Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3: I'm Jolle Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, are you good about like frequent flyer miles and
Speaker 2: hotel rewards and cash back and using your credit card
Speaker 2: to get like good seats at the US Open like
Speaker 2: all the dining? Are you good about maximizing that stuff?
Speaker 3: Nope, I am not.
Speaker 4: I'm trying to be better, you know, I'm finally signing
Speaker 4: up to a bunch of frequent flyer programs and things
Speaker 4: like that. But in general, I am not a points strategy.
Speaker 4: Some people get really into it.
Speaker 5: Now.
Speaker 2: I do not have a very busy life. I do
Speaker 2: not have mental energy towards, you know, maximizing points or
Speaker 2: learning about the newest cars. It's like, oh's this card
Speaker 2: worth a four hundred dollars fee because I can get
Speaker 2: upgraded to Platinum faster this year. I do not want
Speaker 2: to think about that stuff. I'm not that interested. But
Speaker 2: I get the impression that means I'm probably paying for
Speaker 2: someone who is or something like that, or maybe you know,
Speaker 2: I'm paying these fees on my credit cards or these
Speaker 2: interchange fees, et cetera. Maybe I'm leaving money on the
Speaker 2: table by not doing it.
Speaker 5: I don't know.
Speaker 2: I find credit cards to be a weird business, Like
Speaker 2: I don't really know what visa does relative to say,
Speaker 2: the bank that issues a visa card, et cetera, to
Speaker 2: know how they slice them. I don't know any about
Speaker 2: credit cards.
Speaker 4: It's a very opaque business, for sure, and it's a
Speaker 4: weird business. I would say, like it's competitive, but also
Speaker 4: it's like not, you know, like everyone's kind of doing
Speaker 4: the same thing in many ways, so we should talk
Speaker 4: about it. It's also, I imagine, kind of sticky, in
Speaker 4: the same way that deposits at banks are sticky.
Speaker 3: We spoke with Joe Obote about that a while back.
Speaker 2: So I don't cycle through them a bunch and stuff
Speaker 2: like that. And there's so much credit card advertising. I
Speaker 2: don't know what's good, bad or whatever.
Speaker 5: I know.
Speaker 2: Yeah, Look, I use my credit card as a payments
Speaker 2: card because I don't really I don't carry a balance
Speaker 2: from month to month, so I don't I don't know,
Speaker 2: I think my interest rates or whatever. I pay it
Speaker 2: off at the end of every month because I just
Speaker 2: basically use it for payments et cetera. So I just
Speaker 2: don't know much about them, but they're a huge, major
Speaker 2: consumer financing source. Yeah, and every want to talk about
Speaker 2: fintech and BNPL and all these other things and stable
Speaker 2: coins and all this other stuff, and it's like, yeah,
Speaker 2: but the big one. Who's talking about the big one?
Speaker 2: Credit cards?
Speaker 3: Well that's the thing.
Speaker 4: So points have become a bigger attractant, I guess, to
Speaker 4: credit cards, and so people are spending more with their
Speaker 4: credit cards and carrying a bigger balance, which means that
Speaker 4: the rate that you're paying on the credit card is
Speaker 4: actually more important potentially than something like your mortgage rate.
Speaker 2: Totally well pleased to say. We do, in fact have
Speaker 2: the perfect guests. Someone we've had on the podcast before.
Speaker 2: I think the last time we were talking about red Q,
Speaker 2: which is main lending in the seventies. I like his
Speaker 2: work because he goes back to the simple things like
Speaker 2: let's talk about how this works. Let's talk about how
Speaker 2: this works, because I think we move on too quickly
Speaker 2: without sort of understanding the basics. Maybe there are stones
Speaker 2: left unturned.
Speaker 5: Literally.
Speaker 2: The perfect guest Itamar Drexler. He has a finance professor
Speaker 2: at Warden and he was the co author of a
Speaker 2: fairly recent paper sort of looking at the question of
Speaker 2: why are credit card rates so high? Because if you
Speaker 2: actually do borrow from them, sometimes the rates are like
Speaker 2: twenty something percent. Seems way higher than any other sort
Speaker 2: of lending. So itamar Thank you so much for coming
Speaker 2: back on odd lots.
Speaker 5: Thank you very much. It's really nice to be back.
Speaker 5: Thank you for having me.
Speaker 2: When I was doing some prep for this episode, there
Speaker 2: is not a ton of actually like fresh academic work
Speaker 2: on the credit card industry. There's not a ton of papers,
Speaker 2: but it's this huge space.
Speaker 5: Why did you.
Speaker 2: See a reason to go back and revisit the sort
Speaker 2: of basic simple question of looking at interest rates on
Speaker 2: credit cards?
Speaker 5: Yeah, so my interest is usually like we talked about
Speaker 5: when I was here last time's monetary policy, macro and
Speaker 5: out of banking and had some student to our co
Speaker 5: authors now on this paper a couple of years ago,
Speaker 5: I want to talk about fintech because fintech is a
Speaker 5: very popular topic. And then I was thinking, well, how
Speaker 5: do we analyze fintech and what's the potential room for
Speaker 5: fintech to grow if we don't really understand how the
Speaker 5: dominant incumbent players the credit card banks work. And then
Speaker 5: we look at this and I was very surprised to
Speaker 5: see something kind of simple, which is that the return
Speaker 5: on assets for credit card banks are just way higher
Speaker 5: than the average bank. So bank ROAs are typically you know,
Speaker 5: one one point two percent, they move a couple basis
Speaker 5: points are very exciting. Credit card banks ROAs and you know,
Speaker 5: most banks are not just credit cards, so it's actually
Speaker 5: even higher than this, are in the three and a
Speaker 5: half often four percent. So it's very shocked by this.
Speaker 5: How come it's so high when it's so hard to
Speaker 5: squeeze out a couple basis points. And then one of
Speaker 5: the reasons is just they you charge really high rates,
Speaker 5: Like okay, how did they get away with this? You
Speaker 5: know what is going on here? Just very simple question
Speaker 5: about how to decompose that rate into the pieces and
Speaker 5: kind of what's left over at the end.
Speaker 4: In the spirit of starting at basics, walk us through
Speaker 4: the revenue that credit card issuers or credit card banks
Speaker 4: are actually earning, the different types and who the players
Speaker 4: are in the system.
Speaker 5: Yeah, so let's separate first into two categories. One are
Speaker 5: people who revolve their balance, and that's what most of
Speaker 5: the papers about it I think that's the more interesting
Speaker 5: part and there's more details, and it's kind of the
Speaker 5: banking part of it. And there are actually a lot
Speaker 5: of people who revolve often. I find people are surprised
Speaker 5: to hear this, but about sixty percent of the credit
Speaker 5: card users actually revolve, so meaning that they don't pay
Speaker 5: in the grace period at the end of the month,
Speaker 5: and so they're hit with these very high usually interest charges.
