, but the point is to aim high or skip the effort entirely.
   
   
2. Don’t forget the fee income opportunity. There are two real opportunities to increase fee income. One is in account processing fees. For example, Mellon Bank, an early entrant into HSAs, charges $2 – $3.50 per month for account maintenance. Even if banks decide to waive account fees if certain total balances are maintained, or offer the accounts completely free of charge, the fact that the main method of accessing the funds is via debit means that there will be some amount of interchange income.
   
   
3. Win with knowledge. With all due respect to sales training, the real way to have a long-term advantage in the HSA arena is to arm employees with deep knowledge of HSA rules, the health care plans that allow them, the enrollment process, the ins and outs of issuing and using debit cards, and the local players. Employers who are already struggling with what to do about health plans will respond to people who are confident and have answers regarding HSAs. Set the goal that your employees involved in HSA delivery will know more than anybody in town.
   
   
4. Don’t underestimate the importance of statements and reports. All of the knowledge in the world can be undone by a crummy-looking statement or a confusing summary report to an employer. On the other hand, a sales rep who can show a prospect a crisp-looking monthly statement and an easily understood Internet history screen just might be able to swing the deal.
   
   
5. Get the systems right. It’s funny—the systems required to support HSAs are mostly in place already, but just need to be combined in some new ways:
   
   • Web and phone-based access to information via Internet banking
   • Withholding and transfer to accounts via ACH
   • Payment access via debit cards
   • Monitoring of annual contributions and distribution history, as is required for IRAs
   • Service fee options already available in deposit processing systems
   • Employer and employee statement capabilities, like those required for business banking

   The good news is that, although there may be some modifications needed for statements, most of the other system capabilities needed to offer HSAs are available.

In summary, there are countless strategic plans that say a bank will be nimble, respond to market opportunities, and win with execution. There are precious few times a new-opportunity market presents itself and allows the bank to test its ability to actually do it. Perhaps HSAs will not be the next big thing. Maybe the balances won’t grow as predicted. But what would you rather say in three years—that you took a chance on something that didn’t materialize or that you took a wait-and-see attitude and missed the early-entry opportunity on what turned out to be a gold mine?

C’mon. You know which.

Terence Roche is a principal at Cornerstone Advisors and has over 20 years’ experience in bank operations. Before founding Cornerstone, he served as a Managing Director at M ONE, Inc., where he built the firm's highly successful vendor selection practice. Prior to M ONE, he was senior vice president of Systems and Technology at Bay View Federal Bank in San Francisco. He has been published in the American Banker and Bank Technology News. He has taught at the BAI and ACB schools of banking and is a faculty member of the University of Wisconsin Graduate School of Banking.

The text of this article originally appeared on GonzoBanker (www.gonzobanker.com) and is reprinted with permission from GonzoBanker and Cornerstone Advisors, Inc., Scottsdale, Arizona.

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