What's Behind the Boom in Buy Now Pay Later

Buy Now Pay Later is everywhere nowadays. Companies like Affirm, Afterpay, and Klarna have brought installment payments into everyday life, while big banks and tech firms also now racing into the space. With the market growing so rapidly, there are obvious concerns over whether BNPL is adding a new layer of 'hidden leverage' to the economy, giving online shoppers an alternative to more traditional financing like credit cards and bank loans. Data about BNPL usage is notoriously limited, and BNPL firms have so far resisted sharing information. In this episode, we speak with Julie Margetta Morgan, formerly at the CFPB and now president of The Century Foundation, about what's driving the BNPL market, how BNPL companies make money, and the macroeconomic impacts of the BNPL boom. Read more:Klarna, Backers Seek $1.27 Billion in IPO After Tariff PauseDollar Tree Boosts Outlook as Consumers Keep Hunting for Deals Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 0:58Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:39Speaker 02

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• 2:33Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 2:37Joe Weisenthal?

  And I'm Joe Weisenthal.

• 2:39Tracy Alloway?

  Joe, I have a confession to make.

• 2:41Joe Weisenthal?

  Yeah.

• 2:42Tracy Alloway?

  I do a lot of online shopping, like a lot.

• 2:45Joe Weisenthal?

  Really?

• 2:45Tracy Alloway?

  More than is healthy, probably.

• 2:47Joe Weisenthal?

  More than I realized from looking over your shoulder in the office and asking you what you're looking up. Cause I do do that and you never like it, but I still do it.

• 2:54Tracy Alloway?

  No, because sometimes I am in fact shopping online in the office. But a few years ago, I noticed a phenomenon, a change when it came to online shopping. You know what that was?

• 3:05Joe Weisenthal?

  I can guess.

• 3:06Tracy Alloway?

  Yeah. All right. All of a sudden, whenever I was checking out, you would get an offer, a little button usually that would say, do you want to take a buy now, pay later option? And usually it's with a company like Klarna or a firm.

• 3:20Joe Weisenthal?

  Yeah.

• 3:20Tracy Alloway?

  Or something like that. They're everywhere now.

• 3:23Joe Weisenthal?

  So like, I've certainly seen all these buttons. I've never used it. I don't really know why I haven't because like, why shouldn't I spread out? Why shouldn't I? Like for real, like my understanding is that the core of the business model works is that there's no like formal interest, right? So if you did make a hundred dollar purchase,

• 3:42Tracy Alloway?

  Yep.

• 3:42Joe Weisenthal?

  you get to spread it out, say in four payments of $25. And so whether it's a hundred dollars right now or a hundred dollars in four months, it's the same from the end buyer, which of course, in theory, because there's a time value of money is not intuitive. But the idea is that the retailer implicitly pays the interest because it's a form of customer acquisition. And so the retailer is implicitly willing to take a hundred dollars or whatever over X period of time, rather than all at once, in exchange for essentially making it easier for customers to buy. But from the customer perspective, like you or me, who presumably have the money to make, to buy what we're purchasing, I still don't get why we don't all use buy now, pay later, because why not spread out our purchases further out into the future?

• 4:25Tracy Alloway?

  You know how Rebel Wilson described it?

• 4:27Joe Weisenthal?

  Go on.

• 4:28Tracy Alloway?

  In a firm commercial.

• 4:29Joe Weisenthal?

  I didn't, I don't, I haven't seen it.

• 4:31Tracy Alloway?

  Like eating a tub of ice cream, but spreading out the calories over four weeks.

• 4:35Joe Weisenthal?

  Exactly. Why don't?

• 4:36Tracy Alloway?

  It's still 600 calories, right?

• 4:38Joe Weisenthal?

  Yeah.

• 4:38Tracy Alloway?

  That's the issue. But I think, okay. So this is obviously a nuanced subject.

• 4:43Joe Weisenthal?

  Yes.

• 4:44Tracy Alloway?

  So clearly, 0% interest doesn't sound like a problem. But obviously, if you fail to pay.

• 4:50Joe Weisenthal?

  Right.

• 4:51Tracy Alloway?

  You pay a penalty fee.

• 4:52Joe Weisenthal?

  Then you then the penalties are building up.

• 4:53Tracy Alloway?

  Right. So there's that. But the other issue with some of these buy now, pay later items. And it's really interesting. I kind of think about this as a parallel to the private market and credit. So this idea that there's this like whole world of additional credit or leverage that we don't actually have very good data on.

