September 4, 2025 • 36 mins
Buy Now Pay Later is everywhere nowadays. Companies like Affirm, Afterpay, and Klarna have brought installment payments into everyday life, while big banks and tech firms also now racing into the space. With the market growing so rapidly, there are obvious concerns over whether BNPL is adding a new layer of 'hidden leverage' to the economy, giving online shoppers an alternative to more traditional financing like credit cards and bank loans. Data about BNPL usage is notoriously limited, and BNPL firms have so far resisted sharing information. In this episode, we speak with Julie Margetta Morgan, formerly at the CFPB and now president of The Century Foundation, about what's driving the BNPL market, how BNPL companies make money, and the macroeconomic impacts of the BNPL boom.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the out Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe. Why isn't thal Joe?
Speaker 2 (00:24):
I have a confession to make. Yeah, I do a
lot of online shopping, like a lot more than is healthy.
Speaker 4 (00:31):
Probably more than I realized from looking over your shoulder
in the office and asking you what you're looking up,
because I do do that and you never like it.
Speaker 2 (00:38):
But I still do know because sometimes I am, in
fact shopping online in the office. But a few years
ago I noticed a phenomenon, a change when it came
to online shopping. You know what that was, I can guess, yeah,
all right, all of a sudden, whenever I was checking out,
you would get an offer, a little button usually that
would say do you want to take a buy now
(01:00):
pay later option? And usually it's with a company like
Klarna or a firm or something like that. They're everywhere now.
Speaker 4 (01:08):
So, like I've certainly seen all these buttons, I've never
used it. I don't really know why I haven't, because like,
why shouldn't I spread out? Why shouldn't I?
Speaker 3 (01:17):
Like for real?
Speaker 4 (01:18):
Like my understanding is that the core of the business
model works is that there's no like formal interest, right,
so if you make one hundred dollars purchase, you get
to spread it out, say in four payments of twenty
five dollars, and so whether it's one hundred dollars right
now or one hundred dollars and four months, it's the
same from the end buyer, which, of course in theory
because there's a.
Speaker 3 (01:38):
Time value of money, is not intuitive.
Speaker 4 (01:39):
But the idea is that the retailer implicitly pays the
interest because it's a form of customer acquisition, and so
the retailer is implicitly willing to take one hundred dollars
or whatever over x period of time rather than all
at once in exchange for essentially making it easier for
customers to buy. But from the customer person like you
(02:00):
were me, who presumably have the money to make to
buy what we're purchasing, I still don't get why we
don't all use buy now, pay later, because why not
spread out our purchases further out into the future.
Speaker 2 (02:10):
You know how Rebel Wilson described it in a firm commercial.
Speaker 3 (02:14):
I didn't. I don't. I haven't seen it.
Speaker 2 (02:16):
Like eating a tub of ice cream, but spreading out
the calories.
Speaker 3 (02:19):
Over four weeks exactly, why don't.
Speaker 2 (02:21):
It's still six hundred calories, right, that's the issue. But
I think, okay, so this is obviously a nuanced subject. Yes,
so clearly zero percent interest doesn't sound like a problem.
But obviously if you fail to pay, you pay a penalty.
Speaker 3 (02:37):
Then the penalties are building, right.
Speaker 2 (02:39):
So there's that. But the other issue with some of
these buy now, pay later items, and it's really interesting.
I kind of think about this as a parallel to
the private market and credit. So this idea that there's
this like whole world of additional credit or leverage that
we don't actually have very good data on, and that
is growing, right. I think that is the key.
Speaker 4 (03:00):
So here's how I see the issue, which is that
if I could have a tub of ice cream and
it spread out the calories over four months.
Speaker 3 (03:06):
I would certainly do that.
Speaker 4 (03:08):
That sounds pretty great because I burn a certain number
of calories in the day, and so if I had
four months to burn them that that would be far
more efficient. But the flip side is, well, I would
eat more ice cream, so I would eat four times.
I would eat four times as many tubs of ice
cream in that given day, knowing that I have this
four month calorie budget. And so then you still get
(03:28):
the question of like, Okay, maybe there's not a formal interest,
or maybe there's penalties, but I'm buying a lot more
with today's buying power, and that may still yet prove
to be unsustainable to the end consumer, even if it
doesn't formally. Clock is what we measure as consumer debt.
Speaker 2 (03:44):
Here's the added layer. Let's say you're trying to lose
weight or trying to be healthy, and you have like
a dietician. Imagine eating the ice cream, but him never
knowing that you're eating the ice cream, right, Like, this is.
Speaker 3 (03:56):
Well, I lied to my doctors all the time. I mean,
I'm used to that. Okay, all right.
Speaker 2 (04:01):
Rather than us debate this, we do in fact.
Speaker 4 (04:03):
How much didn't you well, you know, like once a week,
I like go through a three milligram Think I did
actually quit?
Speaker 2 (04:10):
And I'm saying that told me this morning you said
you were not going to have any more zins for
the restaurant, and I think I would take the opposite
side of that bet. But now you've committed in public,
public best, So we'll see how it goes. Okay, rather
than us talk about this, we do, in fact have
the perfect guest. We're going to be speaking with Julie Morgan.
She is a president of the Century Foundation, formerly at
(04:32):
the Consumer Financial Protection Bureau of the CFPB, where she
thought a lot about the buy now, pay later phenomenon.
So we're going to get some of her thoughts right now. Julie,
welcome to the show.
Speaker 5 (04:43):
Thank you. I'm so excited to be here.
Speaker 2 (04:45):
So how did this happen? Like, how did this business
model actually come about? Because it felt very sudden to me,
But on the other hand, I was outside of the
US for a long time, so maybe it was quite gradual.
Speaker 5 (04:56):
I'm really excited to answer this question for a number
of reasons, including the way that you all introduced this,
because you spent a lot of time talking about BUYEOW
pay leader as this pay in for zero interest maybe
like no fee or low feed model, and we did
see that model arise during the pandemic and become a
much more assalient part of the way consumers were paying
(05:17):
for goods during the pandemic. And so if I could
take you back to kind of those early years at
the CFPB. Where we're coming out of the pandemic, we're
seeing this rise in buy now pay lead. You know,
regulators and researchers started to investigate this to understand what
it meant for consumers and what the risks were. And
I think there were kind of two fundamental assumptions about
(05:38):
buyeow pay leader at that time. One was just what
we said, it's a pay in for no interest, low
or no fee model. And then two people were using
this in kind of the like what I think of
as a stereotypical gen Z kind of way. They were
using it to finance a purchase that was slightly larger
or more extravagant than what they would have bought, and
(06:00):
it was usually on something like a purse or an
item of clothing. What we've found over time is that
both of those assumptions turned out to be wrong. Right,
So number one, what we're seeing right now as buy now,
pay later and calling by now pay lead is not
in fact always that pay in for no interest product.
