The second factor is that the variable cash that we need to maintain liquidity is built into the instrument. So in the bank instruments, right, yes, they have a minimum Max, but fundamentally, they still work like term deposits. And so we have a separate cash today about million or about 4% of our 3.5% of our total HSA cash that is in purely variable rate instruments, and we need to have it there because that protects us against any liquidity issues. And so the liquidity is built into the contract. And so that’s very helpful in terms of eliminating situations where you have as occurred in March of 2020, very rapid changes in government policy and the like that produce big changes and particularly downward in variable rates. And then the third factor, which I guess will get into a little bit more, I’m sure this will be on the agenda when we get to Investor Day.
But is some stuff that is internal, I’ll just say, internal to the contracts that is just really designed to some extent, to provide a little bit of trade-off between rate and non-cyclicality. We really recognize that it’s not in the interest of our investors nor is it valuable in terms of managing the business for people to start thinking about these dollars as anything other than what in the end they really are, which is fees, right? And when we’ve been — when we’re fully exposed to deposit products as we have been, though we’ve done everything in our power within that world to try and minimize that cyclicality, right? There’s still — particularly when you’re close to rebound, there’s quite a bit of it. And so that’s the third factor. And again, we’ll, I’m sure, go into details at some point.
But take all these together, and it’s not that there aren’t going to be ups and downs, there are okay? But it should be the case, a, that we’re at — the more money that goes into these products, the higher the neutral rate will be. And second, the less variability there will be — or the less variability there will be with short-term changes in interest rates.
Sean Dodge: Okay. And then you said — so the goal is to transition 10%, give or take, of the deposits to these, it sounds like you’re tracking at or slightly better than that. Is that still the way we should be thinking about that over the longer term? Or are there opportunities out there at some point to start to accelerate how quickly you transition cash [indiscernible]?
Jon Kessler: So what I’m asking me to tell you otherwise, that’s the way you should think about it.
Operator: Thank you. And our next question today comes from Scott Schoenhaus with Stephens.
Scott Schoenhaus: Guys, can you hear me? So congrats on Titan. It is also a pleasure working with you. Good welcome to your next adventure. So I just — most of my questions have been asked. I just wanted to drill on on the service fee side. How much of that was driven — the growth driven by — I think you talked last quarter about slightly raised fees versus the underlying improvement in like commuter CERA, if you could break out any differentiation that would be great.
Jon Kessler: So if you look at it, service fees, particularly if you take the if you look at it, service fees, I believe, grew slightly faster than accounts than total accounts. And it’s a little tricky because most service fees come from CDBs and the like. But I would say that the bigger issue here was just — was volume driven. And we are starting to see some of the rate increases that we put out there and talked about in the first quarter, start to come through in actual collected revenues and the like. But I think you’re going to see a little more of that, particularly as we get into the beginning of fiscal ’25 as a critical factor. Of course, we also hope that volumes are up as well. But I think for the moment, what you’re seeing is a little more volume driven on the top line.
Scott Schoenhaus: Great. That’s great color. And then just on the balance sheet, like $290 million of cash. Anything changing in the M&A environment versus 90 days ago?
Jon Kessler: We commented 90 days ago that we felt like kind of given the proximity to the deposit crisis on the bank side that yields weren’t likely. And that’s why we went ahead. And if you recall, back at the end of April, started to — we did a partial paydown on our term A. We sort of just did the math and it made sense. But I should say Tyson did the math and then he showed it to me, and I said no, like 5 times and he kept showing it to me, and he was right. But I think that with a little bit of distance from that, it’s — we are seeing a little bit of that. You’ve seen some transactions announced primarily in areas where the HSA is a piece of the business but not the whole of the business, and those generally are transactions that we’re going to do at this point.
But so you’ve seen a few of those. I think also in truth, the fact that things like the move to enhance rates, the increased investment that we’re making and presumably others who want to be competitive, will make too all those factors raise barriers to staying in the market. And so I do think that it’s possible that over the next while, you will see 1 or 2 of the larger players. I don’t think the very top of the bracket, but in that area, break free, and we’re pleased to be in a position to be ready to do those transactions. And the nice thing about them, as you know, is that from a shareholder perspective, we’ve done a number of these. We know we don’t need any kind of bank or multiple magic to make them work. It’s — we look at the IRR. And if the IRR works, we can do it.
And from a cash flow and leverage perspective, these portfolio type transactions start cash flowing on day 1, and you’re not having to muck around with synergies and all that we’ve dealt with in other transactions, but not in this type. So I guess I would say, that’s just a long way to say, I think it’s incrementally a little bit better. But I think particularly on the smaller transactions, like just plain old bank transfers that occur a little less — still less of those. I think the small banks got a pretty good scare. And I think they’re still pretty scared.
Operator: And our next question today comes from Allen Lutz with Bank of America.
Allen Lutz: I guess one for Tyson. As we look at the custodial revenue and I went back and looked at custodial revenue really since the IPO, and it goes up basically every quarter, only in fiscal ’21 didn’t really ever dip. But I guess I wanted to talk about the components of the about $4.5 million increase sequentially in custodial revenue in the quarter. Can you just talk about what are some of the drivers of that? And then should we see some of those sequential drivers impact revenue going from 2Q to 3Q this year?
