Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the out Thoughts podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe. Why isn't thal Joe?
Speaker 2: I have a confession to make. Yeah, I do a
Speaker 2: lot of online shopping, like a lot more than is healthy.
Speaker 4: Probably more than I realized from looking over your shoulder
Speaker 4: in the office and asking you what you're looking up,
Speaker 4: because I do do that and you never like it.
Speaker 2: But I still do know because sometimes I am, in
Speaker 2: fact shopping online in the office. But a few years
Speaker 2: ago I noticed a phenomenon, a change when it came
Speaker 2: to online shopping. You know what that was, I can guess, yeah,
Speaker 2: all right, all of a sudden, whenever I was checking out,
Speaker 2: you would get an offer, a little button usually that
Speaker 2: would say do you want to take a buy now
Speaker 2: pay later option? And usually it's with a company like
Speaker 2: Klarna or a firm or something like that. They're everywhere now.
Speaker 4: So, like I've certainly seen all these buttons, I've never
Speaker 4: used it. I don't really know why I haven't, because like,
Speaker 4: why shouldn't I spread out? Why shouldn't I?
Speaker 3: Like for real?
Speaker 4: Like my understanding is that the core of the business
Speaker 4: model works is that there's no like formal interest, right,
Speaker 4: so if you make one hundred dollars purchase, you get
Speaker 4: to spread it out, say in four payments of twenty
Speaker 4: five dollars, and so whether it's one hundred dollars right
Speaker 4: now or one hundred dollars and four months, it's the
Speaker 4: same from the end buyer, which, of course in theory
Speaker 4: because there's a.
Speaker 3: Time value of money, is not intuitive.
Speaker 4: But the idea is that the retailer implicitly pays the
Speaker 4: interest because it's a form of customer acquisition, and so
Speaker 4: the retailer is implicitly willing to take one hundred dollars
Speaker 4: or whatever over x period of time rather than all
Speaker 4: at once in exchange for essentially making it easier for
Speaker 4: customers to buy. But from the customer person like you
Speaker 4: were me, who presumably have the money to make to
Speaker 4: buy what we're purchasing, I still don't get why we
Speaker 4: don't all use buy now, pay later, because why not
Speaker 4: spread out our purchases further out into the future.
Speaker 2: You know how Rebel Wilson described it in a firm commercial.
Speaker 3: I didn't. I don't. I haven't seen it.
Speaker 2: Like eating a tub of ice cream, but spreading out
Speaker 2: the calories.
Speaker 3: Over four weeks exactly, why don't.
Speaker 2: It's still six hundred calories, right, that's the issue. But
Speaker 2: I think, okay, so this is obviously a nuanced subject. Yes,
Speaker 2: so clearly zero percent interest doesn't sound like a problem.
Speaker 2: But obviously if you fail to pay, you pay a penalty.
Speaker 3: Then the penalties are building, right.
Speaker 2: So there's that. But the other issue with some of
Speaker 2: these buy now, pay later items, and it's really interesting.
Speaker 2: I kind of think about this as a parallel to
Speaker 2: the private market and credit. So this idea that there's
Speaker 2: this like whole world of additional credit or leverage that
Speaker 2: we don't actually have very good data on, and that
Speaker 2: is growing, right. I think that is the key.
Speaker 4: So here's how I see the issue, which is that
Speaker 4: if I could have a tub of ice cream and
Speaker 4: it spread out the calories over four months.
Speaker 3: I would certainly do that.
Speaker 4: That sounds pretty great because I burn a certain number
Speaker 4: of calories in the day, and so if I had
Speaker 4: four months to burn them that that would be far
Speaker 4: more efficient. But the flip side is, well, I would
Speaker 4: eat more ice cream, so I would eat four times.
Speaker 4: I would eat four times as many tubs of ice
Speaker 4: cream in that given day, knowing that I have this
Speaker 4: four month calorie budget. And so then you still get
Speaker 4: the question of like, Okay, maybe there's not a formal interest,
Speaker 4: or maybe there's penalties, but I'm buying a lot more
Speaker 4: with today's buying power, and that may still yet prove
Speaker 4: to be unsustainable to the end consumer, even if it
Speaker 4: doesn't formally. Clock is what we measure as consumer debt.
Speaker 2: Here's the added layer. Let's say you're trying to lose
Speaker 2: weight or trying to be healthy, and you have like
Speaker 2: a dietician. Imagine eating the ice cream, but him never
Speaker 2: knowing that you're eating the ice cream, right, Like, this is.
Speaker 3: Well, I lied to my doctors all the time. I mean,
Speaker 3: I'm used to that. Okay, all right.
Speaker 2: Rather than us debate this, we do in fact.
Speaker 4: How much didn't you well, you know, like once a week,
Speaker 4: I like go through a three milligram Think I did
Speaker 4: actually quit?