(06:21):
And in fact, many of the companies that we associate
with buy now pay lead, like a firm or Klarna,
are mostly not offering that product. So a firm says
that product is only twenty percent of their business. The
rest of their business is what I would think of
as like a point of sale loans or short term
installment loans with interest rates ranging from you know, ten
to thirty percent and terms that range from thirty days
(06:43):
to six or eighteen months.
Speaker 4 (06:45):
So it's buy now, pay later, but it's more like
just a formal loan.
Speaker 5 (06:49):
Yeah, I mean it's.
Speaker 4 (06:50):
Payment and installment and there's a schedule, but also there
is a nominal interest rate that's visible.
Speaker 5 (06:56):
To the consumer exactly, and I think it is by now,
pay later, in the sense that any loan, including your mortgage, yes,
buy now, pay later. Right. So they've kind of kept
this marketing that I think was really appealing to consumers
and that sort of soothed regulators that these products were
fairly low risk, and then started shifting that into these
products that look very different.
Speaker 4 (07:17):
Okay, whether we're talking about the new products or the
sort of the traditional BNPL the way Tracy and I
described it in the beginning. Currently, what kind of collection
of data like when that happened? So we know, like
credit card data gets collected. There's public statistics about just
the sheer volume of credit cards what do we have
(07:38):
right now in terms of where this gets slotted and
how it's collected as data.
Speaker 5 (07:42):
Yeah, we don't have a ton. So we have a
couple of different ways of looking at buy now, Pay later.
Most of it is through government sources, So the Federal
Reserve and the CFPB have the ability to pull data
from the companies, and if you look at the CFPB's
reports on buy now, Pay Later, that is what they're doing.
They're pulling transaction level data through market monitoring orders.
Speaker 4 (08:01):
That's not but when you say market monitoring orders, just
to be clear, the companies are compelled to regularly update
the CFPB with some level of data.
Speaker 5 (08:10):
They're compelled to provide data. The regularly piece is not
part of it. So this tends to be a one off, right.
We don't have a consistent stream of data coming from
the companies, and so that gives us like a small
window into what's happening in the buyout pay latter space,
but it's really not enough. And then we have survey data,
and that's where you see lending Tree and Axios and
(08:30):
others asking consumers, and I think it's important to understand
that they are you're just kind of getting what the
consumer thinks they have, and it's it really inhibits our
ability to get at are you using paying for are
you paying interest? And all those things?
Speaker 2 (08:46):
How does buy now Pay later fit into private credit
scores like FICO?
Speaker 5 (08:51):
Right?
Speaker 2 (08:51):
Because I imagine you know, if you're applying to a bank,
they're going to look at your FICO score if you
want something like a mortgage. And even though buying now
Pay later seems to be for mostly smaller items at
the moment, so maybe you owe like a couple hundred
or something via a firm, maybe you also owe a
few thousand via Klarna, right, And I imagine if you're
(09:13):
a bank using Fyco scores, you would want to know
that information.
Speaker 5 (09:17):
Yeah, so we don't know this information right now. Fico
announced recently that they plan to start using buy now,
Pay Later as part of their scoring model, and we've
seen the companies be extraordinarily resistant to that. So Clarnet
and others are saying that they're not going to turn
over data until they get certain assurances from Fyco about
how that data is going to be used. So what
(09:39):
we have right now is kind of snapshots in time
to understand how people are stacking, you know, buy Nowpay
Later on top of credit card debt and on top
of other products. And the research that we have there,
which is somewhat limited, does suggest that people are stacking this,
you know. It tells us that about sixty percent of
the people who are using buy now Pay Later have
a SubTime credit score. It tells us that they are
(10:01):
mostly using it on top of credit card debt. And
it's also suggesting that before people take on buy now
pay Leader, there's a slight uptick in their use of
their credit cards. So there's a suggestion that it's really
like you're maxing out one form of debt and then
taking on another.
Speaker 4 (10:16):
I just looked up the Q two New York Fed
Household Debt Report.
Speaker 3 (10:21):
I think it just came out a few days ago.
I must've it's Q two anyway.
Speaker 4 (10:24):
It says there's one point two to one trillion in
total credit card balances outstanding. Do we have something that
we have a guess for what is the number of
BNPL loans of any form currently outstanding, so that we
can benchmark that against credit cards.
Speaker 5 (10:40):
We have numbers that are reported by the companies. We
don't have data that is reported by a government. So
just like that, I think that the best we have
is that the transaction volume is around one hundred and
sixteen billion, and that's up from about thirteen point eight
billion in twenty twenty, so this is growing pretty rapidly.
Speaker 4 (10:57):
So it's it's a non zero. I mean, it's not
like clear like still like a fraction of credit cards,
but this is beyond the rounding air, that's right, Okay.
Speaker 2 (11:06):
Do we have any sense of how usage patterns have changed?
So for instance, you know, during the pandemic, did we
see an uptick in buy now, pay later use as
people were struggling because they didn't have jobs or had
short term cash flow issues? Has it come down since then?
Speaker 5 (11:22):
We're seeing an uptick in people's use of bineopi lator,
and we're seeing shifting patterns of what they're using it
to purchase. So I think I said earlier that there
was this assumption that people were using this to purchase
clothing or other kind of luxury goods. And you know,
even back in twenty twenty two when the CFPB put
out its first report here, we saw that that wasn't true.
People were using bunopaylator for things like groceries and education costs.
(11:47):
The surveys that have come out recently showed that that's growing.
So there was I think in an Axio survey and
a lending Tree survey, they showed somewhere between fourteen and
twenty five percent of bineopay lator users are using it
to purchase groceries. They're showing that a bigger percentage of
people are using binopulator for medical and dental costs than
for the things people might assume stereotypically it's used for,
(12:10):
like dining out or ordering in, or even like purchasing
concert tickets and things like that.
Speaker 3 (12:32):
Is it bad?
Speaker 4 (12:33):
I mean, like, you know, it seems like people are
using buy o pay later for dental or they're using
it for groceries or whatever, and like, you know, the
idea that people are obviously stressed and have to spread
out or borrow money to make those purchases is obviously
I guess there's an inherent angst about that because these
are human essentials. But is it really per se bad
(12:55):
or is it just like no, this is like yet
another tool that people have to sort of you know,
smooth consumption and so forth.