Speaker 5: And then the other part are what people call transactors,
Speaker 5: so they're the kind that do pay during the grace periods,
Speaker 5: so they're not paying interest. Okay, So for the revolvers,
Speaker 5: there's again multiple parts, so you pay interest on the
Speaker 5: balance that you have. But before then there's the part
Speaker 5: which applies both to the transactor and revolvers. When you
Speaker 5: swipe the card, then there's immediately a percentage taken. People
Speaker 5: call it the swipe fee, and that is split up
Speaker 5: into a bunch of pieces. The ones that I used
Speaker 5: to be aware of that most people are aware of is
Speaker 5: the card network like Visa, MasterCard, Amex. There was Discover
Speaker 5: which is now part of Capital One, and that's there's
Speaker 5: a whole menu, but basically it's like fifteen twenty basis points. Okay, okay,
Speaker 5: it doesn't sound like a lot, but there's like ten
Speaker 5: trillion dollars of purchases between debit and credit cards. Turns
Speaker 5: out when you take twenty basis points of ten trillion
Speaker 5: dollars kind of adds.
Speaker 3: Up nice business if you can get it.
Speaker 5: It's really nice. Actually, be surprised that usually Visa and
Speaker 5: JP Morgan are the two most valuable financial services firms.
Speaker 5: They change who's number one, So Visa's, you know, been
Speaker 5: worth over six hundred billion dollars. It's a lot, yea
Speaker 5: and MasterCards is gigantic too, so there's that. Then the
Speaker 5: majority of that swipe fee, the majority of that remain there,
Speaker 5: actually goes to the bank that issued the card to
Speaker 5: the consumer. So that's called interchange fee. And again they
Speaker 5: don't make this like very easy to tell, but in
Speaker 5: our data it's a little over one point eight percent
Speaker 5: on average. I think it's largely been trending up over
Speaker 5: time slowly. So the bank gets that, it actually gets
Speaker 5: the vast majority of that, and then they pay your
Speaker 5: rewards and things. From that, a lot of that goes
Speaker 5: to just pass through to the rewards and things, and
Speaker 5: they keep a small portion of it for themselves. But
Speaker 5: the big part of their business where most of the
Speaker 5: money comes from that we analyze here is all these
Speaker 5: people that revolved. They pay an interest rate, and that
Speaker 5: interest rate now is on average twenty three percent, which
Speaker 5: is just like a shockingly high number. I mean, I
Speaker 5: guess I've seen that. It just when you work on
Speaker 5: assets and like, you know, think the kind of things
Speaker 5: you guys talk about bonds and bonds pay you know whatever,
Speaker 5: five percent investment grades spread is not even eighty basis points. Now,
Speaker 5: on top of it, high yield spreads under three percent, Like,
Speaker 5: how the hell do we get to twenty three percent?
Speaker 2: When you hear this number twenty three percent and you
Speaker 2: think about the fact that credit card users can be
Speaker 2: decomposed into transactors and revolvers, my first instinct would be, well,
Speaker 2: the transactors are very on the ball. They're like, not
Speaker 2: credit risks. I've always been just a transactor. I've never revolved.
Speaker 2: How much of that increase spread can just be explained
Speaker 2: by likelihood of default from the revolvers, which I presume
Speaker 2: are perhaps a little more you know, financially precurious and
Speaker 2: maybe less financially sophisticated.
Speaker 5: Right, So I think, if like me, you didn't know
Speaker 5: much about this, your assumption. If I think, if you
Speaker 5: ask most financial economists, the first thing they would think is, well,
Speaker 5: must be that most of the remainders is a charge offs, right, defaults,
Speaker 5: And that's not true. So you can find that pretty easily.
Speaker 5: So the average charge off rate on the revolvers, okay,
Speaker 5: so when you look at it, let's say you look
Speaker 5: it up online, you'll see kind of, you know, relative
Speaker 5: to the whole balance sheets includes both groups, and like
Speaker 5: you're saying, by definition, transactors don't borrow, so they can't default.
Speaker 5: That kind of makes it go down a little bit.
Speaker 5: But the majority our revolvers, So if we kind of
Speaker 5: clean that out, then on average in our sample it's
Speaker 5: five point seventy five percent of bounces are charged off,
Speaker 5: So it's not trivial by any means. That's a high number.
Speaker 5: But again we were talking about eighteen percent spread, so
Speaker 5: if you think, oh, it must be about eighteen percent
Speaker 5: charge us, it's not even close. And it's like never
Speaker 5: been that high, So you might think, well, maybe it's
Speaker 5: just that's on average, but sometimes it'll spike to be
Speaker 5: ridiculous numbers it does spike, but not for very long
Speaker 5: periods of time. So the bottom line is it's a
Speaker 5: substantial chunk of it, but not even close to a
Speaker 5: majority of it. So you know people default, but they
Speaker 5: don't default that much.
Speaker 4: Can I ask one more question on APR and the
Speaker 4: average there? Did you observe any trend over time? Like
Speaker 4: did the rate actually get higher as time went on?
Speaker 5: So that's something we haven't spent a lot of time
Speaker 5: on in this paper. But the answer to your question
Speaker 5: is this is obviously yes. So if you look at it.
Speaker 5: I think what can be found online is again it's
Speaker 5: I think there's something a little misleading there, but that
Speaker 5: has trended up pretty strongly. I think not as much
Speaker 5: as somebody you know goes to their computer and looks up.
Speaker 5: I'll say, Fred from the Call reports, what is the
Speaker 5: average APR? It looks crazy. It looks like it's gone
Speaker 5: up ten percent. It's gone up. We're gonna get to
Speaker 5: the bottom of like exactly how much I think it's
Speaker 5: gone up substantially since ten years ago. Let's say that
Speaker 5: trend is clear. I don't think it's as much as
Speaker 5: it looks like there, but yeah, it's been going up.
Speaker 4: Actually, okay, so you've established default rates for credit cards,
Speaker 4: and as you said, like this business is about volume, right,
Speaker 4: so is there an argument to be made that maybe
Speaker 4: if the world, you know, falls apart, then you have
Speaker 4: lots and lots and lots of consumers who are defaulting,
Speaker 4: but you know, potentially at a low rate of the total.
Speaker 4: But the volume makes it meaningful for banks.
