Why banks are interested (again) in health savings accounts

Learn why more banks want to offer HSAs to their customers in 2023.

Since its introduction in the Medicare Modernization Act, the health savings account market has continued to grow. As of June 30, 2022, almost 34 million health savings accounts totaled $98 billion in assets, with $34.4 billion in investments and $63.6 billion in deposits. But most of this growth has occurred during a record-low federal reserve rate period. 

Today’s fed rate is the highest rate seen by a mature HSA market.

In response to inflationary concerns, the Federal Reserve has continued to raise the federal funds rate. The current rate of 4.58% is the highest since October 8, 2007. Here’s what the financial market looked like then:

The last time the rate was this high, HSAs had only existed for three years and had less than 4% of the current market's size in assets. So how will a nineteen-year-old HSA market that's 30x greater in asset size react to such high fed rates?

A note on the federal funds rate: the rate that banks and other depository institutions lend funds overnight to each other. The monetary policy-making body (FOMC) of the Federal Reserve sets a target range for the federal funds rate about every six weeks. By adjusting this target range, the federal government generally raises or lowers the cost of borrowing money.

a line graph, showing the federal funds rate since 2003, when the HSA Market opened. It shows that the HSA market hasn't experience such a high federal funds rate in maturity.
The HSA market was only three years old the last time the fed rate crossed 4.5%. Source: Macrotrends

HSAs, banks, and the high federal funds rate 

For this blog post, we'll answer the question about the impact of a high federal funds rate on the HSA market through the lens of depository institutions (i.e., banks). While many organizations, such as health plans and third-party administrators, provide health savings accounts to consumers, all HSAs must be deposited in banks—just like any other type of savings account. And as you might have guessed, banks are the organizations most directly impacted by federal fund rate increases as they hold the deposits. 

Here’s what we’re seeing from banks and HSAs in this current economic climate.

Banks are looking for new methods to make money. 

Higher rates make it more expensive for banks to lend money, and consumers and businesses are less likely to take out loans with higher rates. (The housing market is a good example, as more expensive loans mean fewer people willing to buy homes.) Higher rates also impact the number of mergers and acquisitions, another significant way banks make money.

Banks are looking for new sources of deposits as deposit growth has slowed.

The personal savings rate soared in 2020 as households spent less and stayed indoors, and simultaneously, stimulus payments raised the income of many households. That trend has changed, as has commercial banks' total deposits growth rate. In 2022, the YOY total deposits growth rate decreased every month.* And in 2023, the YOY total deposits growth rate has been negative for both January and February, with February's YOY total deposits growth rate coming in at  -2.41%. This decline in growth comes at a time when banks are more interested in accessing deposits for the promise of higher interest rates. And HSA deposits provide banks with low-cost funds as the cost of CDs, money markets, and other products increase due to an increasingly competitive market.

*December was the only month in 2022 that did not have a lower rate than the previous month; it still had a -0.97 total deposits YOY growth.

a line graph showing total deposits YOY growth since 2003.
Total deposits YOY growth slowed significantly in 2022. Source: FRED

HSA deposits are becoming a new revenue source for banks. 

With the higher fed rate, banks profit more on deposits held and pay more for funds they borrow. But with deposit growth slowing, banks are turning to HSAs as another deposit source. The more HSA deposits they hold, the more interest banks can earn.

Health savings accounts are stickier and more immune to recessionary cycles. 

Health savings account deposits are stickier than most savings accounts. A consumer can withdraw from a typical savings account for any reason, but an account holder can only withdraw from their HSA for medically eligible products and services. This stickiness makes HSA deposits somewhat immune from recessionary cycles where the average consumer spends down their savings. 

Industry experts see a shift to savings.

In Aite-Novarica’s  “Top 10 Trends in Healthcare Payments, 2023, they noted the following:

Focus on HSAs shifts to savings and card spending. The Federal Reserve’s interest rate hikes will impact the bottom line of custodians and revenue share partners in a positive manner. These institutions will consider promoting high-yield savings account options and determine how much of the interest rate increases to share with individual account holders.

We see banks taking two paths to expand HSA deposits in 2023.

We’ve seen two main paths form in our conversations with interested banks. 

Path One: Partner with an existing administrator to hold HSA assets

Similar to how depository institutions have partnered with fintech leaders to gain access to deposits, banks can partner with third-party administrators and health plans to gain exposure to HSA deposits. With this method, banks enjoy HSA deposits’ stickiness but lose a share of the net interest margin to their partner.

Path Two: Directly offer HSAs to customers via an integrated solution.

The second path is an excellent option for banks looking to have full custody of HSA deposits. By partnering with a technology partner that can directly integrate with its banking core, banks enjoy full custody of HSA deposits and can distribute new health savings accounts to their captive user base. This directly integrated solution is a great option for community banks looking to capture demand from their captive user base (retail & employers).

Renewed interest in custody of HSAs is good for banks and consumers.

We believe this competition will be a good force, lowering HSA admin fees. 

More competition will force administrators to reduce their HSA admin fees in a bid to win more accounts (i.e., more HSA deposits). This is good for the consumer and employer.

Jason Bornhorst
CEO of First Dollar
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Josh Hostetler

Josh leads content for First Dollar, a fintech company that builds infrastructure for health spending benefits. Before First Dollar, Josh led course creation at Aceable, taught First Grade, waited tables at Olive Garden, and wore many other hats. He misses the breadsticks.