• 5:11Joe Weisenthal?

  Yeah.

• 5:12Tracy Alloway?

  And that is growing, right? I think that is the key.

• 5:15Joe Weisenthal?

  So here's how I see the issue, which is that if I could have a tub of ice cream and spread out the calories over four months, I would certainly do that. That sounds pretty great because I burn a certain number of calories in a day. And so if I had four months to burn them, that that would be far more efficient. But the flip side is, well, I would eat more ice cream.

• 5:34Tracy Alloway?

  That's right.

• 5:35Joe Weisenthal?

  So I would eat four times. I would eat four times as many tubs of ice cream in that given day, knowing that I have this four month calorie budget. And so then you still get the question of like, okay, maybe there's not a formal interest or maybe there's penalties, but I'm buying a lot more with today's buying power. And that may still yet prove to be unsustainable to the end consumer, even if it doesn't formally clock as what we measure as consumer debt.

• 5:59Tracy Alloway?

  Here's the added layer. Let's say you're trying to lose weight or trying to be healthy and you have like a dietitian. Imagine eating the ice cream, but him never knowing that you're eating the ice cream.

• 6:10Joe Weisenthal?

  Right?

• 6:10Tracy Alloway?

  Like this is.

• 6:11Joe Weisenthal?

  Well, I lie to my doctors all the time. I mean, I'm used to that.

• 6:15Tracy Alloway?

  Okay. All right. Rather than us debate this, we do in fact.

• 6:18Joe Weisenthal?

  How much zin do you use? Well, you know, like once a week I like go through a three milligram thing. I did actually quit and I'm saying that.

• 6:26Tracy Alloway?

  You told me this this morning. You said you were not going to have any more zins.

• 6:29Joe Weisenthal?

  For the rest of my life.

• 6:30Tracy Alloway?

  And I think I would take the opposite side of that bet. But now you've committed in public.

• 6:35Joe Weisenthal?

  In public, that's right.

• 6:36Tracy Alloway?

  So we'll see how it goes. Okay. Rather than us talk about this, we do in fact have the perfect guest. We're going to be speaking with Julie Morgan. She is a president of the Century Foundation, formerly at the Consumer Financial Protection Bureau, the CFPB, where she thought a lot about the buy now, pay later phenomenon. So we're going to get some of her thoughts right now. Julie, welcome to the show.

• 6:58Speaker 06

  Thank you. I'm so excited to be here.

• 7:00Tracy Alloway?

  So how did this happen? Like, how did this business model actually come about? Because it felt very sudden to me, but on the other hand, I was outside of the US for a long time. So maybe it was quite gradual.

• 7:11Speaker 06

  I'm really excited to answer this question for a number of reasons, including the way that you all introduced this. Because you spent a lot of time talking about buy now, pay later as this pay in for zero interest, maybe like no fee or low fee model. And we did see that model arise during the pandemic and become a much more salient part of the way consumers were paying for goods during the pandemic. And so if I could take you back to kind of those early years at the CFPB, where we're coming out of the pandemic, we're seeing this rise in buy now, pay later. You know, regulators and researchers started to investigate this to understand what it meant for consumers and what the risks were. And I think there were kind of two fundamental assumptions about buy now, pay later at that time.

• 7:55Speaker 06

  One was just what we said. It's a pay in for no interest, low or no fee model. And then two, people were using this in kind of the like, what I think of as a stereotypical Gen Z kind of way. They were using it to finance a purchase that was slightly larger or more extravagant than what they would have bought. And it was usually on something like a purse or an item of clothing. What we found over time is that both of those assumptions turned out to be wrong. Right? So number one, what we're seeing right now as buy now, pay later and calling buy now, pay later is not in fact always that pay in for no interest product.

• 8:36Speaker 06

  And in fact, many of the companies that we associate with buy now, pay later, like Affirm or Klarna. Are mostly not offering that product. So a firm says that product is only 20% of their business. The rest of their business is what I would think of as like a, like point of sale loans or short-term installment loans with interest rates ranging from, you know, 10 to 30% and terms that range from 30 days to six or 18 months.

• 9:00Joe Weisenthal?

  So it's buy now, pay later, but it's more like just a formal loan.

• 9:04Speaker 06

  Yeah.

• 9:04Joe Weisenthal?

