Happy tax day! We actually don’t know how you feel about tax day, so if you are grumpy about it, we apologize. However, as a banker, you should be positive on the subject. Taxes, no surprise, are an excellent inducement to engage customers with financial leadership. Tax strategies, savings, and future planning are all anxieties that drive customers, and potential customers, to research. Proactively seek inquiries, and your bank is likely to reap tremendous rewards. Of all bank products, the health savings account/flexible savings account/health reimbursement arrangement (collectively called “HSA” for the sake of brevity) is a deposit product that not only drives profitability but is one that is highly sensitive to marketing. In this article, we explore that sensitivity and discuss some proven strategies of how banks can improve profitability by building high-performance deposits.
Making your bank more profitable is all about selling more profitable products to more profitable customers. Next to choosing your people and geography, proactively managing your product mix and your customers are the best investment a bank can make. While you may not be able to change your whole bank to focus on HSA accounts (some banks have), spending more marketing dollars and management resources in building your HSA business is likely multiple times more important than driving loan growth.
Health Savings Account Marketing Season
One often lost characteristic on HSA customers is how sensitive they are to marketing. The HSA customer is very suggestible and offers to make contributions or to use the account for certain withdrawals will often achieve 18%+ conversion rates. The general education around HSA accounts is low in our industry, so alerts, reminders, web explanations, videos, and calculators go far.
The other major attraction to HSA marketing is that the account has a very defined season. Both consumers and businesses turn their attention to the accounts at the end of the year with the peak being the first week in November. Households and employers (driven by their employee’s questions) inquire how to best use the account with regard to getting in year-end medical charges. Like almost all bank products, interest spikes up again in January and then remains high around tax season as households seek to contribute or open accounts. While interest has increased by about 20% over the past two years, this pattern of seasonality has remained remarkably consistent over the past ten years.
Below is a graphic that details this interest that equates the level of inquiries to a base rate of 100 in November. For example, reading the chart below, December generates about 60% of the inquiries compared to November.
Health Savings Account Value
Like most goal-oriented accounts, the HSA is a wonderful deposit product largely because users are not sensitive to interest rates. Balances build over time and stay on relatively the same trajectory no matter if rates go up or down. In fact, as disposable income grows, which is usually in a period of rising rates, HSA balances tend to increase at a faster rate making HSA accounts very positively convexed. This interest rate performance combined with a long lifetime account value gives this account a risk-adjusted product profitability profile of a 20% return on equity. If marketed through employers and customer acquisition costs can be minimized, gaining triple digit returns in lifetime value is easily obtainable.
While HSA has the initial balances like a checking account, they come to the bank at a fraction of the cost. The average account only has about 13 withdrawals per year and about half as many deposits. Not only is transaction activity reduced, but most transactions come in the form of low-cost debit card debits or bill pay instead of higher cost checks.
As can be seen above, average balances tend to build year-over-year. For every $1,000 contributed, usually $780 is withdrawn, and a balance of $220 remains. Send a reminder to contribute during the marketing season outlined above – either right after a household gets their refund or at the end of the year for tax planning - and you will find that you will quickly build balances faster than almost any other deposit marketing effort.
If all the above isn’t enough to move you to start a new HSA division, consider that cross-selling an HSA account increases the lifetime maturity of both your business and retail customers by more than 30%. There are few other products, save bill pay, that has that type of “stickiness.”
What Customers Want To Know
The number one thing that bank customers want to know is that they want to be reminded of their annual contribution limits. The next most common inquiry we get is how they work and what can the money be used for, and the third most common question is how to record the spending on your taxes. All these questions are easy for your bank to answer and ripe to create education content around.
Bank of America has one of the best educational HSA portals that can be found HERE. If you want more of a community bank HSA muse, consider HSA Bank (HERE), a division of Webster Bank, which specializes in offering HSA accounts. Through HSAs, the bank has generated over $5B of deposits for more than 2mm customers nationwide. Last year, they grew balances at a 20% clips and customers at a 27% rate. At an interest cost of 23 basis points, they generate about $39mm in fees in addition to those low-cost deposits. That works out to roughly a 36% ROE for 2016.
Putting This Into Action
As your bank looks to improve profitability, changing its product mix to include more profitable products is the best place to start. Of those products, creating an HSA infrastructure and marketing program will pay off huge dividends as you go after your small and middle market commercial customers and as you market on a retail basis. While you are at it, don’t forget to include accounts, lawyers, human resources and business consultants as they are all great sources to drive business.
Submitted by Chris Nichols on April 18, 2017