Speaker 5 (13:03):
I think it's bad that we're seeing an uptick in
the use of credit products to pay for essentials. That's
not to say that buy now, pay later is particularly
the enemy there, but you know, this is part of
the reason I've been interested in consumer credit overall is that,
you know, we see these broader changes go on in
the policy space. In particular, recently, we've seen Donald Trump
(13:25):
and Republicans in Congress push through a bill that cuts Medicaid,
cuts food assistance, you know, makes education more expensive, and
the availability of consumer credit products that are kind of
waiting in the wings there blents our ability to really
understand what those changes mean. So, you know, we know
that the Medicaid cuts will result in people having more
(13:47):
expensive health care, but we need to be looking at
the fact that that's going to result in buy now,
pay later loans, It's going to be an opportunity for
medical credit cards from places like Synchrony with per credit,
and so it's relevant to our overall economic situation. It's
relevant to the kind of like what I think is
like a silent financial crisis that's happening for the vast
(14:08):
majority of families in the United States, but it's not tracked.
You know, we've been talking about buy now, Pay later
really not being tracked, but the overall sort of like
consumer credit conditions for families are really not tracked and
talked about in that way. We see economists going on
TV talking about consumption and CPI and GDP, where families
(14:31):
are kind of sitting around the kitchen table talking about
Klarna and a firm and Sally May and Abvian.
Speaker 2 (14:37):
When you were at the CFPB, how are you thinking
about buy now, Pay Later from a sort of regulatory perspective.
Speaker 5 (14:43):
Yeah, so we were looking at the risks of the products,
and then we were kind of trying to look you know,
we've had this phenomenon with consumer credit products across the board,
not just specific to buy now, Pay Later, but it
was really evident at CFPB that you have these sort
of like new entrants into a market whose products are
framed very differently than a traditional consumer credit product, and
(15:05):
it's often part of the marketing pitch. It's like we're
not alone, we're not equity, We're this totally different thing,
and it preys on consumers hesitants to use debt. And
then also you know this idea that we might float
above any regulatory scheme, so for buying out, pay lead
and for these other products like earned wage access or
income share agreements. You know, we were looking at like
(15:26):
what is this under the law, and with buying now
pay later, particularly the products like where Klarna or a
firm is offering basically like a digital or physical card
where you can make repeated purchases where you have a
you know, an overall lit It starts to sound like
a credit card, right, And so you know, cfhobe's initial
approach on regulation here was to really just say, like,
(15:48):
you've got to follow some of the fundamental basics that
apply to the product that you are, right, And so
that was really meant to help people with some of
the real kind of basic consumer protections around managing disputes
and getting accurate billing statements. The other thing CFPP was
doing was on the enforcement and supervision side, so really
(16:09):
taking a look at these companies the same way we
do any other financial institution and making sure they're following
the law. And I think it's important to talk about
that piece because we've seen the Trump administration pull back
on the proposed regulations, but we've also seen them pull
back on enforcement. They specifically said they would deprioritize by now,
pay later in enforcement, and so there are these other
(16:30):
real basics that we're seeing fall apart. You know, if
you look at what consumers are complaining about right now,
they're saying, I had auto pay on my you know,
my Clarina or my after pay and I tried to
take it off and the company continues to charge me.
These are like really basic questions of whether the companies
are falling consumer financial laws and you know cfpps just
(16:53):
off the job.
Speaker 4 (16:54):
So you mentioned that in the research, prior to someone
beginning to use BNPL, increase in their credit card usage, right,
why does someone flip over? Like why doesn't so some
of these purchases. What is insufficient about the existing credit
card system? Is it that they're hitting their credit limits
or what is the situation such that then BNPL becomes
(17:15):
more attractive.
Speaker 5 (17:16):
Yeah, I think we need to take a deeper look
at credit utilization because I do think there are people
who are flipping over and they're using their available credit
balance and then they're shifting to bind a pay leader.
But I think there are a lot of other people
who are just trying to juggle their essentials, you know,
their groceries, and their kids back to school clothes, and
they're doing it through whatever feels like the most convenient
(17:38):
payment method. So the buy now pay lead companies have
made a real effort at being that convenient payment method,
both through kind of point of sale but also through
their apps. So they're pushing their users towards an app
that both makes it more convenience to make the payment
but also pushes you advertisements for different products. And so
(17:59):
I think we see people brought in there. But you
mentioned earlier why you don't use buye now Pay later,
And I do think it's important to great question. We
could do a half hour on your personal finances, but
I think it's important to know that even while there's
a big percentage of people using this to cover basics,
there is kind of a split in buy now pay
lead where if you talk to consultants who look at
(18:21):
this really closely, they're seeing people like you or I
who can I'm making an assumption about your finances get paid. Well, okay,
you know about like you or I who can make
a purchase, but it's a painful purchase, you know, maybe
it's like a new television or something that you just
don't want to pay upfront, so there are people using
it in that way too interesting.
Speaker 2 (18:41):
You mentioned ease of use, and I think this is
really key. What are the conversations like with retailers, So like,
what's the pitch that buy now, pay later platforms are
going to make to I don't know, a Walmart or
whoever to kind of plug directly into their websites.
Speaker 5 (18:56):
Yeah, so the pitch is basically basket size is and
then overall transaction volume. Right, So they're showing that they're
getting the retailers about ten percent more in terms of
the basket size, so the amount of things that people
are purchasing, and then some of the companies are reporting
up to eighty percent more in terms of the actual transaction.
(19:18):
So that's pretty significant for retailers, and I think it
is what is propelling retailers to cut deals with Klarna
or after pay and to pay the costs which are
higher than interchange on a credit card. So in many cases,
you know, we're looking at costs that are somewhere between
one to eight percent of the transaction, plus like a
flat fee that might be like thirty cents per transaction.
(19:40):
So it's pretty significant. I think the other part of
the pitch is and this is this is one of
the pieces that was really kind of consuming a lot
of our attention at CFB is the ability to use
people's data to drive those purchases. So I think if
you're a merchant looking at those big fees, if you're
a Walmart or Amazon or Whoe or you're not just
(20:01):
saying like, let me put this in Klarna or a
firm's hands to hope that people use it more, but
let me use the data I have on hand to
try to drive more purchases. And like a company that
has a lot of information about what I like to
buy and a lot of information about how much money
I have to do it has like a pretty potent
set of data to help drive those purchases. So I
(20:23):
think that's part of the appeal for emergents as well.
Speaker 4 (20:26):
Do we have a way of essentially measuring from the
consumer's perspective a sort of like for like interest rate
that they payment because as you described, like in some
cases they're clear right, in some cases they're more embedded
because it's free for four months, but then there's like
a penalty. In some instances, it's this thing that looks
(20:47):
like a credit card, but maybe structurally there's a different
way of getting from point A to point B, Like
can we measure like, okay, if this were a credit
card payment with a fifteen percent rate, this is the
apples to apples compared you're paying eighteen percent or twelve percent?
Speaker 3 (21:01):
Like, are we able to are you able to do that?