  It's, it's payment and installment and there's a schedule, but also there is a nominal interest rate that's visible to the consumer.

• 9:11Speaker 06

  Exactly. And I think it is buy now, pay later in the sense that any loan, including your mortgage, is buy now, pay later, right? So they've, they've kind of kept this, this marketing that I think was really appealing to consumers and that sort of soothed regulators that these products were fairly low risk and then started shifting that into these products that look very different.

• 9:32Joe Weisenthal?

  Okay. Whether we're talking about the new products or the sort of the traditional BNPL, the way Tracy and I described it in the beginning, currently, what kind of collection of data? Like when that happened? So we know like credit card data gets collected. There is public statistics about just the sheer volume of credit cards. What do we have right now in terms of where this gets slotted and how it's collected as data?

• 9:57Speaker 06

  Yeah, we don't have a ton. So we have a couple of different ways of looking at buy now, pay later. Most of it is through government sources. So the Federal Reserve and the CFPB have the ability to pull data from the companies. And if you look at the CFPB's reports on buy now, pay later, that is what they're doing. They're pulling transaction level data through market monitoring orders. That's not.

• 10:17Joe Weisenthal?

  But when you say market monitoring orders, just to be clear, the companies are compelled to regularly update the CFPB with some level of data.

• 10:25Speaker 06

  They're compelled to provide data. The regularly piece is not part of it. So this tends to be a one-off, right? We don't have a consistent stream of data coming from the companies. And so that gives us like a small window into what's happening in the buy now, pay later space, but it's really not enough. And then we have survey data and that's where you see LendingTree and Axios and others asking consumers. And I think it's important to understand that there, you're just kind of getting what the consumer thinks they have and it's, it really inhibits our ability to get at, are you using pay-in for, are you paying interest and all those things?

• 11:01Tracy Alloway?

  How does buy now, pay later fit into private credit scores like FICO? Right? Because I imagine, you know, if you're applying to a bank, they're going to look at your FICO score if you want something like a mortgage. And even though buy now, pay later seems to be for mostly smaller items at the moment. So maybe you owe like a couple hundred or something via a firm. Maybe you also owe a few thousand via Klarna, right? And I imagine if you're a bank using FICO scores, you would want to know that information.

• 11:32Speaker 06

  Yeah, so we don't know this information right now. FICO announced recently that they plan to start using buy now, pay later as part of their scoring model. And we've seen the companies be extraordinarily resistant to that. So Klarna and others are saying that they're not going to turn over data until they get certain assurances from FICO about how that data is going to be used. So what we have right now is kind of snapshots in time to understand how people are stacking, you know, buy now, pay later on top of credit card debt and on top of other products. And the research that we have there, which is somewhat limited, does suggest that people are stacking this. You know, it tells us that about 60% of the people who are using buy now, pay later have a subprime credit score.

• 12:15Speaker 06

  It tells us that they're mostly using it on top of credit card debt. And it's also suggesting that before people take on buy now, pay later, there's a slight uptick in their use of their credit card. So there's a suggestion that it's really like you're maxing out one form of debt and then taking on another.

• 12:31Joe Weisenthal?

  I just looked up the Q2 New York Fed Household Debt Report. I think it just came out a few days ago. It must have. It was Q2. Anyway, it says there's 1.21 trillion in total credit card balances outstanding. Do we have something that we have a guess for? What is the number of BNPL loans of any form currently outstanding so that we can benchmark that against credit cards?

• 12:55Speaker 06

  We have numbers that are reported by the companies. We don't have data that is reported by a government source like that. I think that the best we have is that the transaction volume is around 116 billion.

• 13:07Joe Weisenthal?

  Okay.

• 13:07Speaker 06

  And that's up from about 13.8 billion in 2020. So this is is growing pretty rapidly.

• 13:12Joe Weisenthal?

  So it's a non-zero. I mean, it's not like clearly like still like a fraction of credit cards, but this is beyond a rounding error.

• 13:19Speaker 06

  That's right.

• 13:20Joe Weisenthal?

  Okay.

• 13:21Tracy Alloway?

  Do we have any sense of how usage patterns have changed? So for instance, you know, during the pandemic, did we see an uptick in buy now, pay later use as people were struggling because they didn't have jobs or had short term cash flow issues? Has it come down since then?