Speaker 5: I mean, we are already looking at as a percentage
Speaker 5: of assets, so that kind of like valuates, it takes
Speaker 5: it all into consideration. I think the question, like in
Speaker 5: our minds was at first, you know, maybe in a crisis,
Speaker 5: something extreme happens. In a sense, it does, but this
Speaker 5: is already the average default rates so usually it's lower,
Speaker 5: and then you kind of include this in there, so
Speaker 5: we'll talk I guess a little bit about risk premium,
Speaker 5: which it turns out to be very clear here and important,
Speaker 5: but it's you know, just the average default rate is
Speaker 5: what it is, so it's not in expected defaults again
Speaker 5: they're it's surprising. But at the same time, if you
Speaker 5: just look at where banks actually suffer default losses in
Speaker 5: an average year, not a crisis year, something like fifty
Speaker 5: percent of banks default losses are actually coming from credit cards.
Speaker 5: The thing is is that they're not surprising, they're not
Speaker 5: unexpected losses. They're kind of the expected, but it's still
Speaker 5: really big. And the reason for that is even though
Speaker 5: credit cards only take up about five percent of banks
Speaker 5: balance sheet, the charge offs or the defaults on average
Speaker 5: bank assets is very low. I mean, you know, we
Speaker 5: have this impression of banks as being these like crazy,
Speaker 5: like risk taking lunatic to actually, I think the right
Speaker 5: way to look at them is that their average asset
Speaker 5: is extremely boring and low risk. They do take a
Speaker 5: lot of leverage, which is only possible because the average
Speaker 5: asset is extremely boring and low risk. But even after
Speaker 5: all that, their amount of defaults is not really that high.
Speaker 5: So if your average asset has about forty basis points
Speaker 5: average charge off and this thing has over five percent,
Speaker 5: then even if it's only five percent of the balance sheet,
Speaker 5: it can act like it's fifty percent of the charge of.
Speaker 2: Other forms of consumer borrowing. Right, Like, people are very
Speaker 2: assiduous about making their car payments making I don't know
Speaker 2: if up until recently, until recently, but historically the perception
Speaker 2: was people really prioritize car payments, right because that's essential
Speaker 2: to live and you can't have your car repossessed. Home
Speaker 2: mortgages obviously for obvious reason. I imagine that a stretched
Speaker 2: household will miss credit card payments are more inclined to
Speaker 2: if they're going to have to miss a payment, it's
Speaker 2: going to be there versus some of these other popular
Speaker 2: areas are borrowing.
Speaker 5: Totally, so the other ones are secured, and this is unsecured.
Speaker 5: So in that sense, this is an actual asset that's
Speaker 5: kind of risky and interesting for my vantage point, and
Speaker 5: that it's unsecured lending to normal people. All the rest
Speaker 5: of the stuff is secured, Like homes are obviously very important,
Speaker 5: collateral cars pretty much so the rates on those are
Speaker 5: much much lower. In these, they're nowhere near you know,
Speaker 5: the spread, there's nowhere near as juicy. I mean, when
Speaker 5: I teach students, we go through, like you know, the
Speaker 5: hierarchy of borrowing that the vast majority of borrowing is secured.
Speaker 5: You have to think it's crazy for a bank to
Speaker 5: come to somebody with the medium or lower credit score
Speaker 5: and say here have the line of credit of like
Speaker 5: five ten thousand dollars and you can default on it.
Speaker 5: You don't get shot for that. It's it's part of
Speaker 5: the law, it's part of the game.
Speaker 1: Yeah.
Speaker 4: I was reading an art from life in nineteen seventy
Speaker 4: where they were talking about how credit cards are becoming
Speaker 4: a big thing, and oh my god, these credit card
Speaker 4: companies are just mailing out applications to Americans. It's like
Speaker 4: giving sugar to diabetics. That was their analogy, speaking of
Speaker 4: unsecured versus secured. I'm also looking right now at a
Speaker 4: website that claims to have invented the first credit card
Speaker 4: that's based on your stock portfolio, So borrowing against your.
Speaker 3: Stock portfolio with the card. I gotta say, the card
Speaker 3: does look pretty nice. It's made of glass. Maybe that
Speaker 3: tells you something intentional metaphor yeah, exactly.
Speaker 4: Okay, So if it's not about risk premiums, if the
Speaker 4: rate isn't compensating for something like default, could it be
Speaker 4: compensating for all the points and benefits that customers are accruing.
Speaker 5: So it's not just compensation for expected default. I want
Speaker 5: I want to separate them from the risk premium. The
Speaker 5: risk premium is kind of the competition for unexpected default,
Speaker 5: which turns out to be pretty big here. But let's
Speaker 5: go back and talk about the point and stuff. So
Speaker 5: I find that people are more excited to talk about
Speaker 5: points than anything. The term rewards was really a marketing flourish.
Speaker 5: So yeah, So in total number of dollars this interchange was,
Speaker 5: I mean, again you have to look at fine exact numbers,
Speaker 5: but for credit cards alone, I think it was over
Speaker 5: one hundred and fifty billion dollars. So, like the GDP
Speaker 5: of a medium sized country gets transferred as interchange, and
Speaker 5: we find that about eighty five percent of that gets
Speaker 5: transferred through as rewards, you could wonder, I think it'd
Speaker 5: be natural to say, what is the point of this?
Speaker 5: Why charge people one point eight percent and then pass
Speaker 5: through one point five to seven percent as rewards? Where well,
Speaker 5: at least some people like I guess you and I
Speaker 5: Joe don't pay that much attention. I think I have
Speaker 5: enormous amounts of United Miles I'm never going to use
Speaker 5: because I have to actually travel to whatever place to
Speaker 5: use them. So why is that? I mean, I think
Speaker 5: a good economic question, and people have tackled this. I
Speaker 5: do think it creates a very strong network effect, so
Speaker 5: you are not actually seeing a charge for this. It's
Speaker 5: the retailer that has to eat it, and if you
Speaker 5: do not use a card that gives rewards, you're not
Speaker 5: going to get in most cases a lower price. So
Speaker 5: there's a whole series of litigation and fights over the
Speaker 5: years amazing about what retailers can do to discriminate prices
Speaker 5: based people who using cards and hurt And I thought
Speaker 5: a couple of years ago. The last couple years, I'm
Speaker 5: seeing more restaurants give you back a percentage or not
Speaker 5: charge you a percentage if you didn't do that. But
Speaker 5: it's a little bit beyond my legal expertise to sometimes
Speaker 5: understand these because for the longest time, I think you
Speaker 5: could give people a discount, but you couldn't do a searcharge.
Speaker 5: There was some like legal discrimination between those things. And
Speaker 5: as a result, people mostly don't pay attention to that
Speaker 5: kind of thing, and so you really want to stay
Speaker 5: inside the network and it kind of keeps you there.
Speaker 5: Even if at the end it would be a total
Speaker 5: pass through, it still helps for them to keep this business.
