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HSA Benchmarking Analysis: Market Trends and Economics

On the surface, the HSA market appears to be highly appealing for banks: from December 2006 to January 2008, accounts grew by 73%, while total balances grew by 140%. However, from the internal perspective of banks, the picture is not so clear, as income per account ranges from $60 to $100. Banks' varying revenue and cost structures indicate that the HSA market is still in a "pre-shakeout" stage, awaiting the bifurcation of market players into "manufacturers" and "distributors."

Despite considerable industry and press coverage since the introduction of health savings accounts in 2004, there has been a general lack of quantitative HSA performance data. Rather, most published information has been limited to marketwide HSA account numbers and balance levels. Given this lack of relevant data, Celent recognized that HSA custodial banks require a more granular level of research, enabling meaningful performance measurement vis-à-vis industry peers.

With its groundbreaking healthcare banking report, HSA Benchmarking Analysis: Market Trends and Economics, Celent crowns the inaugural round of its semiannual HSA Benchmarking Survey. Covering the period from December to 2005 to January 2008, this study provides a highly revealing view of how banks' HSA programs are performing. Fourteen banks participated in this study, sharing internal data related to accounts, balances, deposits, withdrawals, investments, pricing, revenue, costs, functionality, and distribution.
Findings included the following:
• Average account balances hit $1,400, up from $1,028 in Dec. 2006. Although deposits tend to be lower than IRS allowable amounts, they are accelerating over previous years' levels.
• There is no correlation between deposit levels and bank scale (total balances). Similarly, there is no correlation between withdrawal levels and bank scale -- an indication that market factors have a greater impact on consumer behavior than banks' activities.
• There is already considerable pressure on fee structures. At least half of all banks surveyed do not charge set-up fees and monthly fees are dropping compared to previous years.
• Average revenue per account ranges widely from slightly over $12 to $120. DDA (demand deposit account) spread and monthly fees are the main revenue drivers.
• The average cost per account ranges broadly from $22 to $110.

"The HSA market is relatively immature and will experience steady growth, along with heightened competition and attendant quests for cost improvements, customer acquisi¬tion and retention. The race for customers will be fierce, leading to increased investment in remote customer support and price wars," says Red Gillen, senior analyst with Celent's banking group and co-author of the report.

Co-author and Celent senior vice president Alenka Grealish adds, "The long-run battleground will be in customer retention. Similar to the credit card industry, in which scale and retention are critical to performance, the HSA market will be concentrated in the hands of a small number of 'manufacturers,' while distribution will be fragmented across a large number of banks and third parties."