Speaker 2: And I'm saying that told me this morning you said
Speaker 2: you were not going to have any more zins for
Speaker 2: the restaurant, and I think I would take the opposite
Speaker 2: side of that bet. But now you've committed in public,
Speaker 2: public best, So we'll see how it goes. Okay, rather
Speaker 2: than us talk about this, we do, in fact have
Speaker 2: the perfect guest. We're going to be speaking with Julie Morgan.
Speaker 2: She is a president of the Century Foundation, formerly at
Speaker 2: the Consumer Financial Protection Bureau of the CFPB, where she
Speaker 2: thought a lot about the buy now, pay later phenomenon.
Speaker 2: So we're going to get some of her thoughts right now. Julie,
Speaker 2: welcome to the show.
Speaker 5: Thank you. I'm so excited to be here.
Speaker 2: So how did this happen? Like, how did this business
Speaker 2: model actually come about? Because it felt very sudden to me,
Speaker 2: But on the other hand, I was outside of the
Speaker 2: US for a long time, so maybe it was quite gradual.
Speaker 5: I'm really excited to answer this question for a number
Speaker 5: of reasons, including the way that you all introduced this,
Speaker 5: because you spent a lot of time talking about BUYEOW
Speaker 5: pay leader as this pay in for zero interest maybe
Speaker 5: like no fee or low feed model, and we did
Speaker 5: see that model arise during the pandemic and become a
Speaker 5: much more assalient part of the way consumers were paying
Speaker 5: for goods during the pandemic. And so if I could
Speaker 5: take you back to kind of those early years at
Speaker 5: the CFPB. Where we're coming out of the pandemic, we're
Speaker 5: seeing this rise in buy now pay lead. You know,
Speaker 5: regulators and researchers started to investigate this to understand what
Speaker 5: it meant for consumers and what the risks were. And
Speaker 5: I think there were kind of two fundamental assumptions about
Speaker 5: buyeow pay leader at that time. One was just what
Speaker 5: we said, it's a pay in for no interest, low
Speaker 5: or no fee model. And then two people were using
Speaker 5: this in kind of the like what I think of
Speaker 5: as a stereotypical gen Z kind of way. They were
Speaker 5: using it to finance a purchase that was slightly larger
Speaker 5: or more extravagant than what they would have bought, and
Speaker 5: it was usually on something like a purse or an
Speaker 5: item of clothing. What we've found over time is that
Speaker 5: both of those assumptions turned out to be wrong. Right,
Speaker 5: So number one, what we're seeing right now as buy now,
Speaker 5: pay later and calling by now pay lead is not
Speaker 5: in fact always that pay in for no interest product.
Speaker 5: And in fact, many of the companies that we associate
Speaker 5: with buy now pay lead, like a firm or Klarna,
Speaker 5: are mostly not offering that product. So a firm says
Speaker 5: that product is only twenty percent of their business. The
Speaker 5: rest of their business is what I would think of
Speaker 5: as like a point of sale loans or short term
Speaker 5: installment loans with interest rates ranging from you know, ten
Speaker 5: to thirty percent and terms that range from thirty days
Speaker 5: to six or eighteen months.
Speaker 4: So it's buy now, pay later, but it's more like
Speaker 4: just a formal loan.
Speaker 5: Yeah, I mean it's.
Speaker 4: Payment and installment and there's a schedule, but also there
Speaker 4: is a nominal interest rate that's visible.
Speaker 5: To the consumer exactly, and I think it is by now,
Speaker 5: pay later, in the sense that any loan, including your mortgage, yes,
Speaker 5: buy now, pay later. Right. So they've kind of kept
Speaker 5: this marketing that I think was really appealing to consumers
Speaker 5: and that sort of soothed regulators that these products were
Speaker 5: fairly low risk, and then started shifting that into these
Speaker 5: products that look very different.
Speaker 4: Okay, whether we're talking about the new products or the
Speaker 4: sort of the traditional BNPL the way Tracy and I
Speaker 4: described it in the beginning. Currently, what kind of collection
Speaker 4: of data like when that happened? So we know, like
Speaker 4: credit card data gets collected. There's public statistics about just
Speaker 4: the sheer volume of credit cards what do we have
Speaker 4: right now in terms of where this gets slotted and
Speaker 4: how it's collected as data.
Speaker 5: Yeah, we don't have a ton. So we have a
Speaker 5: couple of different ways of looking at buy now, Pay later.
Speaker 5: Most of it is through government sources, So the Federal
Speaker 5: Reserve and the CFPB have the ability to pull data
Speaker 5: from the companies, and if you look at the CFPB's
Speaker 5: reports on buy now, Pay Later, that is what they're doing.
Speaker 5: They're pulling transaction level data through market monitoring orders.
Speaker 4: That's not but when you say market monitoring orders, just
Speaker 4: to be clear, the companies are compelled to regularly update
Speaker 4: the CFPB with some level of data.
Speaker 5: They're compelled to provide data. The regularly piece is not
Speaker 5: part of it. So this tends to be a one off, right.