• 13:37Speaker 06

  We're seeing an uptick in people's use of buy now, pay later, and we're seeing shifting patterns of what they're using it to purchase. So I think I said earlier that there was this assumption that people were using this to purchase clothing or other kind of luxury goods. And, you know, even back in 2022, when the CFPB put out its first report here, we saw that that wasn't true. People were using buy now, pay later for things like groceries and education costs. The surveys that have come out recently showed that that's growing. So there was, I think, an Axios survey and a LendingTree survey, they showed somewhere between 14 and 25% of buy now, pay later users are using it to purchase groceries. They're showing that a bigger percentage of people are using buy now, pay later for medical and dental costs than for the

• 14:22Speaker 06

  things people might assume stereotypically it's used for like dining out or ordering in or even like purchasing concert tickets, things like that.

• 14:47Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 15:02Speaker 07

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service insocial clients.

• 15:11Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reese Merrick of Ripple says.

• 15:19Speaker 08

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80 year old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 15:38Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 15:48Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 16:30Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 17:11Speaker 09

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• 17:41Joe Weisenthal?

  Is it bad? I mean, like, you know, it seems like, oh, people are using buy now, pay later for dental, or they're using it for groceries or whatever. And like... You know, the idea that people are obviously stressed and have to spread out or borrow money to make those purchases is obviously, I guess there's an inherent angst about that because these are human essentials. But is it really per se bad? Or is it just like, no, this is like yet another tool that people have to sort of, you know, smooth consumption and so forth?

• 18:13Speaker 06

  I think it's bad that we're seeing an uptick in the use of credit products to pay for essentials. That's not to say that buy now, pay later is particularly the enemy there. But, you know, this is part of the reason I've been interested in consumer credit overall is that, you know, we see these broader changes go on in the policy space. In particular, recently, we've seen Donald Trump and Republicans in Congress push through a bill that cuts Medicaid, cuts food assistance, you know, makes education more expensive. And the availability of consumer credit products that are kind of waiting in the wings there blunts our ability to really understand what those changes mean. So, you know, we know that the Medicaid cuts will result in people having more expensive

• 18:57Speaker 06

  health care, but we need to be looking at the fact that that's going to result in buy now, pay later loans. It's going to be an opportunity for medical credit cards from places like Synchrony with Care Credit. And so it's relevant to our overall economic situation. It's relevant to the kind of like, what I think of as like a silent financial crisis that's happening for the vast majority of families in the United States. But it's not tracked. You know, we've been talking about buy now, pay later really not being tracked, but the overall sort of like consumer credit conditions for families are really not tracked and talked about in that way. We see economists going on TV talking about consumption and CPI and GDP.

• 19:39Joe Weisenthal?

  Yeah.

• 19:40Speaker 06

  Where families are kind of sitting around the kitchen table, talking about Klarna and Affirm and Sally Mae and Navient.

• 19:46Tracy Alloway?

  When you were at the CFPB, how are you thinking about buy now, pay later from a sort of regulatory perspective?

• 19:52Speaker 06

  Yeah, so we were looking at the risks of the products and then we were kind of trying to look, you know, we've had this phenomenon with consumer credit products across the board, not just specific to buy now, pay later, but it was really evident at CFPB that you have these sort of like new entrants into a market whose products are framed very differently than a traditional consumer credit product. And it's often part of the marketing pitch. It's like, we're not alone, we're not equity, we're this totally different thing. And it preys on consumers hesitant to use debt and then also, you know, this idea that we might float above any regulatory scheme. So for buy now, pay later and for these other products like earned wage access or income share agreements, you know, we were looking at like, what is this under the law?

• 20:37Speaker 06

  And with buy now, pay later, particularly the products like where Klarna or a firm is offering basically like a digital or physical card where you can make repeated purchases, where you have a Certainly sounds like a credit card. It starts to sound like a credit card, right? And so, you know, CFPB's initial approach on regulation here was to really just say like, you've got to follow some of the fundamental basics that apply to the product that you are, right? And so that was really meant to help people with some of the real kind of basic consumer protections around managing disputes and getting accurate billing statements. The other thing CFPB was doing was on the enforcement and supervision side.

• 21:18Speaker 06

  So really taking a look at these companies the same way we do any other financial institution and making sure they're following the law. And I think it's important to talk about that piece because we've seen the Trump administration pull back on the proposed regulations, but we've also seen them pull back on enforcement. They specifically said they would deprioritize buy now, pay later and enforcement. And so there are these other real basics that we're seeing fall apart. You know, if you look at what consumers are complaining about right now, they're saying, I had auto pay on my Klarna or my Afterpay and I tried to take it off and the company continues to charge me. These are like really basic questions of whether the companies are following consumer financial laws and CFPB is just off the job.