Speaker 2: You know, it's interesting. There's this crypto company. Have you
Speaker 2: heard of a Blackbird. Yeah, it's a crypto thing and
Speaker 2: they have a bunch of restaurants. You sign up and
Speaker 2: you're like pay in a coin. I don't know exactly
Speaker 2: how it works, but I think that they have to
Speaker 2: in some way because in theory would be nice, like
Speaker 2: maybe we'll get a little bit in the stable coins.
Speaker 2: It's like a payments rail in the future or in
Speaker 2: this conversation, and think it would be a nice way
Speaker 2: to like circumvent this. But even they, I think implicitly
Speaker 2: have to reinvent the rewards model to do it. Maybe
Speaker 2: you get premium seeds or you get reservations, et cetera.
Speaker 2: In order to sort of like bootstrap a new network,
Speaker 2: you start end up having to reinvent a lot of
Speaker 2: the rebates and the benefits, et cetera that come up
Speaker 2: the old network. Maybe we'll get into crypto a little
Speaker 2: bit more, but talk to us a little bit more
Speaker 2: then about like the persistence of this spread that can't
Speaker 2: fully be explained by defaults.
Speaker 5: Yes, so the default, like I said, is like a
Speaker 5: little under six percent, then I'll just I'll mention it.
Speaker 5: So defaults that do spike in bad times. So we estimate,
Speaker 5: using kind of the cross section of different Fyco scores,
Speaker 5: how much extra compensation you get as you go to
Speaker 5: lower and lower Fyco scores in terms of extra APR
Speaker 5: net of the defaults. So we estimate that the risk
Speaker 5: premium there is accounting for about similar sized piece. So
Speaker 5: there's a risk preum about five percent on average, which
Speaker 5: is much smaller. For let's say you're an eight hundred
Speaker 5: FICHO borrower, there's not that much risk premium. But if
Speaker 5: you're a six hundred Fyco borrower, the risk preum goes
Speaker 5: up to, like, you know, nine percent. So I think
Speaker 5: it's means something very important. I think the person who's
Speaker 5: borrowing there may not realize that they are paying a
Speaker 5: very large risk bemum. So if you're a low Fyco
Speaker 5: borrower and you aren't going to default like you know
Speaker 5: you're not, you're paying a very high risk premium. And
Speaker 5: that is because other people default in bad times. Even
Speaker 5: if you do think you're going to default. Sometimes I
Speaker 5: think one should realize how much of a risk premium
Speaker 5: you're actually paying for this. So but now let's go
Speaker 5: back to something else before we maybe talk more about
Speaker 5: that is the other pieces of this. So we talked
Speaker 5: about interchange and rewards. It's not zero. They do earn
Speaker 5: a little bit from it. Most of the transactors what
Speaker 5: they make off transactors. Is that difference because transactors spend,
Speaker 5: you know, recurringly a lot. Borrowers tend to kind of
Speaker 5: accumulate and they don't have that much more room to
Speaker 5: spend because they've borrowed. So that's not a big portion
Speaker 5: of the revenues there. Then there's fees that's another couple
Speaker 5: percent is actually making the puzzle worse. And then the
Speaker 5: part that turned out to be really big that surprised
Speaker 5: us is operating expenses, of which marketing you mentioned, this
Speaker 5: turns out to be really big, and.
Speaker 3: Yeah, this is the thing that I don't get.
Speaker 4: So there is so much marketing for credit cards, and
Speaker 4: as I said, like they're all kind of similar in
Speaker 4: many ways. And I remember this was often the blockage
Speaker 4: for new entrants from the fintech space trying to get
Speaker 4: into this business. I remember talking to Lending Club about
Speaker 4: this back when they were a thing. They were spending
Speaker 4: so much money on mail advertisements, and I just don't
Speaker 4: get why that's the primary acquisition channel and why it
Speaker 4: seems to be so important to the business model.
Speaker 5: It's a really interesting question. Maybe the answer would be,
Speaker 5: like people listening this will be like I knew that,
Speaker 5: which is the reason you do it. Because it works,
Speaker 5: which means which I wish. I mean, this goes back
Speaker 5: to Joe's question. I think you can see we look,
Speaker 5: we do this analysis there that if you spend more
Speaker 5: on operating expenses, which I think largely means additional marketing
Speaker 5: because the actual operational side of this apparently is very expensive.
Speaker 5: But there's big differences across these guys in operating expenses,
Speaker 5: and I don't think it's because their systems are like
Speaker 5: much more and we actually see no relation between that
Speaker 5: and defaults. So it's once you control for fighters. So
Speaker 5: it's not about screening people for better borrowers. But what
Speaker 5: it is it's an effective, apparently at the margin, customer
Speaker 5: acquisition strategy. So think the following thought process. You could say, well,
Speaker 5: why don't somebody just cut all this marketing out and
Speaker 5: just charge a lower rate and that'll get people.
Speaker 3: Yeah, that's that's your acquisition advertising, right.
Speaker 5: Apparently it doesn't work. So so people are not are
Speaker 5: not rate sensitive, which is a recurring theme I'm starting to,
Speaker 5: you know, learn when we talked about we talk about
Speaker 5: banks and bank deposit rates. People are They're not completely
Speaker 5: insensitive obviously, but they're not that sensitive to the rates
Speaker 5: get paid, and they're not that sensitive to the rates
Speaker 5: that get charged on this, so there are actually this
Speaker 5: is a surprising thing. The CFPP has a spreadsheet, well,
Speaker 5: when there are people still working there. They used to
Speaker 5: have a spreadsheet that they updated with essentially every single
Speaker 5: card there is and what the rate on it. And
Speaker 5: all the cheapest cards are credit unions, and they're significantly cheaper,
Speaker 5: much cheaper than your average credit card. But I'm sure
Speaker 5: almost nobody's accept their customers have heard about them, and
Speaker 5: it's because they don't advertise much. And so you say, well,
Speaker 5: if their rates are so cheap, why don't people go there.
Speaker 5: It's like they haven't heard about them and they don't
Speaker 5: care that much about the rate. Is my inference from this.
Speaker 5: So the more you pay for marketing and operating expenses
Speaker 5: and the data, the higher is the average amount you're
Speaker 5: able to charge this for very funny.
Speaker 2: Does some of the stuff repel the brain of the
Speaker 2: academic economists, No, for real, like this idea that the
Speaker 2: borrower wouldn't be raided sensitive, the idea that we're actually
Speaker 2: paying more to be advertised to et cetera. Because this
Speaker 2: is their cost, the idea that their lower cost options
Speaker 2: out there and all we have to do is search
Speaker 2: for them and they're available.
Speaker 4: Like well, also for macro economists specifically, right, because we
Speaker 4: talk about benchmark rates and the importance of how those
Speaker 4: feed into the economy, and here we are talking about
Speaker 4: the credit card rate, which is actually potentially more important.