Speaker 5: We don't have a consistent stream of data coming from
Speaker 5: the companies, and so that gives us like a small
Speaker 5: window into what's happening in the buyout pay latter space,
Speaker 5: but it's really not enough. And then we have survey data,
Speaker 5: and that's where you see lending Tree and Axios and
Speaker 5: others asking consumers, and I think it's important to understand
Speaker 5: that they are you're just kind of getting what the
Speaker 5: consumer thinks they have, and it's it really inhibits our
Speaker 5: ability to get at are you using paying for are
Speaker 5: you paying interest? And all those things?
Speaker 2: How does buy now Pay later fit into private credit
Speaker 2: scores like FICO?
Speaker 5: Right?
Speaker 2: Because I imagine you know, if you're applying to a bank,
Speaker 2: they're going to look at your FICO score if you
Speaker 2: want something like a mortgage. And even though buying now
Speaker 2: Pay later seems to be for mostly smaller items at
Speaker 2: the moment, so maybe you owe like a couple hundred
Speaker 2: or something via a firm, maybe you also owe a
Speaker 2: few thousand via Klarna, right, And I imagine if you're
Speaker 2: a bank using Fyco scores, you would want to know
Speaker 2: that information.
Speaker 5: Yeah, so we don't know this information right now. Fico
Speaker 5: announced recently that they plan to start using buy now,
Speaker 5: Pay Later as part of their scoring model, and we've
Speaker 5: seen the companies be extraordinarily resistant to that. So Clarnet
Speaker 5: and others are saying that they're not going to turn
Speaker 5: over data until they get certain assurances from Fyco about
Speaker 5: how that data is going to be used. So what
Speaker 5: we have right now is kind of snapshots in time
Speaker 5: to understand how people are stacking, you know, buy Nowpay
Speaker 5: Later on top of credit card debt and on top
Speaker 5: of other products. And the research that we have there,
Speaker 5: which is somewhat limited, does suggest that people are stacking this,
Speaker 5: you know. It tells us that about sixty percent of
Speaker 5: the people who are using buy now Pay Later have
Speaker 5: a SubTime credit score. It tells us that they are
Speaker 5: mostly using it on top of credit card debt. And
Speaker 5: it's also suggesting that before people take on buy now
Speaker 5: pay Leader, there's a slight uptick in their use of
Speaker 5: their credit cards. So there's a suggestion that it's really
Speaker 5: like you're maxing out one form of debt and then
Speaker 5: taking on another.
Speaker 4: I just looked up the Q two New York Fed
Speaker 4: Household Debt Report.
Speaker 3: I think it just came out a few days ago.
Speaker 3: I must've it's Q two anyway.
Speaker 4: It says there's one point two to one trillion in
Speaker 4: total credit card balances outstanding. Do we have something that
Speaker 4: we have a guess for what is the number of
Speaker 4: BNPL loans of any form currently outstanding, so that we
Speaker 4: can benchmark that against credit cards.
Speaker 5: We have numbers that are reported by the companies. We
Speaker 5: don't have data that is reported by a government. So
Speaker 5: just like that, I think that the best we have
Speaker 5: is that the transaction volume is around one hundred and
Speaker 5: sixteen billion, and that's up from about thirteen point eight
Speaker 5: billion in twenty twenty, so this is growing pretty rapidly.
Speaker 4: So it's it's a non zero. I mean, it's not
Speaker 4: like clear like still like a fraction of credit cards,
Speaker 4: but this is beyond the rounding air, that's right, Okay.
Speaker 2: Do we have any sense of how usage patterns have changed?
Speaker 2: So for instance, you know, during the pandemic, did we
Speaker 2: see an uptick in buy now, pay later use as
Speaker 2: people were struggling because they didn't have jobs or had
Speaker 2: short term cash flow issues? Has it come down since then?
Speaker 5: We're seeing an uptick in people's use of bineopi lator,
Speaker 5: and we're seeing shifting patterns of what they're using it
Speaker 5: to purchase. So I think I said earlier that there
Speaker 5: was this assumption that people were using this to purchase
Speaker 5: clothing or other kind of luxury goods. And you know,
Speaker 5: even back in twenty twenty two when the CFPB put
Speaker 5: out its first report here, we saw that that wasn't true.
Speaker 5: People were using bunopaylator for things like groceries and education costs.
Speaker 5: The surveys that have come out recently showed that that's growing.
Speaker 5: So there was I think in an Axio survey and
Speaker 5: a lending Tree survey, they showed somewhere between fourteen and
Speaker 5: twenty five percent of bineopay lator users are using it
Speaker 5: to purchase groceries. They're showing that a bigger percentage of
Speaker 5: people are using binopulator for medical and dental costs than
Speaker 5: for the things people might assume stereotypically it's used for,
Speaker 5: like dining out or ordering in, or even like purchasing
Speaker 5: concert tickets and things like that.
Speaker 3: Is it bad?
Speaker 4: I mean, like, you know, it seems like people are
Speaker 4: using buy o pay later for dental or they're using
Speaker 4: it for groceries or whatever, and like, you know, the
Speaker 4: idea that people are obviously stressed and have to spread
Speaker 4: out or borrow money to make those purchases is obviously
Speaker 4: I guess there's an inherent angst about that because these
Speaker 4: are human essentials. But is it really per se bad
Speaker 4: or is it just like no, this is like yet
Speaker 4: another tool that people have to sort of you know,
Speaker 4: smooth consumption and so forth.