• 22:03Joe Weisenthal?

  So you mentioned that in the research, prior to someone beginning to use BNPL, there is an increase in their credit card usage, right? Why does someone flip over? Like, why doesn't... So some of these purchases, what is insufficient about the existing credit card system? Is it that they're hitting their credit limits or what is the situation such that then BNPL becomes more attractive?

• 22:25Speaker 06

  Yeah, I think we need to take a deeper look at credit utilization because I do think there are people who are flipping over and they're using their available credit balance and then they're shifting to buy now, pay later. But I think there are a lot of other people who are just trying to juggle their essentials, their groceries and their kids' back to school clothes. And they're doing it through whatever feels like the most convenient payment method. So the buy now, pay later companies have made a real effort at being that convenient payment method, both through kind of point of sale, but also through their apps. So they're pushing their users towards an app that both makes it more convenient to make the payment, but also pushes you advertisements for different products. And so I think we see people brought in there.

• 23:10Speaker 06

  But you mentioned earlier why you don't use buy now, pay later and I do think it's important to mention. Great question. We could do a half hour on your personal finances, but I think it's important to know that even while there's a big percentage of people using this to cover basics, there is kind of a split in buy now, pay later where if you talk to consultants who look at this really closely, they're seeing people like you or I who can... I'm making an assumption about your finances.

• 23:37Joe Weisenthal?

  I get paid well.

• 23:37Speaker 06

  Okay, cool. Like you or I who can make a purchase, but it's a painful purchase. Maybe it's like a new television or something that you just don't want to pay upfront. So there are people using it in that way, too.

• 23:49Joe Weisenthal?

  Interesting.

• 23:50Tracy Alloway?

  You mentioned ease of use, and I think this is really key. What are the conversations like with retailers? So like, what's the pitch that buy now, pay later platforms are going to make to, I don't know, a Walmart or whoever to kind of plug directly into their websites?

• 24:06Speaker 06

  Yeah, so the pitch is basically basket sizes and then overall transaction volume, right? So they're showing that they're getting the retailers about 10% more in terms of the basket size. So the amount of things that people are purchasing. And then some of the companies are reporting up to 80% more in terms of the actual transaction. So that's pretty significant for retailers. And I think it is what is propelling retailers to cut deals with Klarna or Afterpay and to pay the costs, which are higher than interchange on a credit card. So in many cases, you know, we're looking at costs that are somewhere between 1 to 8% of the transaction, plus like a flat fee that might be like 30 cents per transaction.

• 24:50Speaker 06

  So it's pretty significant. I think the other part of the pitch is, and this is, this is one of the pieces that was really kind of consuming a lot of our attention at CFPB, is the ability to use people's data to drive those purchases. So I think if you're a merchant looking at those big fees, if you're a Walmart or Amazon or whoever, you're not just saying like, let me put this in Klarna or a firm's hands to hope that people use it more, but let me use the data I have on hand to try to drive more purchases. And like, a company that has a lot of information about what I like to buy and a lot of information about how much money I have to do it, has like a pretty potent set of data to help drive those purchases. So I think that's part of the appeal for merchants as well.

• 25:35Joe Weisenthal?

  Do we have a way of essentially measuring, from the consumer's perspective, a sort of like-for-like interest rate that they payment? Because as you described, like, in some cases, they're clear, right? In some cases, they're more embedded because it's free for four months, but then there's like a penalty. In some instances, it's this thing that looks like a credit card, but maybe structurally, there's a different way of getting from point A to point B. Like, can we measure like, okay, if this were a credit card payment with a 15% rate, this is the apples-to-apples compare, you're paying 18% or 12%? Like, are we able to, are you able to do that?

• 26:13Speaker 06

  Me personally, I'm not able to do that. But you know, at the CFPB, we did do that on certain products. We didn't do that for buy now, pay later. In many cases, because the products we were studying had almost no cost, right? They were no interest and no fee. Maybe they had a late fee that might kick in. But remember, where they're requiring auto payments, which most of the companies are, those late fees are less likely to be incurred.

• 26:38Joe Weisenthal?

  Sure.