Speaker 2: Like I'm serious though, Like rates are high because to
Speaker 2: some extent consumers just aren't paying attention to them, et cetera.
Speaker 2: Do counter people who think, no, there must be something,
Speaker 2: There must be some variable you're missing, because we're rational
Speaker 2: and we would take out the lower rate.
Speaker 5: I want to talk to people like you're saying, I
Speaker 5: haven't really held up the chance, because you know, when
Speaker 5: you pitch this to a finance audience, not macro people,
Speaker 5: and I have a finance president, then they're more open.
Speaker 5: I mean, credit cards is the thing in finance. People
Speaker 5: like credit cards. But I think the interaction with macro
Speaker 5: and monetary is really interesting, so it doesn't bother me.
Speaker 5: I think it's interesting. I mean, I think it's kind
Speaker 5: of bad that a lot of people who are usually
Speaker 5: not in the best shape are essentially adding six percent
Speaker 5: rate to their credit card because they're paying for the
Speaker 5: advertising that they responded to. But you know that's you know,
Speaker 5: you could get it if you didn't respond to the advertising,
Speaker 5: responded to the rate, they would do that instead, but
Speaker 5: they don't, So you know, think about you know, you
Speaker 5: guys often talk about the FED lowering or hiking rates.
Speaker 5: At the risk of sounding heretical here, I am not
Speaker 5: a huge believer that consumers at all are very sensitive
Speaker 5: to these changes in the policy rate and the FED
Speaker 5: funds rate, even though the standard model works through their
Speaker 5: inner temporal consumption savings decision. I think most of the
Speaker 5: events is very weak that they care about that. And
Speaker 5: then the credit card, I think on top of that
Speaker 5: is really makes this clear because if you're paying twenty
Speaker 5: three percent and you are the kind of person that
Speaker 5: wants to borrow, I mean, obviously because you've borrowed, how
Speaker 5: much is a half of percent going to matter to you?
Speaker 5: If the FED hikes plus you could have been getting
Speaker 5: a much cheaper rate anyway, and that didn't compel you
Speaker 5: to go looking for it. So I think it kind
Speaker 5: of puts a big question mark over whether that's really
Speaker 5: the channel, which which is a lot of people have
Speaker 5: said that, but it's still kind of the main way
Speaker 5: with those things.
Speaker 4: Can we talk a little bit more about competition and
Speaker 4: why doesn't someone just come in with a lower rate
Speaker 4: and disrupt the entire business.
Speaker 5: Let's give you another example, personal lines of credit. These
Speaker 5: were all new things to me. I find this. I
Speaker 5: think where you've put retail people with the financial sector,
Speaker 5: you actually get a lot of explosions. They're like weird stuff.
Speaker 5: So that's the place where sort of academics should go looking,
Speaker 5: and many do, but it's not the place where I
Speaker 5: kind of having worked at like hedge fund market maker,
Speaker 5: ever thought about these things you want to think about,
Speaker 5: like the fancy people, like the people who are sophisticated
Speaker 5: do all the math, but they kind of cancel each
Speaker 5: other out. Where the real fireworks are is when you
Speaker 5: get into the retail sector. And if you look at
Speaker 5: personal lines of credit from the same companies at the
Speaker 5: same FICO, they're substantially cheaper, plus you get all the
Speaker 5: money up front. That's something it's still very puzzling that
Speaker 5: there is almost no marketing there. You don't get marketed
Speaker 5: a lot on personal lines of credit, and the people
Speaker 5: who discover them do use them to consolidate these debts
Speaker 5: and pay them off in one shot at a lower interester.
Speaker 5: It's a very I think, very logical thing to do
Speaker 5: don't do, but I mean, just to get back to
Speaker 5: I think we see them over and over and you're
Speaker 5: talking about BNPL and stuff. This idea of how do
Speaker 5: you acquire customers in what role the rate actually has
Speaker 5: there is just keep seeing it. It's like a movie.
Speaker 5: I've seen this before. It's more effective at the margin
Speaker 5: than lowering the rates, and it explains a lot. I
Speaker 5: think of how the finance sector interacts with retail, which
Speaker 5: is not just like canceling out. So that's the issues, Like, oh, well,
Speaker 5: they spend five percent of assets on marketing, then they
Speaker 5: add five percent to the cost. I guess there's no
Speaker 5: harm in that. Well not really, because what people have
Speaker 5: done is paid the five percent in order to get
Speaker 5: the marketing. So if you really like the commercials, you
Speaker 5: should be really happy. But I don't think most people
Speaker 5: would sign up for that.
Speaker 4: I'm just I've still stunned that the advertising actually works,
Speaker 4: because like, I get the mail and I just throw
Speaker 4: it out without looking at it.
Speaker 3: Maybe I should be looking at it.
Speaker 4: On the disruption front, you mentioned BNPL, and we've done
Speaker 4: at least one episode on it. We should probably do
Speaker 4: more at some point. Is that the big disruptor, you know,
Speaker 4: if they're plugged into websites and some of them are
Speaker 4: getting rewarded for being plugged into those websites by retailers,
Speaker 4: then they bypass the high acquisition costs. And presumably it
Speaker 4: can still acquire customers because you see them everywhere online.
Speaker 5: So I do think that has a lot to do
Speaker 5: with what their angle is, is it gets in front
Speaker 5: of you in that way. I listened to a recent
Speaker 5: episode of Yours. I think you guys were talking about BNPL,
Speaker 5: SOO I wasn't going back to a much earlier episode.
Speaker 5: But I don't think the economics of the BNPL beyond
Speaker 5: that aspect of it, are that different from the credit cards,
Speaker 5: and there still is very high operating and acquisition cost
Speaker 5: if you look at like BNPL companies also then don't
Speaker 5: really make money, and so I think they're still in
Speaker 5: that stage where they're building up to it. And you
Speaker 5: mentioned lending club bunding club didn't make money now it
Speaker 5: did not, It didn't, so because I think you want
Speaker 5: to grab these juicy customers but they respond to the
Speaker 5: marketing and just to go even back to that, so
Speaker 5: Amex is one of It's really hard to find aggregate
Speaker 5: marketing numbers across companies, but from lists I've seen, Amex
Speaker 5: might even be it's definitely, I think a top ten
Speaker 5: marketer in the whole country. It might even be in
Speaker 5: top five. I'm not sure, along with some of the
Speaker 5: It spends over six billion dollars a year on marketing.