Speaker 5: I think it's bad that we're seeing an uptick in
Speaker 5: the use of credit products to pay for essentials. That's
Speaker 5: not to say that buy now, pay later is particularly
Speaker 5: the enemy there, but you know, this is part of
Speaker 5: the reason I've been interested in consumer credit overall is that,
Speaker 5: you know, we see these broader changes go on in
Speaker 5: the policy space. In particular, recently, we've seen Donald Trump
Speaker 5: and Republicans in Congress push through a bill that cuts Medicaid,
Speaker 5: cuts food assistance, you know, makes education more expensive, and
Speaker 5: the availability of consumer credit products that are kind of
Speaker 5: waiting in the wings there blents our ability to really
Speaker 5: understand what those changes mean. So, you know, we know
Speaker 5: that the Medicaid cuts will result in people having more
Speaker 5: expensive health care, but we need to be looking at
Speaker 5: the fact that that's going to result in buy now,
Speaker 5: pay later loans, It's going to be an opportunity for
Speaker 5: medical credit cards from places like Synchrony with per credit,
Speaker 5: and so it's relevant to our overall economic situation. It's
Speaker 5: relevant to the kind of like what I think is
Speaker 5: like a silent financial crisis that's happening for the vast
Speaker 5: majority of families in the United States, but it's not tracked.
Speaker 5: You know, we've been talking about buy now, Pay later
Speaker 5: really not being tracked, but the overall sort of like
Speaker 5: consumer credit conditions for families are really not tracked and
Speaker 5: talked about in that way. We see economists going on
Speaker 5: TV talking about consumption and CPI and GDP, where families
Speaker 5: are kind of sitting around the kitchen table talking about
Speaker 5: Klarna and a firm and Sally May and Abvian.
Speaker 2: When you were at the CFPB, how are you thinking
Speaker 2: about buy now, Pay Later from a sort of regulatory perspective.
Speaker 5: Yeah, so we were looking at the risks of the products,
Speaker 5: and then we were kind of trying to look you know,
Speaker 5: we've had this phenomenon with consumer credit products across the board,
Speaker 5: not just specific to buy now, Pay Later, but it
Speaker 5: was really evident at CFPB that you have these sort
Speaker 5: of like new entrants into a market whose products are
Speaker 5: framed very differently than a traditional consumer credit product, and
Speaker 5: it's often part of the marketing pitch. It's like we're
Speaker 5: not alone, we're not equity, We're this totally different thing,
Speaker 5: and it preys on consumers hesitants to use debt. And
Speaker 5: then also you know this idea that we might float
Speaker 5: above any regulatory scheme, so for buying out, pay lead
Speaker 5: and for these other products like earned wage access or
Speaker 5: income share agreements. You know, we were looking at like
Speaker 5: what is this under the law, and with buying now
Speaker 5: pay later, particularly the products like where Klarna or a
Speaker 5: firm is offering basically like a digital or physical card
Speaker 5: where you can make repeated purchases where you have a
Speaker 5: you know, an overall lit It starts to sound like
Speaker 5: a credit card, right, And so you know, cfhobe's initial
Speaker 5: approach on regulation here was to really just say, like,
Speaker 5: you've got to follow some of the fundamental basics that
Speaker 5: apply to the product that you are, right, And so
Speaker 5: that was really meant to help people with some of
Speaker 5: the real kind of basic consumer protections around managing disputes
Speaker 5: and getting accurate billing statements. The other thing CFPP was
Speaker 5: doing was on the enforcement and supervision side, so really
Speaker 5: taking a look at these companies the same way we
Speaker 5: do any other financial institution and making sure they're following
Speaker 5: the law. And I think it's important to talk about
Speaker 5: that piece because we've seen the Trump administration pull back
Speaker 5: on the proposed regulations, but we've also seen them pull
Speaker 5: back on enforcement. They specifically said they would deprioritize by now,
Speaker 5: pay later in enforcement, and so there are these other
Speaker 5: real basics that we're seeing fall apart. You know, if
Speaker 5: you look at what consumers are complaining about right now,
Speaker 5: they're saying, I had auto pay on my you know,
Speaker 5: my Clarina or my after pay and I tried to
Speaker 5: take it off and the company continues to charge me.
Speaker 5: These are like really basic questions of whether the companies
Speaker 5: are falling consumer financial laws and you know cfpps just
Speaker 5: off the job.
Speaker 4: So you mentioned that in the research, prior to someone
Speaker 4: beginning to use BNPL, increase in their credit card usage, right,
Speaker 4: why does someone flip over? Like why doesn't so some
Speaker 4: of these purchases. What is insufficient about the existing credit
Speaker 4: card system? Is it that they're hitting their credit limits
Speaker 4: or what is the situation such that then BNPL becomes
Speaker 4: more attractive.