• 26:38Speaker 06

  But I think the the sort of relevant thing is to understand how much people are paying overall in access fees and interest for the goods and services that they need. And that's incredibly difficult to do because these companies are sort of layering these different products. So you have a credit card with a set interest rate, but you might be incurring debt on a number of different products across multiple B and P L providers that each have different terms and and different costs. So it's really difficult. I mean, it's difficult for us to understand from a research perspective. It's even more difficult for a consumer, I think, to make those choices and those trade offs.

• 27:33Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 28:15Speaker 01

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• 30:26Tracy Alloway?

  Just going back to the data aspect of this for a second. You said that some of the platforms are reluctant to report to FICO.

• 30:35Tracy Alloway?

  And are asking for certain assurances. What exactly do they want here?

• 30:41Speaker 06

  I mean, I've looked into this question. They haven't been super clear, I think, about what they want. They've sort of made some general statements that they want to make sure that, you know, reporting this data won't be used negatively to affect people. I mean, this is really just my speculation. But what I think is really interesting about this is the companies are playing on this kind of broader skepticism about credit reporting and FICO overall. Because I think, you know, people's experience, and certainly what we saw in the research at CFPB, is that, you know, credit reporting has predominantly been used to ding people and to coerce them into making payments they might not want to make. So like, medical debt is a great example of that.

• 31:23Speaker 06

  CFPB's research showed it really had no value for the fundamental purpose of credit reporting, which is evaluating people's ability to repay. And it was mostly being used to coerce. So when Klarna says, you know, we want to make sure this isn't used to ding people, that feels very noble. But I think at the end of the day, we should be kind of skeptical of why they don't want to report.

• 31:43Joe Weisenthal?

  Sir, explain this further about medical debt. And when you say it has no value, but also it's been used to coerce, what are the conditions with medical debt and FICO?

• 31:53Speaker 06

  Yeah, so we've looked at medical debt and credit reporting really closely at CFPB. And what we saw was that it didn't have predictive value. So medical debt was not predictive of whether you would repay other types of debt. And part of the reason is that a lot of medical debt that is reported on people's credit reports is inaccurate in one way or another. You know, it might be that the debt collector is going after you for a debt that is larger than what you think you pay because you think your insurance company ought to have paid. It might be that you actually already paid the debt and that information hasn't gotten to the debt collector. So it's really kind of this junk data that's sitting on people's credit reports.

• 32:32Joe Weisenthal?

  And then explain the coercion element. Like, how does it? So, medical debt isn't a good predictor of someone's ability to pay a future loan.

• 32:41Speaker 06

  Right.

• 32:42Joe Weisenthal?

  So it's not great for that. And yet, what? It's still like, people, because it affects their credit card scores, feel this extra pressure to pay it off? Like, explain the sort of like, the effect on the end patient in this case.

• 32:53Speaker 06

  Yeah, exactly. So the constituency that wants medical debt on your credit reports is primarily third-party debt collectors. And why do they want that there? They want it there. So that they can call you and say, you know,

• 33:06Joe Weisenthal?

  This is gonna hurt your credit.

• 33:07Speaker 06

  or it's gonna hurt your credit. And I think at CFPB, we tried to spend a lot of time thinking this through from the consumer perspective and what that feels like.

• 33:15Joe Weisenthal?

  So actually, I was not familiar with it at all, but just to go further, is this like, I hadn't really thought about the sort of behind the scenes fight of what does and doesn't go into a FICO, but obviously that's very intuitive. Is this like a common thing across a range of either formal debt products or quasi debt products where they're all like sort of jockeying either to be in or out of the calculation basket?

• 33:41Speaker 06

  I mean, I think it is, the medical debt is a thing because CFPB made it a thing. I don't think we have enough research on what is or isn't on your credit report and why, but when regulators start to, to pick those fights,

• 33:56Joe Weisenthal?

  Yeah.

• 33:57Speaker 06

  you start to get this jockeying for, for what's on there. I think student debt is another good example where there are legitimate questions of what ought to and not be on there. And some of it is about the predictive value, but a lot of it is about putting debt on people's credit reports that we know is inaccurate.

• 34:14Tracy Alloway?

  It is true that every few years, we see like these efforts from private companies, I guess, to try to augment credit scores with new technology. So I remember very clearly being at a startups offices in San Francisco in like, I guess it would have been 2015 or something, and they were walking me through the data that they could use to make short-term loans. And one of the things they were talking about was like just the basic cursor movement on the screen, like how fast you click the button to get money, whether or not, you know, if it's a sliding bar that goes from like $1,000 to $10,000, like whether or not you hesitate to go to 10,000 and then go back and then go back to 10,000 again.