Speaker 5 (21:04):
Me personally, I'm not able to do that. But you
know at the CFPV we did do that on certain products.
We didn't do that for buying now pay later in
many cases because the products we were studying had almost
no cost, right, they were no interest in, no fee.
Maybe they had a late fee that might kick in,
but remember where they're requiring auto payments, which most of
(21:25):
the companies are, those late fees are less likely to
be incurred. But I think the sort of relevant thing
is to understand how much people are paying overall in access,
fees and interest for the goods and services that they need.
And that's incredibly difficult to do because these companies are
sort of layering these different products. So you have a
(21:46):
credit card with a set interest rate, but you might
be incurring debt on a number of different products across
multiple band pail providers. That each have different terms and
different costs, so it's really difficult. It's difficult for us
to understand from a research perspective, it's even more difficult
for a consumer, I think, to make those choices in
(22:06):
those trade offs.
Speaker 2 (22:22):
Just going back to the data aspect of those for
a second, you said that some of the platforms are
reluctant to report to FYCO and are asking for certain assurances.
What exactly do they want here?
Speaker 5 (22:37):
I mean, I've looked into this question. They haven't been
super clear I think about what they want. They've sort
of made some general statements that they want to make
sure that you reporting this data won't be used negatively
to affect people. I mean, this is really just my speculation.
But what I think is really interesting about this is
the companies are playing on this kind of broader skepticism
(22:59):
about credit reporting and FYCO overall, because I think, you
know people's experience and certainly what we saw in the
research at CFPP is that credit reporting has predominantly been
used to ding people and to coerce them into making
payments they might not want to make. So like medical
debt is a great example of that. Cfb's research showed
(23:21):
it really had no value for the fundamental purpose of
credit reporting, which is evaluating people's ability to repay, and
it was mostly being used to course. So when Klarna says,
you know, we want to make sure this isn't used
to ding people, that feels very noble. But I think
at the end of the day we should be kind
of skeptical of why they don't want to report.
Speaker 4 (23:40):
Explain this further about medical debt and would you say
it has no value? But also it's been used to course,
what are the conditions with medical debt and FYCO.
Speaker 5 (23:50):
Yeah, So we looked at medical debt and credit reporting
really closely at CFPB, and what we saw was that
it didn't have predictive value. So medical debt was not
predictive of whether you would repay other types of debt.
And part of the reason is that a lot of
medical debt that is reported on people's credit reports is
inaccurate in one way or another. You know, it might
(24:11):
be that the debt collector is going after you for
a debt that is larger than what you think you
pay because you think your insurance company ought to have paid.
It might be that you actually already paid the debt
and that information hasn't gotten to the debt collector, so
it's really kind of this junk data that's sitting on
people's credit reports.
Speaker 4 (24:29):
And then explain the coercion element, like how does it
so medical debt isn't a good predictor of someone's ability
to pay a future loan, so it's not great for that.
And yet what it's still like people because it affects
their credit card scorers, feel this extra pressure to pay it.
Like explain sort of like the effect on the patient
(24:50):
in this case.
Speaker 5 (24:50):
Yeah, exactly. So the constituency that wants medical debt on
your credit reports is primarily third party debt collectors. And
why do they want that there? They want it there
so that they can call you and say, you know,
this is going to be this debt or it's going
to hurt your credit. And I think at CFB we
tried to spend a lot of time thinking this through
from the consumer perspective and what that feels like.
Speaker 4 (25:12):
So actually I was not familiar with that at all.
But just to go further, is this, like I hadn't
really thought about the sort of behind the scenes fight
of what does and doesn't go into a fight though
but obviously that's very intuitive. Is this like a common
thing across a range of either formal debt products or
quasi debt products, where they're all like sort of jocking
(25:34):
either to be in or out of the calculation basket.
Speaker 5 (25:38):
I mean, I think it is. The medical debt is
a thing because see if he be made it a thing.
I don't think we have enough research on what is
or isn't on your credit report and why. But when
regulators start to pick those fights, yeah, you start to
get this jocking for what's on there. I think student
debt is another good example where there are legitimate quessions
(26:00):
of what ought to and not not be on there.
And some of it is about the predictive value, but
a lot of it is about putting debt on people's
credit reports that we know is inaccurate.
Speaker 2 (26:11):
It is true that every few years we see like
these efforts from private companies I guess, to try to
augment credit scores with new technology. So I remember very
clearly being at a startup's offices in San Francisco in
like I guess it would have been twenty fifteen or something,
and they were walking me through the data that they
could use to make short term loans. And one of
(26:35):
the things they were talking about was like just the
basic cursor movement on the screen, like how fast you
click the button to get money, whether or not you know,
if it's a sliding bar that goes from like one
thousand dollars to ten thousand dollars, Like whether or not
you hesitate to go to ten thousand and then go
back and then go back to ten thousand again. It
(26:56):
seemed very dystopian to me, And I'm curious what those
efforts are like right now given the new emphasis on
AI and maybe you know, even more data that is
now available to private companies to look at to try
to judge whether people are credit worthy or not.
Speaker 5 (27:14):
Yeah, if you listen to the earnings calls where CEOs
are talking to investors about their underwriting models for a
variety of different products, whether it's kind of traditional credit
cards or things like bnpl ai comes up a lot.
You know, everybody sort of wants to say that they've
got this proprietary am that's exactly it.
Speaker 2 (27:32):
Yeah, they were saying the same thing ten years ago. Yeah.
Speaker 5 (27:35):
Yeah, And I think there's a lot of things to
unpack there and to be concerned about so I think
we should You know, we know that AI models often
bake in racial biases, so we know that there's some
concern there about these models, you know. But I also
think to your point there, we're dragging in a lot
of extraneous data about people into the way we look
(27:58):
at their credit worthiness, some of which should be relevant,
some of which really should not. And what I think
is most important to think about there is that those
models are completely opaque, and company is often when they're
faced with regulatory scrutiny say kind of like the AI
did it right, as though the people at the companies
are not responsible for the outcomes of the technology. So
(28:21):
you know, under the Biden administration, the approach there had
really been to say you're responsible. It sounds so basic,
but the laws are the laws, whether it's about consumer
protection or about you know, basic discrimination among credit applicants,
the laws are the laws, and you're responsible for the
outcomes of those models. And I think that shift is
or that kind of approach is really really important here
(28:44):
to drive some accountability, because otherwise it does kind of
get out of hands.
Speaker 2 (28:49):
So I mentioned in the intro that the parallel that
I reach for when thinking about buy Now, Pay Later
is sort of private credit. So this idea that you know,
it's a more opaque market and people are worried about
its size, and they're worried about transparency and hidden leverage
and all of that. But on the other hand, you know,
it is an extra credit bigot that companies can tap
(29:14):
in times of emergency, and we certainly saw that over
the past five years or so. Net net. When you
look at buy now, Pay Later, would you say the
effects are good, more good or more bad? This is
a tough one.