Speaker 5: Yeah, I think we need to take a deeper look
Speaker 5: at credit utilization because I do think there are people
Speaker 5: who are flipping over and they're using their available credit
Speaker 5: balance and then they're shifting to bind a pay leader.
Speaker 5: But I think there are a lot of other people
Speaker 5: who are just trying to juggle their essentials, you know,
Speaker 5: their groceries, and their kids back to school clothes, and
Speaker 5: they're doing it through whatever feels like the most convenient
Speaker 5: payment method. So the buy now pay lead companies have
Speaker 5: made a real effort at being that convenient payment method,
Speaker 5: both through kind of point of sale but also through
Speaker 5: their apps. So they're pushing their users towards an app
Speaker 5: that both makes it more convenience to make the payment
Speaker 5: but also pushes you advertisements for different products. And so
Speaker 5: I think we see people brought in there. But you
Speaker 5: mentioned earlier why you don't use buye now Pay later,
Speaker 5: And I do think it's important to great question. We
Speaker 5: could do a half hour on your personal finances, but
Speaker 5: I think it's important to know that even while there's
Speaker 5: a big percentage of people using this to cover basics,
Speaker 5: there is kind of a split in buy now pay
Speaker 5: lead where if you talk to consultants who look at
Speaker 5: this really closely, they're seeing people like you or I
Speaker 5: who can I'm making an assumption about your finances get paid. Well, okay,
Speaker 5: you know about like you or I who can make
Speaker 5: a purchase, but it's a painful purchase, you know, maybe
Speaker 5: it's like a new television or something that you just
Speaker 5: don't want to pay upfront, so there are people using
Speaker 5: it in that way too interesting.
Speaker 2: You mentioned ease of use, and I think this is
Speaker 2: really key. What are the conversations like with retailers, So like,
Speaker 2: what's the pitch that buy now, pay later platforms are
Speaker 2: going to make to I don't know, a Walmart or
Speaker 2: whoever to kind of plug directly into their websites.
Speaker 5: Yeah, so the pitch is basically basket size is and
Speaker 5: then overall transaction volume. Right, So they're showing that they're
Speaker 5: getting the retailers about ten percent more in terms of
Speaker 5: the basket size, so the amount of things that people
Speaker 5: are purchasing, and then some of the companies are reporting
Speaker 5: up to eighty percent more in terms of the actual transaction.
Speaker 5: So that's pretty significant for retailers, and I think it
Speaker 5: is what is propelling retailers to cut deals with Klarna
Speaker 5: or after pay and to pay the costs which are
Speaker 5: higher than interchange on a credit card. So in many cases,
Speaker 5: you know, we're looking at costs that are somewhere between
Speaker 5: one to eight percent of the transaction, plus like a
Speaker 5: flat fee that might be like thirty cents per transaction.
Speaker 5: So it's pretty significant. I think the other part of
Speaker 5: the pitch is and this is this is one of
Speaker 5: the pieces that was really kind of consuming a lot
Speaker 5: of our attention at CFB is the ability to use
Speaker 5: people's data to drive those purchases. So I think if
Speaker 5: you're a merchant looking at those big fees, if you're
Speaker 5: a Walmart or Amazon or Whoe or you're not just
Speaker 5: saying like, let me put this in Klarna or a
Speaker 5: firm's hands to hope that people use it more, but
Speaker 5: let me use the data I have on hand to
Speaker 5: try to drive more purchases. And like a company that
Speaker 5: has a lot of information about what I like to
Speaker 5: buy and a lot of information about how much money
Speaker 5: I have to do it has like a pretty potent
Speaker 5: set of data to help drive those purchases. So I
Speaker 5: think that's part of the appeal for emergents as well.
Speaker 4: Do we have a way of essentially measuring from the
Speaker 4: consumer's perspective a sort of like for like interest rate
Speaker 4: that they payment because as you described, like in some
Speaker 4: cases they're clear right, in some cases they're more embedded
Speaker 4: because it's free for four months, but then there's like
Speaker 4: a penalty. In some instances, it's this thing that looks
Speaker 4: like a credit card, but maybe structurally there's a different
Speaker 4: way of getting from point A to point B, Like
Speaker 4: can we measure like, okay, if this were a credit
Speaker 4: card payment with a fifteen percent rate, this is the
Speaker 4: apples to apples compared you're paying eighteen percent or twelve percent?
Speaker 3: Like, are we able to are you able to do that?
Speaker 5: Me personally, I'm not able to do that. But you
Speaker 5: know at the CFPV we did do that on certain products.
Speaker 5: We didn't do that for buying now pay later in
Speaker 5: many cases because the products we were studying had almost
Speaker 5: no cost, right, they were no interest in, no fee.
Speaker 5: Maybe they had a late fee that might kick in,
Speaker 5: but remember where they're requiring auto payments, which most of
Speaker 5: the companies are, those late fees are less likely to
Speaker 5: be incurred. But I think the sort of relevant thing
Speaker 5: is to understand how much people are paying overall in access,
Speaker 5: fees and interest for the goods and services that they need.