Speaker 5: And this is not including the lounges and all this,
Speaker 5: which has been like articles about how everybody's like investing
Speaker 5: like millions of dollars in these lines. That's that's a
Speaker 5: separate category. And Capital one spends over four billion dollars
Speaker 5: a year. So I looked it up, and amics is
Speaker 5: bigger than Nike and Coke and marketing, and you think
Speaker 5: of like those being the ones that got to be
Speaker 5: like the gigantic ones, and Capital one's about as big.
Speaker 2: Wait, a personal line of credit, Yeah, that's just a
Speaker 2: good classic is the product. I've never looked into one
Speaker 2: of those. An unsecured loan from the bank.
Speaker 5: It's an unsecure line.
Speaker 2: But this is just like classic bank borrowing. I go
Speaker 2: to the bank, guys, they can um borrow some money.
Speaker 5: Surprisingly that the I mean you can make you can
Speaker 5: look it up even like it's so easy to look
Speaker 5: it up. They offer you it's a relatively large amount
Speaker 5: compared to a credit card, and you put in your fight. Oh,
Speaker 5: they give you a rate. The rate's almost for sure
Speaker 5: always lower than the credit card. I don't get it either,
Speaker 5: but you know, you know, and.
Speaker 2: One could use these to payoff of all.
Speaker 5: That's mostly what people do, which they should. I had
Speaker 5: a journalist ask me about this, and I was like,
Speaker 5: this is a great idea, Like I should look this
Speaker 5: up and talk about this. I mean, there's no you know,
Speaker 5: how do you explain this spread? I mean, I think
Speaker 5: largely it's got a lot of this less of this
Speaker 5: retail focus to it. But yeah, it's the same companies too.
Speaker 5: If you go to amex MS lineup credit Discover offers
Speaker 5: a discovered line of credit capital one capital one line
Speaker 5: of credit. It's the same thing.
Speaker 3: It's so strange, this whole conversation.
Speaker 2: It edges into some frankly like slightly uncomfortable territory in
Speaker 2: my opinion, because you write, because especially when you characterize something,
Speaker 2: it's like you're kind of end up paying a lot
Speaker 2: for them to advertise to you, and you apparently like
Speaker 2: the advertisement because that's you responded to it, et cetera.
Speaker 2: Like you edge into this territory where it's like these
Speaker 2: are not like it must be not the most sophisticated base, right,
Speaker 2: It's like, why do Nigerian email scams have all kinds
Speaker 2: of typos, et cetera. And the theory is because they
Speaker 2: want to select for people who will be foolish enough
Speaker 2: to respond to them, because if you go down the chain,
Speaker 2: they don't want you to be too savvy and asking questions.
Speaker 2: So like, let's just get all the savvy customers out
Speaker 2: of the way who would instantly recognize a scam email,
Speaker 2: and then you like get there. It's right, Like it's
Speaker 2: a little.
Speaker 5: Saying that the Nigerian princess don't pay you back.
Speaker 2: I'm just saying like it seems like there's a filtration
Speaker 2: process going on where you end up with the base
Speaker 2: of revolvers where all this money is made, where it's
Speaker 2: clearly not that because otherwise they would be doing the
Speaker 2: personal line of credit or not doing these things, or
Speaker 2: looking for that credit union credit card.
Speaker 5: Well, I'll say something about marketing, and I mean we
Speaker 5: all do respond that. You know, you guys are you
Speaker 5: guys are very not elitist here and every anti elitist.
Speaker 5: So marketing is just a huge industry. Is As a
Speaker 5: finance person, I'm like, we do have a marketing department
Speaker 5: at the business school, and I'm like, wow, there's a
Speaker 5: reason because you look at let's say you look at
Speaker 5: Alphabet and Meta. Meta's revenues are almost one hundred percent
Speaker 5: from marketing, and Google's are like close to eighty percent.
Speaker 5: We're talking hundreds of billions of dollars a year and
Speaker 5: all the very sophisticated stuff. And at the end, it's
Speaker 5: to sell, you sell, you advertise.
Speaker 2: It works and I've I've certainly been taken I get
Speaker 2: taken in by marketing all the time.
Speaker 1: Just say.
Speaker 5: One of the thing is I think the reason that
Speaker 5: because the ros here are high, when we decompose this
Speaker 5: at the end, it sort of does most If you
Speaker 5: take the alpha of this, think of this as alpha
Speaker 5: relative to the average bank asset. We get that it's
Speaker 5: about of percent, So how do you get down two percent?
Speaker 5: So the risk premium here is quite big. We compare
Speaker 5: it to the risk premium on bonds. You have to
Speaker 5: compare it to high old corporate bonds, and it looks
Speaker 5: similar for all but the lowest FIICO bonds versus let's
Speaker 5: say triple C rated bonds, where the lowest FYCO seems
Speaker 5: to have a big chunk the risk cream over and
Speaker 5: above the bonds. I'd actually see the bonds look low
Speaker 5: relative to that because it's the risk premum on credit
Speaker 5: cards that kind of rises linearly and it's the bonds
Speaker 5: that kind of don't. But for the not so bad credits,
Speaker 5: it's pretty similar risk premium to highyield bond market. So
Speaker 5: that sense doesn't look it's big, but it doesn't look crazy,
Speaker 5: but it should, say you know, Goldman, I think they
Speaker 5: when they got in before they got into credit cards
Speaker 5: and it did not work out, it's apparently it is
Speaker 5: competitive in that sense. I think they were eyeing this
Speaker 5: and saying this is a good business. You see the
Speaker 5: highest roe's by far of all the you know, if
Speaker 5: you go look through the banks ten k's, you know,
Speaker 5: some of them break this out. I think JP Morgan
Speaker 5: for example, and you see like that's got the highest
Speaker 5: roe by far, that it's bigger than the you know,
Speaker 5: all the other parts of the bank. So I think
Speaker 5: they were thinking that now it got into it paid
Speaker 5: very high operating costs and had higher defaults than other
Speaker 5: ones that didn't obviously did not work out because they
Speaker 5: turned away from it.
Speaker 4: Do you see any signs of rates eventually coming down?
Speaker 4: It sounds like it's probably not going to be through
Speaker 4: competition or new entrance like FinTechs. But could it be
Speaker 4: something like regulation. I have vague memories of the Credit
Speaker 4: Card Act doing something on this front, but could it
Speaker 4: be something.