Speaker 5 (29:27):
It is a really tough one because I don't I
said this earlier. I don't want to single out buy
Now Pay Later as the bad guy here. I think,
first of all, there are a lot of bad guys.
There are a lot of good guys too. But you know,
I think the thing to really focus on is, like
we're in what the Trump administration is describing as like
(29:50):
a relatively good economy, and we're sitting here talking about
like turning on this pigot for these kind of like
new and interesting types of debt to help people handle
really basic expenses. That seems like a problem we should
not be in an emergency situation and yet we are,
and so I'm concerned that that availability of these credit
(30:12):
products is obscuring, like the kind of growing emergency around
people's cost of living, which often you know in the
news is about their grocery prices, the eggs, their sneakers
for back to school, and those are really important, but
it's also their healthcare, the cost of college, being able
to retire. So families are feeling really squeezed, and you know,
(30:36):
to me, the most important thing there is like where
I think we're seeing the Trump administration sort of test
out this theory that they can keep the high level
metrics of whether the economy is on track, steady or
growing while letting somewhere around sixty percent of people have
these private financial crises. We're going to see that play
(30:56):
out over the next couple of years. And so that's
that's the way I think about these. It's not really
like is the individual one good, but it's like, do
you know what we're doing overall? And is anyone doing
the math? All right?
Speaker 2 (31:07):
Julian Morgan, thank you so much for coming on all
thoughts really appreciated.
Speaker 5 (31:11):
Thank you, thanks for having me.
Speaker 2 (31:26):
Joe. I'm glad we finally did that episode We've been
talking about doing one on BNPL for a while. BNPL.
It always reminds me of like it sounds like BNP
Paribo's like Italian subsidiary or something. But there are a
bunch of things to pick out there. I mean, number one,
it's clearly a nuanced issue, yeah right, and like clearly,
as you laid out in the intro, it can have
(31:47):
a smoothing effect. The second thing that always seems to
come up is this idea that like, well, it's not
that big now, right, Like it's not big enough to
have an effect right now. But as Julie mentioned, we
are seeing, you know, volumes slowly pick up, and I
guess slowly, not that slowly, Yeah, yeah, right, And I
(32:08):
guess like I kind of wonder what happens like as
more and more of this activity actually stretches into services
forus goods, like that seems to be quite a big shift.
Speaker 4 (32:19):
Well, I'd say, like, I think Julie's last point is
very relevant, which is like, you know, when we think
about household borrowing, and again probably you and I because
we're sort of children of or you know, grew up
during the financial crisis, you know, we sort of think
about like.
Speaker 2 (32:34):
We weren't children, No, we're children, But.
Speaker 4 (32:37):
You know what I'm saying, Yeah, you know, I think
you and I often think about credit from the effects
of defaults and so forth, and that could be an effect,
and that's not something to be dismissed. But the other
idea is like how much of like sort of like
aggregate economic conditions consumption is sort of debt financed and
in a way that we can't like fully measure, right,
(32:59):
because we comfort we can measure credit card dead and
so we have some sense of credit card dead is
the size of incomes or whatever, But if there's this
other rapidly growing source and it's pretty crucial for like
sort of keeping the headline figures of consumption or GDP,
you know, like my conclusion or like my sense it's like, yeah,
it's not that huge yet, but it's definitely not nothing,
(33:19):
and it's definitely not you know, it's bigger than.
Speaker 2 (33:21):
A rounding air, right, And it certainly says something to
Julia's point about like the state of the average American
consumer who probably is struggling to pay something like dental fees.
Speaker 4 (33:33):
Yeah, yeah, no, and like the fact in like, you know,
I think there's I thought it was interesting too that
like maybe both of us are least just me had
a certain.
Speaker 3 (33:41):
Maybe already outdated view of what BNPL is.
Speaker 2 (33:44):
Oh yeah, because like the idea of like I'm going
to polize that they have like actual apps, yees.
Speaker 4 (33:48):
So the idea that like, oh, I'm going to buy
a television that's a thousand dollars and make it like
four two hundred and fifty dollars purchases, like that sounds great.
Should I should be doing this? But if that's just
sort of like on business model, but that there's like
this growing business model that looks more like installment loans
where there is a formal interest rate, but it also
sort of looks like the same thing and you also
get a card, et cetera. But it's just like a
(34:09):
slightly different structure, and formerly it isn't called debt or
isn't categorized or is it reported as debt than then
I think obviously we need to continue to get a
better handle on you know.
Speaker 3 (34:19):
How big this is. Yeah.
Speaker 2 (34:20):
Absolutely, Also Klarna says it's a bank now, which is
kind of confusing.
Speaker 4 (34:25):
Yeah, it's like the hottest thing everyone wants everyone for
bank charters these days.
Speaker 2 (34:30):
Oh yeah, that would be interesting to look at because
we went after the financial crisis, speaking of two thousand
and eight, we went years and years in brand.
Speaker 4 (34:38):
Everyone, so every like every random brokerage or fine, we
got a bank charter. We acquired a company that has
a bank charter.
Speaker 2 (34:44):
Time is a flat circle show? Yeah, all right, shall
we leave it there.
Speaker 3 (34:47):
Let's leave it there.
Speaker 2 (34:48):
This has been another episode of the Odd Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (34:53):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 4 (34:55):
Follow our guest Julie Morgan, She's at Jay Margetta, follow
our producers and Rodriguez at Carmen armand Dashel Bennett at
dashbod and Kale Brooks and Kale Brooks. For more Odd
Lots content, go to Bloomberg dot com slash odd Lots.
We have a daily newsletter and all of our episodes,
and you can chat about all of these topics twenty
four to seven in our discord Discord dot gg slash odlocks.
Speaker 2 (35:17):
And if you enjoy odd Lots, if you like it
when we talk about the state of consumer debt, then
please leave us a positive review on your favorite podcast platform,
and remember, if you are a Bloomberg subscriber, you can
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you need to do is find the Bloomberg channel on
Apple Podcast and follow the instructions there. Thanks for listening,
(36:01):
Stood in a
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the out Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe. Why isn't thal Joe?
Speaker 2 (00:24):
I have a confession to make. Yeah, I do a
lot of online shopping, like a lot more than is healthy.
Speaker 4 (00:31):
Probably more than I realized from looking over your shoulder
in the office and asking you what you're looking up,
because I do do that and you never like it.