Speaker 5: And that's incredibly difficult to do because these companies are
Speaker 5: sort of layering these different products. So you have a
Speaker 5: credit card with a set interest rate, but you might
Speaker 5: be incurring debt on a number of different products across
Speaker 5: multiple band pail providers. That each have different terms and
Speaker 5: different costs, so it's really difficult. It's difficult for us
Speaker 5: to understand from a research perspective, it's even more difficult
Speaker 5: for a consumer, I think, to make those choices in
Speaker 5: those trade offs.
Speaker 2: Just going back to the data aspect of those for
Speaker 2: a second, you said that some of the platforms are
Speaker 2: reluctant to report to FYCO and are asking for certain assurances.
Speaker 2: What exactly do they want here?
Speaker 5: I mean, I've looked into this question. They haven't been
Speaker 5: super clear I think about what they want. They've sort
Speaker 5: of made some general statements that they want to make
Speaker 5: sure that you reporting this data won't be used negatively
Speaker 5: to affect people. I mean, this is really just my speculation.
Speaker 5: But what I think is really interesting about this is
Speaker 5: the companies are playing on this kind of broader skepticism
Speaker 5: about credit reporting and FYCO overall, because I think, you
Speaker 5: know people's experience and certainly what we saw in the
Speaker 5: research at CFPP is that credit reporting has predominantly been
Speaker 5: used to ding people and to coerce them into making
Speaker 5: payments they might not want to make. So like medical
Speaker 5: debt is a great example of that. Cfb's research showed
Speaker 5: it really had no value for the fundamental purpose of
Speaker 5: credit reporting, which is evaluating people's ability to repay, and
Speaker 5: it was mostly being used to course. So when Klarna says,
Speaker 5: you know, we want to make sure this isn't used
Speaker 5: to ding people, that feels very noble. But I think
Speaker 5: at the end of the day we should be kind
Speaker 5: of skeptical of why they don't want to report.
Speaker 4: Explain this further about medical debt and would you say
Speaker 4: it has no value? But also it's been used to course,
Speaker 4: what are the conditions with medical debt and FYCO.
Speaker 5: Yeah, So we looked at medical debt and credit reporting
Speaker 5: really closely at CFPB, and what we saw was that
Speaker 5: it didn't have predictive value. So medical debt was not
Speaker 5: predictive of whether you would repay other types of debt.
Speaker 5: And part of the reason is that a lot of
Speaker 5: medical debt that is reported on people's credit reports is
Speaker 5: inaccurate in one way or another. You know, it might
Speaker 5: be that the debt collector is going after you for
Speaker 5: a debt that is larger than what you think you
Speaker 5: pay because you think your insurance company ought to have paid.
Speaker 5: It might be that you actually already paid the debt
Speaker 5: and that information hasn't gotten to the debt collector, so
Speaker 5: it's really kind of this junk data that's sitting on
Speaker 5: people's credit reports.
Speaker 4: And then explain the coercion element, like how does it
Speaker 4: so medical debt isn't a good predictor of someone's ability
Speaker 4: to pay a future loan, so it's not great for that.
Speaker 4: And yet what it's still like people because it affects
Speaker 4: their credit card scorers, feel this extra pressure to pay it.
Speaker 4: Like explain sort of like the effect on the patient
Speaker 4: in this case.
Speaker 5: Yeah, exactly. So the constituency that wants medical debt on
Speaker 5: your credit reports is primarily third party debt collectors. And
Speaker 5: why do they want that there? They want it there
Speaker 5: so that they can call you and say, you know,
Speaker 5: this is going to be this debt or it's going
Speaker 5: to hurt your credit. And I think at CFB we
Speaker 5: tried to spend a lot of time thinking this through
Speaker 5: from the consumer perspective and what that feels like.
Speaker 4: So actually I was not familiar with that at all.
Speaker 4: But just to go further, is this, like I hadn't
Speaker 4: really thought about the sort of behind the scenes fight
Speaker 4: of what does and doesn't go into a fight though
Speaker 4: but obviously that's very intuitive. Is this like a common
Speaker 4: thing across a range of either formal debt products or
Speaker 4: quasi debt products, where they're all like sort of jocking
Speaker 4: either to be in or out of the calculation basket.
Speaker 5: I mean, I think it is. The medical debt is
Speaker 5: a thing because see if he be made it a thing.
Speaker 5: I don't think we have enough research on what is
Speaker 5: or isn't on your credit report and why. But when
Speaker 5: regulators start to pick those fights, yeah, you start to
Speaker 5: get this jocking for what's on there. I think student
Speaker 5: debt is another good example where there are legitimate quessions
Speaker 5: of what ought to and not not be on there.
Speaker 5: And some of it is about the predictive value, but
Speaker 5: a lot of it is about putting debt on people's
Speaker 5: credit reports that we know is inaccurate.