• 34:59Tracy Alloway?

  It seemed very dystopian to me. And I'm curious what those efforts are like right now, given the new emphasis on AI and maybe even more data that is now available to private companies to look at to try to judge whether people are creditworthy or not.

• 35:17Speaker 06

  Yeah, if you listen to the earnings calls where CEOs are talking to investors about their underwriting models for a variety of different products, whether it's kind of traditional credit cards or things like BNPL, AI comes up a lot. Everybody wants to say that they've got this proprietary AI model.

• 35:35Tracy Alloway?

  That's exactly it. They were saying the same thing 10 years ago.

• 35:38Speaker 06

  Yeah, yeah. And I think there's a lot of things to unpack there and to be concerned about. So I think we should, we know that AI models often bake in racial biases. So we know that there's some concern there about these models. But I also think, to your point, we're dragging in a lot of extraneous data about people into the way we look at their creditworthiness, some of which should be relevant, some of which really should not. And what I think is most important to think about there is that those models are completely opaque and companies often, when they're faced with regulatory scrutiny, say kind of like, "The AI did it," right? As though the people at the companies are not responsible for the outcomes of the

• 36:23Speaker 06

  technology. So under the Biden administration, the approach there had really been to say, "You're responsible." It sounds so basic, but the laws are the laws, whether it's about consumer protection or about basic discrimination among credit applicants. The laws are the laws and you're responsible for the outcomes of those models. And I think that shift is, or that kind of approach is really, really important here to drive some accountability because otherwise it does kind of get out of hand.

• 36:53Tracy Alloway?

  So I mentioned in the intro that the parallel that I reach for when thinking about buy now, pay later is sort of private credit. So this idea that, you know, it's a more opaque market and people are worried about its size and they're worried about transparency and hidden leverage and all of that. But on the other hand, you know, it is an extra credit spigot that companies can tap in times of emergency. And we certainly saw that over the past five years or so. Net, net, when you look at buy now, pay later, would you say the effects are good, more good or more bad? This is a tough one.

• 37:30Speaker 06

  It is a really tough one because I don't, I said this earlier, I don't want to single out buy now, pay later as the bad guy here. I think, first of all, there are a lot of bad guys. There are a lot of good guys, too. But, you know, I think the thing to really focus on is like, we're in what the Trump administration is describing as like a relatively good economy. And we're sitting here talking about like turning on the spigot for these kind of like new and interesting types of debt to help people handle really basic expenses. That seems like a problem. We should not be in an emergency situation and yet we are.

• 38:11Speaker 06

  And so I'm concerned that that availability of these credit products is obscuring like the kind of growing emergency around people's cost of living, which often, you know, in the news is about their grocery prices, the eggs, their sneakers for back to school. And those are really important, but it's also their health care, the cost of college, being able to retire. So families are feeling really squeezed. And, you know, to me, the most important thing there is like, we're, I think, we're seeing the Trump administration sort of test out this theory that they can keep the high level metrics of whether the economy is on track, steady or growing, while letting somewhere

• 38:54Speaker 06

  around 60% of people have these private financial crises. We're going to see that play out over the next couple of years. And that's, that's the way I think about these credit products. It's not really like, is the individual one good? But it's like, do we know what we're doing overall? And is anyone doing the math?

• 39:10Tracy Alloway?

  All right. Julie Morgan, thank you so much for coming on All Thoughts. Really appreciate it.

• 39:14Speaker 06

  Thank you. Thanks for having me.

• 39:29Tracy Alloway?

  Joe, I'm glad we finally did that episode. We've been talking about doing one on BNPL for a while. BNPL, it always reminds me of like, it sounds like BNP Paribas, like Italian subsidiary or something. But there are a bunch of things to pick out there. I mean, number one, it's clearly a nuanced issue, right? And like, clearly, as you laid out in the intro, it can have a smoothing effect.

• 39:51Joe Weisenthal?

  Yeah.

• 39:52Tracy Alloway?

  The second thing that always seems to come up is this idea that like, well, it's not that big now, right?

• 39:59Joe Weisenthal?

  Yeah.

• 40:00Tracy Alloway?

  Like, it's not big enough to have an effect right now.