Speaker 5: Like that the Credit Card Act? There are tons of
Speaker 5: papers on it when it came out, mostly limited your
Speaker 5: ability to increase rates on existing borrowing, and it sort
Speaker 5: of put caps on all kinds of fees and charges,
Speaker 5: and then people were looking for whether banks would move
Speaker 5: that to something else. I think in the long run
Speaker 5: the answer is yes. I don't know if they move
Speaker 5: that or just something else. But I mean, so far
Speaker 5: rates if you could just plot it on fred even
Speaker 5: though I think it's like a little bit distorted, it's
Speaker 5: been going up and up, I mean before it starts
Speaker 5: going down because I got to stop going up. So
Speaker 5: they're in pretty strong position. But there is this by
Speaker 5: now pay later, there were lending club kind of things
Speaker 5: A largely crashed and burned, and payments in general. I mean,
Speaker 5: you know these companies for payments are huge is because
Speaker 5: there is this you know PayPal A these guys, this
Speaker 5: is just to take off a little bit off the
Speaker 5: top of this swipe fee and then we're gonna get
Speaker 5: to the interest rates on this borrowing. I mean, I
Speaker 5: think that there is constantly like movement in this space,
Speaker 5: but it has not been to drive down things, driven
Speaker 5: up acquisition costs more than just driven down the actual rates.
Speaker 2: Unrelated macro question. One of the reasons I like your work.
Speaker 2: They're sort of revisiting some of these like basic questions,
Speaker 2: which I think is useful. And of course when we
Speaker 2: talked to a couple of years ago, it was like,
Speaker 2: let's revisit some of what we thought we knew about
Speaker 2: the seventies and say if that inflation story is a
Speaker 2: little bit different, just on the big macro question. These
Speaker 2: days rates where they are inflation sort of persistently warm,
Speaker 2: A lot of people are like, I got to talk
Speaker 2: about our star must be therefore higher than it otherwise
Speaker 2: would have been. What do you think we've learned? You know,
Speaker 2: we had this very fast rate gig cycle twenty twenty
Speaker 2: one through twenty twenty three. I would say many economists
Speaker 2: would have expected the unemployment rate to rise a lot
Speaker 2: more given that rate hike cycle it has.
Speaker 3: And spending to go down, you're spending.
Speaker 2: To go down, et cetera. But I personally am rarely
Speaker 2: satisfied by the stories that people tell about how in
Speaker 2: fact those raid hikes translated into lower inflation. Have you
Speaker 2: yourself sort of learned anything interesting in the last I
Speaker 2: don't know, three or four years, five years of this
Speaker 2: macro experiment that we have post pandemic.
Speaker 5: I think it's a great topic in question. My inference
Speaker 5: was that the cycle. I'm in the group that thought
Speaker 5: that this was largely a supply shock issue. That COVID
Speaker 5: disrupted supply chains tremendously. I mean, we saw that, and
Speaker 5: I think if you look like the New York Fed
Speaker 5: has this index that they put together on supply disruptions,
Speaker 5: this predicted the trajectory of inflation with a three month
Speaker 5: lead very well. I think we had a period where
Speaker 5: we saw that there was increased employment and yet output
Speaker 5: was going down. So usually when we talk about productivity
Speaker 5: and things, there's all these compositional issues. Do you fire
Speaker 5: at least productive people, so productivity goes up for mechanical reasons.
Speaker 5: But when you have more people being employed and yet
Speaker 5: outputs going down, as it did for several quarters, that
Speaker 5: can't be the reason. So I took away from it.
Speaker 5: You know, there's harsh arguments about this, that this was
Speaker 5: largely supply driven, and how it relates to the seventies
Speaker 5: is our argument there, for different reasons, was that it
Speaker 5: was supply driven due to credit crunches and things. So
Speaker 5: I tend to think that a lot of the business
Speaker 5: cycle things and the inflations we've seen, like after wars,
Speaker 5: were often switching the kind of production that you do,
Speaker 5: which is a supply thing. I'm very much in the
Speaker 5: supply camp, and I think the reason that employment held
Speaker 5: up and spending held up because I don't think that
Speaker 5: this was happening through decreasing demand and getting people fired
Speaker 5: and so forth. I think it was products, you know,
Speaker 5: components could ship again and so people could be more
Speaker 5: productive with the labor they had. So to me, I'm
Speaker 5: sure some people very very highly disagreed. To me, that
Speaker 5: looked like a pretty clear story.
Speaker 4: So if you're at Jerome pal and you're worried about
Speaker 4: inflation going up, and I should just mention we are
Speaker 4: recording this.
Speaker 2: On October twenty nine.
Speaker 3: Yeah, FED, which is why we expect it to be
Speaker 3: a cut, right, but you know, inflation is still, you know,
Speaker 3: somewhat warm.
Speaker 4: As Joe said, if you're worried about it, should you
Speaker 4: be looking at credit card rates versus you know, mortgage
Speaker 4: rates or benchmark rates or things like that. How should
Speaker 4: policy makers actually think about this problem between those?
Speaker 5: I think mortgage rates that people you know do seem
Speaker 5: very much to respond to, it is a much bigger amount.
Speaker 5: Maybe they are more sophisticated sensitive. It lasts with you
Speaker 5: for a long time. I mean, I think that's much
Speaker 5: more important the shifts in those spreads for the macro
Speaker 5: economy than well, the credit card rates is just not
Speaker 5: much movement. I mean, they are literally tacked on top
Speaker 5: of the Fed Funds rates, so that's completely mechanical. Didn't
Speaker 5: used to be the case thirty years ago. But the
Speaker 5: spread will move one for one with the Fed Funds,
Speaker 5: except when they expand it by issuing new cards and
Speaker 5: making rates hire. So I think the mortgage market's much
Speaker 5: more important for macro kind of stuff. I mean, I
Speaker 5: don't envy, you know, Pal's job. It's a very hard job. Now,
Speaker 5: I'm not sure. Last time was at the FED. I
Speaker 5: was in the elevator when he got in, but I
Speaker 5: didn't didn't want to bug in, so I didn't say
Speaker 5: anything to him. But I got to see him in person.
Speaker 2: Drove our stars fake real good. Going back to you know,
Speaker 2: you're talking about fintech et cetera, I personally like, I
Speaker 2: actually think stable coins are going to be a very
Speaker 2: big deal. I do not necessarily think they're going to
Speaker 2: be a big deal for consumer transaction. It's not obvious
Speaker 2: to me. My guess is that they'll open up new
Speaker 2: transactions that we aren't thinking of right now, but not
Speaker 2: for like buying coffee or buying you know whatever. But
Speaker 2: from your research, whether into cards, et cetera, how would
Speaker 2: that inform your or other fintech how would that inform
Speaker 2: your thinking about the trajectory of the stable coin industry.
Speaker 5: It's stable coin. It's interesting, and I've heard you mentioned
Speaker 5: this kind of view, which I think is not and
Speaker 5: i'd considered I was thinking a lot about consumers. I'll
Speaker 5: say this, I think for me and something I talk
Speaker 5: to my co author's stable coin are they're like a
Speaker 5: puzzle in the sense that maybe not all stable coin,
Speaker 5: but the ones that have been around are kind of
Speaker 5: like a money market fund that doesn't pay you interest.