Speaker 2: It is true that every few years we see like
Speaker 2: these efforts from private companies I guess, to try to
Speaker 2: augment credit scores with new technology. So I remember very
Speaker 2: clearly being at a startup's offices in San Francisco in
Speaker 2: like I guess it would have been twenty fifteen or something,
Speaker 2: and they were walking me through the data that they
Speaker 2: could use to make short term loans. And one of
Speaker 2: the things they were talking about was like just the
Speaker 2: basic cursor movement on the screen, like how fast you
Speaker 2: click the button to get money, whether or not you know,
Speaker 2: if it's a sliding bar that goes from like one
Speaker 2: thousand dollars to ten thousand dollars, Like whether or not
Speaker 2: you hesitate to go to ten thousand and then go
Speaker 2: back and then go back to ten thousand again. It
Speaker 2: seemed very dystopian to me, And I'm curious what those
Speaker 2: efforts are like right now given the new emphasis on
Speaker 2: AI and maybe you know, even more data that is
Speaker 2: now available to private companies to look at to try
Speaker 2: to judge whether people are credit worthy or not.
Speaker 5: Yeah, if you listen to the earnings calls where CEOs
Speaker 5: are talking to investors about their underwriting models for a
Speaker 5: variety of different products, whether it's kind of traditional credit
Speaker 5: cards or things like bnpl ai comes up a lot.
Speaker 5: You know, everybody sort of wants to say that they've
Speaker 5: got this proprietary am that's exactly it.
Speaker 2: Yeah, they were saying the same thing ten years ago. Yeah.
Speaker 5: Yeah, And I think there's a lot of things to
Speaker 5: unpack there and to be concerned about so I think
Speaker 5: we should You know, we know that AI models often
Speaker 5: bake in racial biases, so we know that there's some
Speaker 5: concern there about these models, you know. But I also
Speaker 5: think to your point there, we're dragging in a lot
Speaker 5: of extraneous data about people into the way we look
Speaker 5: at their credit worthiness, some of which should be relevant,
Speaker 5: some of which really should not. And what I think
Speaker 5: is most important to think about there is that those
Speaker 5: models are completely opaque, and company is often when they're
Speaker 5: faced with regulatory scrutiny say kind of like the AI
Speaker 5: did it right, as though the people at the companies
Speaker 5: are not responsible for the outcomes of the technology. So
Speaker 5: you know, under the Biden administration, the approach there had
Speaker 5: really been to say you're responsible. It sounds so basic,
Speaker 5: but the laws are the laws, whether it's about consumer
Speaker 5: protection or about you know, basic discrimination among credit applicants,
Speaker 5: the laws are the laws, and you're responsible for the
Speaker 5: outcomes of those models. And I think that shift is
Speaker 5: or that kind of approach is really really important here
Speaker 5: to drive some accountability, because otherwise it does kind of
Speaker 5: get out of hands.
Speaker 2: So I mentioned in the intro that the parallel that
Speaker 2: I reach for when thinking about buy Now, Pay Later
Speaker 2: is sort of private credit. So this idea that you know,
Speaker 2: it's a more opaque market and people are worried about
Speaker 2: its size, and they're worried about transparency and hidden leverage
Speaker 2: and all of that. But on the other hand, you know,
Speaker 2: it is an extra credit bigot that companies can tap
Speaker 2: in times of emergency, and we certainly saw that over
Speaker 2: the past five years or so. Net net. When you
Speaker 2: look at buy now, Pay Later, would you say the
Speaker 2: effects are good, more good or more bad? This is
Speaker 2: a tough one.
Speaker 5: It is a really tough one because I don't I
Speaker 5: said this earlier. I don't want to single out buy
Speaker 5: Now Pay Later as the bad guy here. I think,
Speaker 5: first of all, there are a lot of bad guys.
Speaker 5: There are a lot of good guys too. But you know,
Speaker 5: I think the thing to really focus on is, like
Speaker 5: we're in what the Trump administration is describing as like
Speaker 5: a relatively good economy, and we're sitting here talking about
Speaker 5: like turning on this pigot for these kind of like
Speaker 5: new and interesting types of debt to help people handle
Speaker 5: really basic expenses. That seems like a problem we should
Speaker 5: not be in an emergency situation and yet we are,
Speaker 5: and so I'm concerned that that availability of these credit
Speaker 5: products is obscuring, like the kind of growing emergency around
Speaker 5: people's cost of living, which often you know in the
Speaker 5: news is about their grocery prices, the eggs, their sneakers
Speaker 5: for back to school, and those are really important, but
Speaker 5: it's also their healthcare, the cost of college, being able
Speaker 5: to retire. So families are feeling really squeezed, and you know,
Speaker 5: to me, the most important thing there is like where
Speaker 5: I think we're seeing the Trump administration sort of test
Speaker 5: out this theory that they can keep the high level
Speaker 5: metrics of whether the economy is on track, steady or
Speaker 5: growing while letting somewhere around sixty percent of people have
Speaker 5: these private financial crises. We're going to see that play
Speaker 5: out over the next couple of years. And so that's
Speaker 5: that's the way I think about these. It's not really
Speaker 5: like is the individual one good, but it's like, do
Speaker 5: you know what we're doing overall? And is anyone doing
Speaker 5: the math? All right?
