Bankers are eager to cash in on the easy funding offered by health savings accounts, but many have discovered installing the systems necessary to manage the accounts poses considerable challenges.
These accounts, which offer customers a tax-deferred way to put aside funds for medical expenses, are providing banks with a new source of deposits. Multiple business units must work together on the accounts, which combine the tax advantages of retirement plans with the transactional capabilities of traditional deposit accounts.
If that isn't hard enough, HSAs are available only for insurance policies with high deductibles, so health insurance companies must also be kept in the loop.
John M. Prince, a senior vice president at JPMorgan Chase & Co., which started offering an HSA in January of last year, said his company is still adjusting certain aspects of the account and will be doing so at least through 2007.
"It's a lot of work," he said. "We spent a lot of money on technology." He would not give specific spending figures.
JPMorgan Chase was one of the first banking companies to start offering an HSA after the law authorizing such accounts took effect, Mr. Prince said.
The accounts are typically funded by payroll deduction and have tax-reporting requirements similar to individual retirement accounts. But unlike IRAs, which are designed for long-term savings, HSAs also are transactional accounts; deposits and claims payments flow in and out of them throughout the year.
JPMorgan Chase's HSA combines a deposit account with an investment account and accepts deposits through automated clearing house payments. Users access the funds through a specialized debit card and can get account details through a Web site or through a call center. The entire system is also connected to 10 health insurance carriers.
Mr. Prince said JPMorgan Chase has also developed a single legal agreement for opening both the deposit and the investment account, though it will probably be several years before any users have enough money in their accounts to take full advantage of the investment features.
"We built the technology because we think it's necessary to be in the business," he said. "It's just going to take the market a while to get there."
HSAs are similar to medical flexible spending accounts, which are also offered through many companies, but FSA funds must be used within the same calendar year in which they are deposited.
Edward Kountz, a senior analyst at TowerGroup, the Needham, Mass., market research unit of MasterCard International, predicted that the number of HSAs and FSAs will rise to nearly 29.1 million by 2010, from 17.3 million this year, and that HSAs could have between $10 billion and $26 billion of assets by 2010.
Webster Financial Corp. of Waterbury, Conn., says it has 120,000 HSAs with $200 million of deposits.
The $17.2 billion-asset Webster jumped into the market this year by acquiring Eastern Wisconsin Bancshares, a small banking company in Howards Grove that specialized in HSAs. Nathaniel Brinn, an executive vice president at Webster, said it has enhanced its HSA Web site, offers automated enrollment processes, and is working with carriers, third-party administrators, and vendors of products such as specialized payment cards to enhance the accounts.
For example, Webster is working on ways to present both the banking and insurance data from the accounts online, he said.
"We're integrating on all fronts. I'm not sure everybody else is doing that," Mr. Brinn said.
Wells Fargo & Co. of San Francisco, another early developer of HSAs, made its first big splash in the market in October, when it announced a deal to act as the HSA trustee for Blue Shield of California.
John Reynolds, a senior vice president at Wells Fargo Institutional Trust Services, acknowledged the challenge of building a comprehensive system that meets the needs of corporate customers, end users, health care providers, and insurers. "We have pieces of it. We don't have the whole picture yet," he said.
Wells hopes to use HSAs to "penetrate some new geographic regions" beyond its West Coast base, Mr. Reynolds said. The accounts could also help its card and investment business units develop better ways to work together, he said.
U.S. Bancorp of Minneapolis, which began offering HSAs in January, is emphasizing its role as a custodian of funds. Daniel Kelly, a senior vice president at U.S. Bancorp, said the transaction-account portion of its HSA is in place now, but it will be October before it can integrate the accounts with its investment management system.
"It's somewhat of a work in progress," Mr. Kelly said.
Bank of America Corp. of Charlotte announced plans last month to enter the market. It said it plans initially on providing custodial and administrative services to health plans and employers, but it will also develop online bill payment and reimbursement services.
Eventually, B of A said, it plans to offer HSAs to its 33 million customer households.
A B of A spokesperson would not answer questions for this article.
Small banks are just as eager as large ones to get into the market.
For example, American Chartered Bank of Schaumburg, Ill., began offering HSAs in February 2004, at the request of a director who wanted to offer the accounts to employees of his law firm.
"We originally configured our product as an interest-bearing checking account. That was appealing to the support staff personnel" at the law firm, who viewed the account as a way to meet the high deductibles charged by the firm's insurer, said Ronald R. Hunt, a senior vice president and the chief operations officer at the $1.7 billion-asset unit of American Chartered Bancorp Inc.
But later, the law firm's partners began asking for a higher-yielding alternative they could use to shelter more income from taxes, Mr. Hunt said. "We immediately added CDs to our offerings."
To offer both the transactional and investment elements of the HSAs, American Chartered had to move them from its standard core-processing system to one that could handle the tax reporting, he said. Fiserv Inc. of Brookfield, Wis., provides both systems.
But the effort has been worthwhile, because the bank's primary business customers are net borrowers, he said. "We're always actively scrambling for reasonably priced funding," and the bank can now tap into the HSA deposits.
Fiserv announced plans in June to develop a broad range of HSA products for the 8,000 community banks and credit unions for which it provides core processing.
Other small banks have faced similar issues. Community Bank of San Joaquin, in Stockton, Calif., had to ask its core-banking software vendor, Open Solutions Inc. of Glastonbury, Conn., for a system upgrade to handle the tax accounting issues, then had to wait for its document vendor, Bankers Systems Inc. of St. Cloud, Minn., to develop the forms for opening the accounts. Spokespeople for Bankers Systems did not return calls Tuesday.
Marti Denk, the chief operating officer of the $116 million-asset Community Bank, a unit of Bank On It Inc., said it now has 120 employers using its HSA product.
"It's a nice little account. It's not a big responsibility for the bank. It brings in deposits. It generates fees," she said. "It's a no-brainer."
Some bankers offering the accounts, though, say there are limits to what they can offer.
Darby Bank and Trust Co. in Vidalia, Ga., for one, said that after it began offering HSAs through an insurance agent in Savannah, it was getting more business than it was prepared to handle.
After the bank's name showed up on the Internet, "before we knew it we had a dozen insurance companies, small agencies, that were contacting us," said John Tyson, a senior vice president and the chief operating officer at the $505 million-asset Darby, the main operating unit of DBT Holding Co. "We've gotten calls from all over the state. We have declined to go after that business, because we were not set up for it."
Darby has several hundred HSA accounts, Mr. Tyson said. "Once we got into it, it seemed natural, even for a community bank, to start offering it." But he acknowledged concerns about whether his bank wants to stay in the business.
"Is this more complicated than we've made it seem? Are we in over our heads? I don't think that will be the case," Mr. Tyson said. However, "we have not ruled out that possibility in the future, to say we gave it a shot but it's too competitive."
