Though an increasing number of banking companies are moving into the health savings account business, some experts say most of them should not expect the product to become a large revenue driver anytime soon.
"The middle market - including community banks - have [HSAs] but they are not positioned to generate a significant account base with it because of limited distribution opportunities," said Dan Kelly, the manager of HSA services for U.S. Bancorp's institutional trust and custody unit in Minneapolis.
Mr. Kelly said few channels deliver enough scale for HSAs to be profitable for banks.
Large banking companies, including his own, have already tapped health plans, third-party administrators, and business services firms, which include human resources benefit outsourcers, payroll administrators, and tax and consulting firms, he added.
Nonetheless, more than 80% of banks are "very optimistic" about the industry's prospects for administering health savings accounts, according to a study of 80 mostly large institutions by Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks bank sales of insurance and investment products.
Most banks surveyed by the Kehrer firm - more than half of which already administer HSAs -- said they expect strong or moderate growth in the business during the next two years.
That optimism may be misplaced, according to Katy Henrickson, a senior analyst at Forrester Research. She said only a very small group of banks - including JPMorgan Chase & Co., Mellon Financial Corp., and Webster Financial Corp.'s HSA Bank - are generating profits on these accounts. And that's because they were among the first to the product and were able to partner with big health-care plans.
"A lot of smaller firms will just have the product, but they won't make a lot from it," she said.
Peter Delano, a senior analyst at the TowerGroup unit of MasterCard International, agreed. Health savings accounts are at best an ancillary product for most banks, he said, and will not drive real asset growth.
"It is a new product, and it is exciting for banks to have an opportunity to generate additional assets, but in my mind, it remains to be seen if there will be a big boom for the industry as a whole," Mr. Delano said. "Some select institutions with wide distribution or adequate scale to develop a low-cost infrastructure may have a shot at profitability, but for the majority of banks it will be quite difficult."
Hurdles face most banks trying to accumulate assets through health savings accounts, according to Mr. Delano. Though the law lets a person contribute as much as $2,650 a year tax-free to an HSA, Tower's research says the average account will have a balance of only $300 to $750 by 2007.
Marshall Soura, an executive vice president and managing director of Sovereign Bancorp Inc.'s global solutions unit, said small and midsize banks still have an opportunity in HSAs. Sovereign, which launched its health savings account in October, has already aligned itself with two health-care providers in New England.
"What we are finding is, health-care providers have to have more than just one custodian," he said. "If the employer banks with a particular bank, that is who they want handling their HSA. Over time, as this business evolves, the leading HSA providers will be whatever banks the employers want."
Forrester has estimated better than 15-fold growth in HSAs, from 391,000 accounts at Oct. 31 to more than 6.3 million by 2008. These accounts will generate more than $250 million of fees in 2008, the Cambridge, Mass., technology and market research company said.
But Ms. Henrickson said only a small group of banking companies will make this money - mostly the larger ones that got into the market early and are charging transaction fees. Fees charged for setup and transactions are making health savings accounts profitable for the time being at banks that have developed scale, she said.
"Banks are charging more than they would for a checking account for now, she said, but these fees are going to get competed away."
U.S. Bancorp's Mr. Kelly agreed that fees on health savings accounts would decline rapidly.
"Pricing pressure is already a reality," he said. Scale is going to be absolutely necessary to survive."
Tower's Mr. Delano said banks are better positioned than mutual fund companies or other asset managers to reap profits from HSAs. The best way to profit, he said, is through partnership with another company that will handle administration and record keeping.
"Only the largest firms with an established expertise in HSAs and record keeping will do this at a low enough cost to maximize the profit potential of this product," he said.
"I think that the size of the account balance is the driver here," he said, "and really there is only so much that banks can do with small balances. In order to generate assets, banks have to be able to invest the balances and then they can generate management fees on that. It is difficult to generate large spreads with small assets."
Forrester's Ms. Henrickson said many banks are trying to use health savings accounts to cross-sell other products. Forrester's research says that about 20% of account holders use their HSA as a savings vehicle; 60% use it to cover medical expenses; and 20% do both.
"These products can potentially develop bigger relationships, but we haven't seen it yet," Ms. Henrickson said. "Banks have to be realistic. These savers are high-net-worth individuals, and it is very likely that they have already established their financial relationships. If they are saving in an HSA, then they are probably already saving with other products elsewhere."
"This product isn't like a 401(k) or an IRA; it just doesn't have that kind of growth potential," Mr. Delano said said.
Mr. Soura of Sovereign disagreed. The business is long-term and will evolve slowly, he said, and he expects the product to become a "major deposit play" that will grow in popularity much as individual retirement accounts did.
"For a bank to succeed with this, it has to be in this for the long term," he said. "This business will ramp up slowly.