Speaker 2: Julian Morgan, thank you so much for coming on all
Speaker 2: thoughts really appreciated.
Speaker 5: Thank you, thanks for having me.
Speaker 2: Joe. I'm glad we finally did that episode We've been
Speaker 2: talking about doing one on BNPL for a while. BNPL.
Speaker 2: It always reminds me of like it sounds like BNP
Speaker 2: Paribo's like Italian subsidiary or something. But there are a
Speaker 2: bunch of things to pick out there. I mean, number one,
Speaker 2: it's clearly a nuanced issue, yeah right, and like clearly,
Speaker 2: as you laid out in the intro, it can have
Speaker 2: a smoothing effect. The second thing that always seems to
Speaker 2: come up is this idea that like, well, it's not
Speaker 2: that big now, right, Like it's not big enough to
Speaker 2: have an effect right now. But as Julie mentioned, we
Speaker 2: are seeing, you know, volumes slowly pick up, and I
Speaker 2: guess slowly, not that slowly, Yeah, yeah, right, And I
Speaker 2: guess like I kind of wonder what happens like as
Speaker 2: more and more of this activity actually stretches into services
Speaker 2: forus goods, like that seems to be quite a big shift.
Speaker 4: Well, I'd say, like, I think Julie's last point is
Speaker 4: very relevant, which is like, you know, when we think
Speaker 4: about household borrowing, and again probably you and I because
Speaker 4: we're sort of children of or you know, grew up
Speaker 4: during the financial crisis, you know, we sort of think
Speaker 4: about like.
Speaker 2: We weren't children, No, we're children, But.
Speaker 4: You know what I'm saying, Yeah, you know, I think
Speaker 4: you and I often think about credit from the effects
Speaker 4: of defaults and so forth, and that could be an effect,
Speaker 4: and that's not something to be dismissed. But the other
Speaker 4: idea is like how much of like sort of like
Speaker 4: aggregate economic conditions consumption is sort of debt financed and
Speaker 4: in a way that we can't like fully measure, right,
Speaker 4: because we comfort we can measure credit card dead and
Speaker 4: so we have some sense of credit card dead is
Speaker 4: the size of incomes or whatever, But if there's this
Speaker 4: other rapidly growing source and it's pretty crucial for like
Speaker 4: sort of keeping the headline figures of consumption or GDP,
Speaker 4: you know, like my conclusion or like my sense it's like, yeah,
Speaker 4: it's not that huge yet, but it's definitely not nothing,
Speaker 4: and it's definitely not you know, it's bigger than.
Speaker 2: A rounding air, right, And it certainly says something to
Speaker 2: Julia's point about like the state of the average American
Speaker 2: consumer who probably is struggling to pay something like dental fees.
Speaker 4: Yeah, yeah, no, and like the fact in like, you know,
Speaker 4: I think there's I thought it was interesting too that
Speaker 4: like maybe both of us are least just me had
Speaker 4: a certain.
Speaker 3: Maybe already outdated view of what BNPL is.
Speaker 2: Oh yeah, because like the idea of like I'm going
Speaker 2: to polize that they have like actual apps, yees.
Speaker 4: So the idea that like, oh, I'm going to buy
Speaker 4: a television that's a thousand dollars and make it like
Speaker 4: four two hundred and fifty dollars purchases, like that sounds great.
Speaker 4: Should I should be doing this? But if that's just
Speaker 4: sort of like on business model, but that there's like
Speaker 4: this growing business model that looks more like installment loans
Speaker 4: where there is a formal interest rate, but it also
Speaker 4: sort of looks like the same thing and you also
Speaker 4: get a card, et cetera. But it's just like a
Speaker 4: slightly different structure, and formerly it isn't called debt or
Speaker 4: isn't categorized or is it reported as debt than then
Speaker 4: I think obviously we need to continue to get a
Speaker 4: better handle on you know.
Speaker 3: How big this is. Yeah.
Speaker 2: Absolutely, Also Klarna says it's a bank now, which is
Speaker 2: kind of confusing.
Speaker 4: Yeah, it's like the hottest thing everyone wants everyone for
Speaker 4: bank charters these days.
Speaker 2: Oh yeah, that would be interesting to look at because
Speaker 2: we went after the financial crisis, speaking of two thousand
Speaker 2: and eight, we went years and years in brand.
Speaker 4: Everyone, so every like every random brokerage or fine, we
Speaker 4: got a bank charter. We acquired a company that has
Speaker 4: a bank charter.
Speaker 2: Time is a flat circle show? Yeah, all right, shall
Speaker 2: we leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Odd Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 4: Follow our guest Julie Morgan, She's at Jay Margetta, follow
Speaker 4: our producers and Rodriguez at Carmen armand Dashel Bennett at
Speaker 4: dashbod and Kale Brooks and Kale Brooks. For more Odd
Speaker 4: Lots content, go to Bloomberg dot com slash odd Lots.
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Speaker 2: Stood in a