Speaker 2 (00:38):
But I still do know because sometimes I am, in
fact shopping online in the office. But a few years
ago I noticed a phenomenon, a change when it came
to online shopping. You know what that was, I can guess, yeah,
all right, all of a sudden, whenever I was checking out,
you would get an offer, a little button usually that
would say do you want to take a buy now
(01:00):
pay later option? And usually it's with a company like
Klarna or a firm or something like that. They're everywhere now.
Speaker 4 (01:08):
So, like I've certainly seen all these buttons, I've never
used it. I don't really know why I haven't, because like,
why shouldn't I spread out? Why shouldn't I?
Speaker 3 (01:17):
Like for real?
Speaker 4 (01:18):
Like my understanding is that the core of the business
model works is that there's no like formal interest, right,
so if you make one hundred dollars purchase, you get
to spread it out, say in four payments of twenty
five dollars, and so whether it's one hundred dollars right
now or one hundred dollars and four months, it's the
same from the end buyer, which, of course in theory
because there's a.
Speaker 3 (01:38):
Time value of money, is not intuitive.
Speaker 4 (01:39):
But the idea is that the retailer implicitly pays the
interest because it's a form of customer acquisition, and so
the retailer is implicitly willing to take one hundred dollars
or whatever over x period of time rather than all
at once in exchange for essentially making it easier for
customers to buy. But from the customer person like you
(02:00):
were me, who presumably have the money to make to
buy what we're purchasing, I still don't get why we
don't all use buy now, pay later, because why not
spread out our purchases further out into the future.
Speaker 2 (02:10):
You know how Rebel Wilson described it in a firm commercial.
Speaker 3 (02:14):
I didn't. I don't. I haven't seen it.
Speaker 2 (02:16):
Like eating a tub of ice cream, but spreading out
the calories.
Speaker 3 (02:19):
Over four weeks exactly, why don't.
Speaker 2 (02:21):
It's still six hundred calories, right, that's the issue. But
I think, okay, so this is obviously a nuanced subject. Yes,
so clearly zero percent interest doesn't sound like a problem.
But obviously if you fail to pay, you pay a penalty.
Speaker 3 (02:37):
Then the penalties are building, right.
Speaker 2 (02:39):
So there's that. But the other issue with some of
these buy now, pay later items, and it's really interesting.
I kind of think about this as a parallel to
the private market and credit. So this idea that there's
this like whole world of additional credit or leverage that
we don't actually have very good data on, and that
is growing, right. I think that is the key.
Speaker 4 (03:00):
So here's how I see the issue, which is that
if I could have a tub of ice cream and
it spread out the calories over four months.
Speaker 3 (03:06):
I would certainly do that.
Speaker 4 (03:08):
That sounds pretty great because I burn a certain number
of calories in the day, and so if I had
four months to burn them that that would be far
more efficient. But the flip side is, well, I would
eat more ice cream, so I would eat four times.
I would eat four times as many tubs of ice
cream in that given day, knowing that I have this
four month calorie budget. And so then you still get
(03:28):
the question of like, Okay, maybe there's not a formal interest,
or maybe there's penalties, but I'm buying a lot more
with today's buying power, and that may still yet prove
to be unsustainable to the end consumer, even if it
doesn't formally. Clock is what we measure as consumer debt.
Speaker 2 (03:44):
Here's the added layer. Let's say you're trying to lose
weight or trying to be healthy, and you have like
a dietician. Imagine eating the ice cream, but him never
knowing that you're eating the ice cream, right, Like, this is.
Speaker 3 (03:56):
Well, I lied to my doctors all the time. I mean,
I'm used to that. Okay, all right.
Speaker 2 (04:01):
Rather than us debate this, we do in fact.
Speaker 4 (04:03):
How much didn't you well, you know, like once a week,
I like go through a three milligram Think I did
actually quit?
Speaker 2 (04:10):
And I'm saying that told me this morning you said
you were not going to have any more zins for
the restaurant, and I think I would take the opposite
side of that bet. But now you've committed in public,
public best, So we'll see how it goes. Okay, rather
than us talk about this, we do, in fact have
the perfect guest. We're going to be speaking with Julie Morgan.
She is a president of the Century Foundation, formerly at
(04:32):
the Consumer Financial Protection Bureau of the CFPB, where she
thought a lot about the buy now, pay later phenomenon.
So we're going to get some of her thoughts right now. Julie,
welcome to the show.
Speaker 5 (04:43):
Thank you. I'm so excited to be here.
Speaker 2 (04:45):
So how did this happen? Like, how did this business
model actually come about? Because it felt very sudden to me,
But on the other hand, I was outside of the
US for a long time, so maybe it was quite gradual.
Speaker 5 (04:56):
I'm really excited to answer this question for a number
of reasons, including the way that you all introduced this,
because you spent a lot of time talking about BUYEOW
pay leader as this pay in for zero interest maybe
like no fee or low feed model, and we did
see that model arise during the pandemic and become a
much more assalient part of the way consumers were paying
(05:17):
for goods during the pandemic. And so if I could
take you back to kind of those early years at
the CFPB. Where we're coming out of the pandemic, we're
seeing this rise in buy now pay lead. You know,
regulators and researchers started to investigate this to understand what
it meant for consumers and what the risks were. And
I think there were kind of two fundamental assumptions about
(05:38):
buyeow pay leader at that time. One was just what
we said, it's a pay in for no interest, low
or no fee model. And then two people were using
this in kind of the like what I think of
as a stereotypical gen Z kind of way. They were
using it to finance a purchase that was slightly larger
or more extravagant than what they would have bought, and
(06:00):
it was usually on something like a purse or an
item of clothing. What we've found over time is that
both of those assumptions turned out to be wrong. Right,
So number one, what we're seeing right now as buy now,
pay later and calling by now pay lead is not
in fact always that pay in for no interest product.
(06:21):
And in fact, many of the companies that we associate
with buy now pay lead, like a firm or Klarna,
are mostly not offering that product. So a firm says
that product is only twenty percent of their business. The
rest of their business is what I would think of
as like a point of sale loans or short term
installment loans with interest rates ranging from you know, ten
to thirty percent and terms that range from thirty days
(06:43):
to six or eighteen months.
Speaker 4 (06:45):
So it's buy now, pay later, but it's more like
just a formal loan.
Speaker 5 (06:49):
Yeah, I mean it's.
Speaker 4 (06:50):
Payment and installment and there's a schedule, but also there
is a nominal interest rate that's visible.
Speaker 5 (06:56):
To the consumer exactly, and I think it is by now,
pay later, in the sense that any loan, including your mortgage, yes,
buy now, pay later. Right. So they've kind of kept
this marketing that I think was really appealing to consumers
and that sort of soothed regulators that these products were
fairly low risk, and then started shifting that into these
products that look very different.
