The increase in assets in health savings accounts has many banks hopping on the bandwagon to launch the hot product and cross-sell it to retail customers, but Mellon Financial Corp. will continue to reap revenue from HSAs even after hopping out of the business this spring.
In March, Mellon announced a definitive agreement to sell its human resources consulting and outsourcing business, which includes the health savings account business line, to Affiliated Computer Services Inc. for $455 million.
Steve Hooper, a senior vice president and director of health savings account product management at Mellon, said Tuesday that despite the sale, which is expected to close before June 30, health savings accounts will remain a growing part of Mellon's business because the bank will continue to handle custodial services, cash management, record keeping, and investment management for the many sales alliances it has formed.
"This is an important revenue stream for Mellon," Mr. Hooper said.
Once the sale closes, he said, ACS will handle all the customer-facing operations, but Mellon will handle all the back-office services. Because of this, Mellon has kept working to expand the health savings business rapidly.
Analysts said Mellon sold its HR outsourcing business because it is a tough market but that the sale would not dampen Mellon's interest in health savings accounts.
"This is just a very vibrant business for Mellon, and it will continue to develop for them even after it is sold," said Burton Greenwald, a Philadelphia analyst. "They will continue to draw revenue from it, and they will continue to help it flourish."
Since starting with HSAs last April, Mellon has opened 20,000 accounts by selling through alliances with health plans, insurance companies, and third-party administrators. On Tuesday, it announced its 50th alliance, a partnership with NGS American Inc. to offer health savings accounts to their 350,000 members.
The Pittsburgh financial services company has been successful with the product because, even as competitors used health savings accounts to cross-sell other products and services through their retail arms, Mellon found a niche in lacking a retail arm.
Mr. Hooper said the absence of a retail operation left Mellon "uniquely situated to dominate the market."
"We aren't cross-selling here, and that is why health plans are partnering with us," Mr. Hooper said. "We aren't trying to get customers so that we can call them up the next week to sell them a mortgage. That is why insurance companies are selecting us."
Mr. Hooper said Mellon's HSA-alliance pipeline remains robust. The company has responded to four requests for proposals this week and has "several dozen" insurance companies in the pipeline, he said. He expects the Mellon HSA business that's being sold to expand from 20,000 to "in the seven figures" by 2007.
"Anybody can go to their corner savings and loan, and they may have a health savings account for you, but that is just an account with the triple tax advantage," Mr. Hooper said. "We bundle services around that."
Health savings accounts, established by the Medicare Prescription Drug Improvement and Modernization Act of 2003, let employers and employees contribute pretax funds (up to $2,600 for an individual and $5,150 for a family this year) to cover qualified medical expenses not paid under high-deductible health-care plans.
A report by Forrester Research Inc., a Cambridge, Mass., firm, predicts there will be 320,000 health savings accounts open by yearend, with $172 million of assets. Katy Henrickson, a Forrester analyst, said the account total would reach 6 million, with $4.8 billion of assets, by the end of 2008 and 18.6 million, with $34.7 billion, by yearend 2012.
Ms. Henrickson said banks are excited about the product because of the fee potential; she expects health savings account-related fees to top $1 billion by 2012. "I think that any bank worth its mettle is evaluating whether or not to provide health savings accounts," she said.
JPMorgan Chase & Co., Wells Fargo & Co., and Mellon are the top bank providers because they are finding a way to create an integrated offering with health plans, Ms. Henrickson said.
"Anyone can be a custodian and provide health savings accounts like a checking account, but I don't think that is enough," she said. "People are looking for a bank that can hook this product with their insurance plan and other products out there. Banks have to be slightly more innovative to really take advantage of this product."
Mr. Hooper said the key to Mellon's success has been "getting on the best street corners." Mellon is partners with large insurance companies nationally, including Blue Cross and Blue Shield in eight states.
Mellon's plan is popular with insurance companies, he said, because the bank offers a free debit card and checkbook and integrated investment options through its Dreyfus Corp. asset management subsidiary to customers who accumulate a few thousand dollars in their accounts.
Close integration with insurance companies and easily usable health savings accounts, Mr. Hooper said, should mean robust revenue streams even after the sale to ACS is completed.
