Most of us know the Federal Reserve Board as the central banker for the United States. It is the entity that conducts the nation's monetary policy, supervises and regulates banking institutions, provides financial services to those institutions, and stabilizes the financial system during times of crisis.

But fewer people know that the Fed has a vibrant research department that provides cutting edge data on issues that affect consumer finance, including how we pay for things.

The Fed recently released “Consumers’ Use of Mobile Financial Services 2013,” which updates similar research done in 2011. Within the payments industry you won’t find a hotter topic than mobile payments (unless it’s EMV, but that’s a story for another day). But it can be difficult cutting through all the hype to get an accurate picture of how consumers look at mobile: who uses it, who doesn’t, what do they use it for, and how confident are they in mobile as a payment system.

The Fed, with no dog in the hunt, has done this. “Consumers Use of Mobile Financial Services 2013” is a thorough collection of data with objective analysis. It covers 4 areas: mobile banking, mobile payments, shopping with mobile technology and how secure consumers think it is to entrust important personal information to a channel like mobile.

Among the report’s findings:

Those who had adopted mobile payments appear pleased with the channel. Over 90% of these respondents said they were “satisfied” or “very satisfied” with their mobile payment experiences. In fact, a number appeared ready to take the next step in the mobile payment march. About a third of them said it was “likely” or “very likely” they would use contactless payments if given the change. That’s up from 5% in the previous survey.

The report also digs into why consumers have rejected the concept of mobile banking. The reasons seem to be more visceral than anything else. Top reasons include having their banking needs met by more traditional channels, and concerns over security.

Only a third of mobile banking users, when asked to rate the overall security of mobile banking, labeled it “safe” or “very safe,” hardly a ringing endorsement.

Despite the lingering concerns over security, more and more consumers are using their mobile phones to check their bank balances or buy their morning coffee. And while use of mobile payments has remained constant over the last two surveys, according to the Fed, the use of mobile banking is up 33% over the last year.

Clearly these gains are tied to the increasing proliferation of smartphones. As mobile telephony grew over the last 15 years, proponents of mobile commerce kept saying that it would take off once the industry found the “killer app” that would drive the market. It appears now that the killer app wasn’t an app at all. It was the phone itself. 

www.chaddsdfordplanning.com 

In a “Man Bites Dog” lead, we’re pleased to announce that healthcare spending appears to be declining. As of now.

Earlier this month, the Wall Street Journal editorialized that the growth in health spending has leveled out at about 4% over the last three years. That’s lower than it’s been for 40 years and way down from its mark of 6% to 10% over the last decade.

At first glance it looks like the decline is tied to the continuing weak economy: fewer jobs mean less employer-subsidized health insurance and medical treatment. In fact, according to the Journal, the Kaiser Family Foundation recently estimated that nearly 80% of the health spending slowdown can be attributed to economic conditions.

If that’s the case, then we can expect an explosion in health care costs as the economy improves. Right? Not so fast.

There is also evidence that the change in healthcare spending has been going on for longer than thought and that it may indicate a permanent leveling of cost. If so, this would be contrary to everything we think about healthcare.

In fact, another economic model now shows that the slowdown has been going on for a long time. That it is systemic, durable and, perhaps, permanent. Economist David Cutlerand Nikhil Sagni say that their model shows that the recession of 2007 only accounts for about 45% of the decline in spending. That’s about half of the Kaiser estimate.

Taking it a step further, another model by Michael Chernow of the Harvard Medical School has suggested that the spending decline is the result of market choice and competition, introduced into the healthcare market beginning in the last decade. Investigating changes in the large market insurance business he found that these firms did better than smaller ones controlling cost through the use of higher deductibles and co-pays, as well as innovative program designs. These changes account for 20% of the slowdown, the model suggests.

When patients, rather than a third party, are empowered to make their own spending decisions about healthcare, they tend to be more frugal. Over the long haul this lowers overall costs, the models seem to suggest.

During World War II the War Labor Board determined that wage and price controls did not apply to fringe benefits, including health insurance. Providing health insurance was a way employers could retain workers—by raising their overall standard of living without fattening the pay envelop.  In today’s healthcare market there are those who suggest that large companies can reverse the effect of the Board’s wartime decision by plowing money saved by these new high deductible/co-pay models into workers’ paychecks. What would be nice would be a study to validate whether this theory is true.

Which brings us back to today’s current healthcare morass. The Affordable Care Act outlaws most of the types of plan innovation that seem responsible for the slowdown in health spending. For example, the law’s arcane rules outlaw what the government considers to be excessive cost-sharing with beneficiaries.  There go the higher deductibles and co-pays.

Cutler estimates that entitlement spending in healthcare will be about three-quarters of a trillion dollars lower over the next decade if the current slowdown in spending continues. But that doesn’t seem possible under the current ACA rules.

Look for costs to start rising again as the ACA kicks in in 2014. The government will mitigate this effect on consumers by injecting money to inflate the healthcare system. But that money will come out of the left pocket of consumers and go back into their right pocket as a subsidy. The resulting loss in price stability will be greater than the entitlement gain.