Speaker 4 (07:17):
Okay, whether we're talking about the new products or the
sort of the traditional BNPL the way Tracy and I
described it in the beginning. Currently, what kind of collection
of data like when that happened? So we know, like
credit card data gets collected. There's public statistics about just
the sheer volume of credit cards what do we have
(07:38):
right now in terms of where this gets slotted and
how it's collected as data.
Speaker 5 (07:42):
Yeah, we don't have a ton. So we have a
couple of different ways of looking at buy now, Pay later.
Most of it is through government sources, So the Federal
Reserve and the CFPB have the ability to pull data
from the companies, and if you look at the CFPB's
reports on buy now, Pay Later, that is what they're doing.
They're pulling transaction level data through market monitoring orders.
Speaker 4 (08:01):
That's not but when you say market monitoring orders, just
to be clear, the companies are compelled to regularly update
the CFPB with some level of data.
Speaker 5 (08:10):
They're compelled to provide data. The regularly piece is not
part of it. So this tends to be a one off, right.
We don't have a consistent stream of data coming from
the companies, and so that gives us like a small
window into what's happening in the buyout pay latter space,
but it's really not enough. And then we have survey data,
and that's where you see lending Tree and Axios and
(08:30):
others asking consumers, and I think it's important to understand
that they are you're just kind of getting what the
consumer thinks they have, and it's it really inhibits our
ability to get at are you using paying for are
you paying interest? And all those things?
Speaker 2 (08:46):
How does buy now Pay later fit into private credit
scores like FICO?
Speaker 5 (08:51):
Right?
Speaker 2 (08:51):
Because I imagine you know, if you're applying to a bank,
they're going to look at your FICO score if you
want something like a mortgage. And even though buying now
Pay later seems to be for mostly smaller items at
the moment, so maybe you owe like a couple hundred
or something via a firm, maybe you also owe a
few thousand via Klarna, right, And I imagine if you're
(09:13):
a bank using Fyco scores, you would want to know
that information.
Speaker 5 (09:17):
Yeah, so we don't know this information right now. Fico
announced recently that they plan to start using buy now,
Pay Later as part of their scoring model, and we've
seen the companies be extraordinarily resistant to that. So Clarnet
and others are saying that they're not going to turn
over data until they get certain assurances from Fyco about
how that data is going to be used. So what
(09:39):
we have right now is kind of snapshots in time
to understand how people are stacking, you know, buy Nowpay
Later on top of credit card debt and on top
of other products. And the research that we have there,
which is somewhat limited, does suggest that people are stacking this,
you know. It tells us that about sixty percent of
the people who are using buy now Pay Later have
a SubTime credit score. It tells us that they are
(10:01):
mostly using it on top of credit card debt. And
it's also suggesting that before people take on buy now
pay Leader, there's a slight uptick in their use of
their credit cards. So there's a suggestion that it's really
like you're maxing out one form of debt and then
taking on another.
Speaker 4 (10:16):
I just looked up the Q two New York Fed
Household Debt Report.
Speaker 3 (10:21):
I think it just came out a few days ago.
I must've it's Q two anyway.
Speaker 4 (10:24):
It says there's one point two to one trillion in
total credit card balances outstanding. Do we have something that
we have a guess for what is the number of
BNPL loans of any form currently outstanding, so that we
can benchmark that against credit cards.
Speaker 5 (10:40):
We have numbers that are reported by the companies. We
don't have data that is reported by a government. So
just like that, I think that the best we have
is that the transaction volume is around one hundred and
sixteen billion, and that's up from about thirteen point eight
billion in twenty twenty, so this is growing pretty rapidly.
Speaker 4 (10:57):
So it's it's a non zero. I mean, it's not
like clear like still like a fraction of credit cards,
but this is beyond the rounding air, that's right, Okay.
Speaker 2 (11:06):
Do we have any sense of how usage patterns have changed?
So for instance, you know, during the pandemic, did we
see an uptick in buy now, pay later use as
people were struggling because they didn't have jobs or had
short term cash flow issues? Has it come down since then?
Speaker 5 (11:22):
We're seeing an uptick in people's use of bineopi lator,
and we're seeing shifting patterns of what they're using it
to purchase. So I think I said earlier that there
was this assumption that people were using this to purchase
clothing or other kind of luxury goods. And you know,
even back in twenty twenty two when the CFPB put
out its first report here, we saw that that wasn't true.
People were using bunopaylator for things like groceries and education costs.
(11:47):
The surveys that have come out recently showed that that's growing.
So there was I think in an Axio survey and
a lending Tree survey, they showed somewhere between fourteen and
twenty five percent of bineopay lator users are using it
to purchase groceries. They're showing that a bigger percentage of
people are using binopulator for medical and dental costs than
for the things people might assume stereotypically it's used for,
(12:10):
like dining out or ordering in, or even like purchasing
concert tickets and things like that.
Speaker 3 (12:32):
Is it bad?
Speaker 4 (12:33):
I mean, like, you know, it seems like people are
using buy o pay later for dental or they're using
it for groceries or whatever, and like, you know, the
idea that people are obviously stressed and have to spread
out or borrow money to make those purchases is obviously
I guess there's an inherent angst about that because these
are human essentials. But is it really per se bad
(12:55):
or is it just like no, this is like yet
another tool that people have to sort of you know,
smooth consumption and so forth.
Speaker 5 (13:03):
I think it's bad that we're seeing an uptick in
the use of credit products to pay for essentials. That's
not to say that buy now, pay later is particularly
the enemy there, but you know, this is part of
the reason I've been interested in consumer credit overall is that,
you know, we see these broader changes go on in
the policy space. In particular, recently, we've seen Donald Trump
(13:25):
and Republicans in Congress push through a bill that cuts Medicaid,
cuts food assistance, you know, makes education more expensive, and
the availability of consumer credit products that are kind of
waiting in the wings there blents our ability to really
understand what those changes mean. So, you know, we know
that the Medicaid cuts will result in people having more
(13:47):
expensive health care, but we need to be looking at
the fact that that's going to result in buy now,
pay later loans, It's going to be an opportunity for
medical credit cards from places like Synchrony with per credit,
and so it's relevant to our overall economic situation. It's
relevant to the kind of like what I think is
like a silent financial crisis that's happening for the vast
(14:08):
majority of families in the United States, but it's not tracked.
You know, we've been talking about buy now, Pay later
really not being tracked, but the overall sort of like
consumer credit conditions for families are really not tracked and
talked about in that way. We see economists going on
TV talking about consumption and CPI and GDP, where families
(14:31):
are kind of sitting around the kitchen table talking about
Klarna and a firm and Sally May and Abvian.
Speaker 2 (14:37):
When you were at the CFPB, how are you thinking
about buy now, Pay Later from a sort of regulatory perspective.