• 40:02Joe Weisenthal?

  Probably not.

• 40:03Tracy Alloway?

  But as Julie mentioned, we are seeing, you know, volumes slowly pick up. And I guess that-

• 40:09Joe Weisenthal?

  Not that slowly.

• 40:10Tracy Alloway?

  Not that slow. Yeah, you're right. And I guess like, I kind of wonder what happens like, as more and more of this activity actually stretches into services versus goods? Like, that seems to be quite a big shift.

• 40:22Joe Weisenthal?

  Well, I'd say like, I think Julie's last point was very relevant, which is like, you know, when we think about household borrowing, and again, probably you and I, because we're sort of children of, or you know, grew up during the financial crisis, you know, we sort of think about like-

• 40:37Tracy Alloway?

  We weren't children in 2008.

• 40:39Joe Weisenthal?

  No, we were children, but you know what I'm saying?

• 40:41Tracy Alloway?

  Yeah.

• 40:42Joe Weisenthal?

  You know, I think you and I often think about credit from the effects of defaults and so forth, and that could be an effect, and that's not something to be dismissed. But the other idea is like, how much of like, sort of like, aggregate economic conditions, consumption, is sort of debt financed and in a way that we can't like, fully measure, right? Because we comfortably can measure credit card debt, and so we have some sense of credit card debt as a size of incomes or whatever. But if there's this other rapidly growing source, and it's pretty crucial for like, sort of keeping the headline figures of consumption or GDP, you know, like, my conclusion, or like, my sense is like, yeah, it's not that huge yet, but it's definitely not nothing. And it's definitely not, you know, it's bigger than a rounding error.

• 41:25Tracy Alloway?

  Right. And it certainly says something, to Julie's point, about like, the state of the average American consumer, who probably is struggling to pay something like- Dental fees.

• 41:36Joe Weisenthal?

  Yeah, yeah, no, and like the fact in like, um, you know, I think there's, I thought it was interesting too, that like, maybe both of us, or at least just me, had a certain, maybe already outdated view of what BNPL is.

• 41:47Tracy Alloway?

  Oh, yeah.

• 41:48Joe Weisenthal?

  Because like, the idea of like, oh, I'm gonna buy like-

• 41:50Tracy Alloway?

  I didn't even realize that they had like, actual apps.

• 41:51Joe Weisenthal?

  Yeah, so the idea that like, oh, I'm gonna buy a television that's a thousand dollars and make it like, for $250 purchases, like, that sounds great, I should, I should be doing this. But if that's just sort of like, one business model, but that there's like, this growing business model that looks more like installment loans, where there is a formal interest rate, but it also sort of looks like the same thing, and you also get a card, etc., but it's just like, a slightly different structure, and formerly it isn't called debt, or isn't categorized, or is it reported as debt, then I, then I think, obviously, we need to continue to get a better handle on, you know, how big this is.

• 42:23Tracy Alloway?

  Yeah, absolutely. Also, Klarna says it's a bank now, which is kind of confusing.

• 42:28Joe Weisenthal?

  Oh, really?

• 42:28Tracy Alloway?

  Yeah.

• 42:30Joe Weisenthal?

  It's like, the hottest thing, everyone wants, everyone's always filing for bank charters these days.

• 42:33Tracy Alloway?

  Oh, yeah, that would be interesting to look at, because we went after the financial crisis, speaking of 2008, we went years and years and years without a brand new bank.

• 42:41Joe Weisenthal?

  Now, everyone's like, every like, every random brokerage or fintech, oh, we got a bank charter, we acquired a company that has a bank charter.

• 42:47Tracy Alloway?

  Time is a flat circle, Joe.

• 42:49Joe Weisenthal?

  Yeah.

• 42:49Tracy Alloway?

  All right, shall we leave it there?

• 42:50Joe Weisenthal?

  Let's leave it there.

• 42:51Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway, you can follow me at Tracy Alloway.

• 42:56Joe Weisenthal?

  And I'm Joe Weisenthal, you can follow me at TheStalwart. Follow our guest Julie Morgan, she's at Jay Margetta. Follow our producers Carmen Rodriguez at CarmenArmin, Dashal Bennett at Dashbot, and Cale Brooks at CaleBrooks. For more Odd Lots content, go to Bloomberg.com/oddlots. We have a daily newsletter and all of our episodes, and you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 43:20Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about the state of consumer debt, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free, all you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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