Speaker 5: That's how I would summarize them, because and that's why
Speaker 5: I think these are some like the most profitable companies
Speaker 5: ever per employee, because they don't do anything. So if
Speaker 5: you give them a bunch of billion dollars, they just
Speaker 5: take the whole interest. There's some advertising there too, but
Speaker 5: not a tremendous amount compared to that, and people are
Speaker 5: happy with that. I don't really get it, but you know,
Speaker 5: now they've, like you mentioned, they've started to learn the
Speaker 5: sort of tricks of the trade. They're going to do rewards.
Speaker 5: It's better than paying people actual interests. You give them rewards.
Speaker 5: So from the point of view consumers, it is kind
Speaker 5: of a mystery. I mean, I would love to start
Speaker 5: a money market fund and not pay anybody any interest.
Speaker 5: Life economically, when you don't pay any interest on a dollar, ever,
Speaker 5: you've taken the whole dollar. That's what the dollar does.
Speaker 5: It pays you interest. So the net present value of
Speaker 5: all the interest of a dollar is the dollar. So
Speaker 5: if they never pay you and you stay there forever,
Speaker 5: then if they have eight billion dollars, they've captured eight
Speaker 5: billion dollars.
Speaker 3: Again, nice business, if you yeah, that's a great business.
Speaker 5: It's it's weird, but it's a great business.
Speaker 3: What's your next research project?
Speaker 5: So I think from this credit card stuff, there's definitely
Speaker 5: interesting things to think about, you know, how people default
Speaker 5: and how much this marketing stuff affects them. From another
Speaker 5: point of view is one of my co authors in here,
Speaker 5: a former student of mine. We have a bunch of
Speaker 5: work on adjustable rate mortgages and why they kind of disappeared.
Speaker 5: So they used to be a big thing and they've
Speaker 5: kind of disappeared, and I think we kind of understand why.
Speaker 5: So that's uh, you know, there's been a lot of
Speaker 5: discussion about that for mortgages. Why is the US in
Speaker 5: one camp and many other countries in another camp? But
Speaker 5: the US kind of used to be in the adjustable
Speaker 5: mortgage rate camp at least pre crisis and stuff.
Speaker 2: I remember when the rate hike, when we started surging.
Speaker 2: Do popular theory that monetary policy would have more teeth
Speaker 2: in countries like Canada, Australia, the UK because so many
Speaker 2: more households would be more sensitive to faster resets. Has
Speaker 2: that actually been born out? It sounds great, it's like
Speaker 2: a theory. Intuitively that makes a lot of sense, I do.
Speaker 2: I guess Canadian unemployment has trended higher than American but
Speaker 2: the inflation trajectories I think have been roughly the same,
Speaker 2: and those other Anglophone countries versus the US where they hit.
Speaker 2: I don't know, like how strong effect was that, do
Speaker 2: you know.
Speaker 5: I don't know exactly, but I don't get the impression
Speaker 5: that it was tremendously different. I think it has impacted consumers.
Speaker 5: One thing I should note, though, is there's two senses
Speaker 5: in which monetary policy can have an effect. One is
Speaker 5: that it makes people have to spend a lot of
Speaker 5: money on that, so it's expensive for them. But the
Speaker 5: other one is that here and I don't think that's
Speaker 5: the effect we were going for, but people have just
Speaker 5: you know, stopped taking out as many mortgages and don't move.
Speaker 5: It was a negative effect. I'm just not sure it's
Speaker 5: anti inflationary effect. So it's like if you're gonna have
Speaker 5: floating rate stuff, and that's like the case with credit cards,
Speaker 5: and it shouldn't affect the volume of it that much
Speaker 5: into of producing it, but it's kind of people. It's
Speaker 5: expensive for them, and then on the fixed rate one
Speaker 5: they just stick to the old stuff and we don't
Speaker 5: you know, mortgage credits really dried up in a way,
Speaker 5: but it's not affecting the existing bar wars, only to
Speaker 5: the extent that you don't want to move, which is
Speaker 5: actually a big deal.
Speaker 2: Drexler, thank you so much for coming back on odd low.
Speaker 2: It's always a trade. And next time you have a
Speaker 2: new report out, let's talking let's talk arms next time.
Speaker 5: Okay, great, thank you very much having me.
Speaker 2: Tracy. I found that conversation to be fascinating. I have
Speaker 2: to admit, like, yeah, like credit cards are the sort
Speaker 2: of black box to me in many respects. I don't
Speaker 2: really understand the business because I don't actually use them
Speaker 2: for revolving purposes or borrowing against them. I don't think
Speaker 2: I quite realized how crazy the numbers are. And I
Speaker 2: certainly knew that there's tons of advertising, including direct mail
Speaker 2: on credit cards, but the idea that this is so
Speaker 2: substantial that a big part of what people are paying
Speaker 2: for here is the advertising that was all very novel
Speaker 2: to me.
Speaker 3: It's very surprising.
Speaker 4: My main takeaway is that people, I guess are not rational,
Speaker 4: at least when it comes to credit cards. Right, the
Speaker 4: marketing seems to work.
Speaker 2: Yeah, no, totally. I'm not rational because I don't take
Speaker 2: advantage of all the points that I could, and I
Speaker 2: don't like optimize the way I could. And when I,
Speaker 2: like buy a plane ticket, only part of the time
Speaker 2: do I think about is this the airlines?
Speaker 4: Well, you could also argue that it's rational to like
Speaker 4: factor in the time and spend on doing that.
Speaker 2: Sorry, I justify all of this money left on the
Speaker 2: tech's right by saying I make it irrational. My time
Speaker 2: is valuable, Yeah, my time is valuable. It's but you know,
Speaker 2: if there are all these other borrowing products out there
Speaker 2: that are cheaper, et cetera, it does feel like someone
Speaker 2: must be able to come along and make a product.
Speaker 5: And yeah, that is, let's going to.
Speaker 2: Compete on raid or you're gonna be able to borrow achiever.
Speaker 2: I don't know, maybe b NPL will achieve that. I
Speaker 2: don't know.
Speaker 3: I'm going to go take out a personal finance loan
Speaker 3: right now.
Speaker 5: Go for it.
Speaker 3: Shall we leave it there, let's leave it there. This
Speaker 3: has been another episode of the Audthlots podcast. I'm Tracy Alloway.
Speaker 3: You can follow me at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our guest Itamar Drexler. He's at Idres. Follow our
Speaker 2: producers Carmen Rodriguez at Carman Arman, Dashel Bennett at Dashbot,
Speaker 2: and kill Brooks at Kilbrooks. More odd Lots content go
Speaker 2: to Bloomberg dot com slash odd lots. We have a
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