UMB Financial Corp. doubled its health savings account business last year, and the president of its health care services unit said he is confident his company can continue to develop as larger banks enter the business.
The Kansas City, Mo., banking company has amassed $75 million of deposits from partnerships with insurers, third-party administrators and technology companies, said Dennis Triplett, the unit's president.
"I believe this is a number we can double again, not just because of the growth we have seen in the industry, but because of some of the legislative changes that have taken place," Mr. Triplett said in an interview last week. "Deductible amounts have increased and acceptance of these plans is widening."
Health savings accounts, which allow workers to save for medical expenses tax-free, began to appear in 2004 as a means to pay for high-deductible insurance plans. By the end of last year there were 3.6 million of the accounts with $5.1 billion of deposits, according to an estimate from Information Strategies Inc., which tracks the product. The Palisades Park, N.J., firm predicts that there will be 8 million accounts with $13.6 billion of deposits by the end of this year.
One reason the accounts appear primed for growth has to do with structural changes. The Tax Relief and Health Care Act of 2006, which President Bush signed into law last month, allows a one-time rollover to HSAs from flexible spending accounts, health reimbursement accounts, and individual retirement accounts. Also, savers no longer need to limit their contributions to the corresponding health plan's annual deductible cost.
In addition, individuals who open an account after the health plan's term begins can still deposit the total annual amount allowed. This year the contribution cap rose 5.6% for individuals, to $2,850, and 3.7% for families, to $5,650.
Small companies like UMB are well represented among health savings account custodians. There are 1,200 custodial institutions, including about 500 community banks and 400 credit unions, according to Information Strategies.
The largest account providers are small institutions like Webster Financial Corp. in Waterbury, Conn., whose HSA Bank had $356 million of HSA deposits as of March 28, and UnitedHealth Group Inc.'s Exante Financial Services, which had $325 million as of Feb. 28.
But analysts warn that as the popularity of the accounts continue to increase, so will the likelihood that large financial services companies will enter the fray and eventually crowd out small institutions.
Specialty banks like Exante and HSA Bank held 36% of HSA deposits last year, according to Information Strategies, but that percentage is expected to decline to 11% by 2010 as national and regional banks, investment banks, and brokerage companies gather share.
Donald Mazzella, the editorial director for Information Strategies, said that despite these trends, he is confident there will be enough room for more banks as the market continues to expand. Information Strategies has predicted that there will 1,600 institutions offering the accounts by the end of this year.
"To be honest, I think bigger banks are going to have a tougher time breaking into the HSA space than the smaller banks, because their goals are so much bigger," Mr. Mazzella said. "There has been a lot of turnover at the big banks, because they haven't reached the goals that they set up. Big banks need big numbers to succeed."
Mr. Triplett said UMB will be able to continue to compete for accounts as the market continues to evolve.
"As an early adopter, we have generated a certain position in this market, and I look forward to continued growth as a result of that," he said. "While there will be additional competition, the growth has been so greater that we are still bullish about our position, thanks to the capabilities that we have."
UMB Bank has been offering HSAs since 2004 after having offered medical savings accounts since 1996 It has had a relationship with First Data Healthcare Services, a division of First Data Corp., for two years to offer a credit card that incorporates an individual's HSA with a line of credit.
"A lot of companies are discussing a line of credit, but when you get down to the ground level, most of the competitors aren't there yet," Mr. Triplett said. "The cards offer us a tangible differentiator in a crowding market."
Robyn Bartlett-Andersen, the general manager of health care services for First Data Corp., said it offers a multipurpose card that can consolidate a flexible spending account, a health savings account, a health reimbursement account, and a line of credit on a single card.
"This is something a lot of competitors are trying to get, but the regulatory hurdles have been difficult to get over," she said. "We were told by the IRS that we were on the right track."
Too many banks are trying to fit health savings accounts into their banking model, Ms. Bartlett-Andersen said, rather than considering the products more holistically.
Mr. Triplett agreed with that assessment. "Banks need to remember what happened with IRAs," he said. "Banks had 75% share of IRAs, but now they have 9%, because banks wanted to use IRAs as a way to acquire deposits, but consumers wanted mutual funds. HSAs are not just a deposit product. This is a relationship that a bank can acquire and retain, whether the assets are put in money market funds or equity funds or FDIC deposits."
Mr. Mazzella said he thinks banking companies like UMB ill remain a strong competitor in the HSA market. "These specialty banks are too firmly established to be eliminated, but they are scrambling right now to distinguish themselves."