Speaker 5 (14:43):
Yeah, so we were looking at the risks of the products,
and then we were kind of trying to look you know,
we've had this phenomenon with consumer credit products across the board,
not just specific to buy now, Pay Later, but it
was really evident at CFPB that you have these sort
of like new entrants into a market whose products are
framed very differently than a traditional consumer credit product, and
(15:05):
it's often part of the marketing pitch. It's like we're
not alone, we're not equity, We're this totally different thing,
and it preys on consumers hesitants to use debt. And
then also you know this idea that we might float
above any regulatory scheme, so for buying out, pay lead
and for these other products like earned wage access or
income share agreements. You know, we were looking at like
(15:26):
what is this under the law, and with buying now
pay later, particularly the products like where Klarna or a
firm is offering basically like a digital or physical card
where you can make repeated purchases where you have a
you know, an overall lit It starts to sound like
a credit card, right, And so you know, cfhobe's initial
approach on regulation here was to really just say, like,
(15:48):
you've got to follow some of the fundamental basics that
apply to the product that you are, right, And so
that was really meant to help people with some of
the real kind of basic consumer protections around managing disputes
and getting accurate billing statements. The other thing CFPP was
doing was on the enforcement and supervision side, so really
(16:09):
taking a look at these companies the same way we
do any other financial institution and making sure they're following
the law. And I think it's important to talk about
that piece because we've seen the Trump administration pull back
on the proposed regulations, but we've also seen them pull
back on enforcement. They specifically said they would deprioritize by now,
pay later in enforcement, and so there are these other
(16:30):
real basics that we're seeing fall apart. You know, if
you look at what consumers are complaining about right now,
they're saying, I had auto pay on my you know,
my Clarina or my after pay and I tried to
take it off and the company continues to charge me.
These are like really basic questions of whether the companies
are falling consumer financial laws and you know cfpps just
(16:53):
off the job.
Speaker 4 (16:54):
So you mentioned that in the research, prior to someone
beginning to use BNPL, increase in their credit card usage, right,
why does someone flip over? Like why doesn't so some
of these purchases. What is insufficient about the existing credit
card system? Is it that they're hitting their credit limits
or what is the situation such that then BNPL becomes
(17:15):
more attractive.
Speaker 5 (17:16):
Yeah, I think we need to take a deeper look
at credit utilization because I do think there are people
who are flipping over and they're using their available credit
balance and then they're shifting to bind a pay leader.
But I think there are a lot of other people
who are just trying to juggle their essentials, you know,
their groceries, and their kids back to school clothes, and
they're doing it through whatever feels like the most convenient
(17:38):
payment method. So the buy now pay lead companies have
made a real effort at being that convenient payment method,
both through kind of point of sale but also through
their apps. So they're pushing their users towards an app
that both makes it more convenience to make the payment
but also pushes you advertisements for different products. And so
(17:59):
I think we see people brought in there. But you
mentioned earlier why you don't use buye now Pay later,
And I do think it's important to great question. We
could do a half hour on your personal finances, but
I think it's important to know that even while there's
a big percentage of people using this to cover basics,
there is kind of a split in buy now pay
lead where if you talk to consultants who look at
(18:21):
this really closely, they're seeing people like you or I
who can I'm making an assumption about your finances get paid. Well, okay,
you know about like you or I who can make
a purchase, but it's a painful purchase, you know, maybe
it's like a new television or something that you just
don't want to pay upfront, so there are people using
it in that way too interesting.
Speaker 2 (18:41):
You mentioned ease of use, and I think this is
really key. What are the conversations like with retailers, So like,
what's the pitch that buy now, pay later platforms are
going to make to I don't know, a Walmart or
whoever to kind of plug directly into their websites.
Speaker 5 (18:56):
Yeah, so the pitch is basically basket size is and
then overall transaction volume. Right, So they're showing that they're
getting the retailers about ten percent more in terms of
the basket size, so the amount of things that people
are purchasing, and then some of the companies are reporting
up to eighty percent more in terms of the actual transaction.
(19:18):
So that's pretty significant for retailers, and I think it
is what is propelling retailers to cut deals with Klarna
or after pay and to pay the costs which are
higher than interchange on a credit card. So in many cases,
you know, we're looking at costs that are somewhere between
one to eight percent of the transaction, plus like a
flat fee that might be like thirty cents per transaction.
(19:40):
So it's pretty significant. I think the other part of
the pitch is and this is this is one of
the pieces that was really kind of consuming a lot
of our attention at CFB is the ability to use
people's data to drive those purchases. So I think if
you're a merchant looking at those big fees, if you're
a Walmart or Amazon or Whoe or you're not just
(20:01):
saying like, let me put this in Klarna or a
firm's hands to hope that people use it more, but
let me use the data I have on hand to
try to drive more purchases. And like a company that
has a lot of information about what I like to
buy and a lot of information about how much money
I have to do it has like a pretty potent
set of data to help drive those purchases. So I
(20:23):
think that's part of the appeal for emergents as well.
Speaker 4 (20:26):
Do we have a way of essentially measuring from the
consumer's perspective a sort of like for like interest rate
that they payment because as you described, like in some
cases they're clear right, in some cases they're more embedded
because it's free for four months, but then there's like
a penalty. In some instances, it's this thing that looks
(20:47):
like a credit card, but maybe structurally there's a different
way of getting from point A to point B, Like
can we measure like, okay, if this were a credit
card payment with a fifteen percent rate, this is the
apples to apples compared you're paying eighteen percent or twelve percent?
Speaker 3 (21:01):
Like, are we able to are you able to do that?
Speaker 5 (21:04):
Me personally, I'm not able to do that. But you
know at the CFPV we did do that on certain products.
We didn't do that for buying now pay later in
many cases because the products we were studying had almost
no cost, right, they were no interest in, no fee.
Maybe they had a late fee that might kick in,
but remember where they're requiring auto payments, which most of
(21:25):
the companies are, those late fees are less likely to
be incurred. But I think the sort of relevant thing
is to understand how much people are paying overall in access,
fees and interest for the goods and services that they need.
And that's incredibly difficult to do because these companies are
sort of layering these different products. So you have a
(21:46):
credit card with a set interest rate, but you might
be incurring debt on a number of different products across
multiple band pail providers. That each have different terms and
different costs, so it's really difficult. It's difficult for us
to understand from a research perspective, it's even more difficult
for a consumer, I think, to make those choices in
(22:06):
those trade offs.
Speaker 2 (22:22):
Just going back to the data aspect of those for
a second, you said that some of the platforms are
reluctant to report to FYCO and are asking for certain assurances.
What exactly do they want here?
Speaker 5 (22:37):
I mean, I've looked into this question. They haven't been
super clear I think about what they want. They've sort
of made some general statements that they want to make
sure that you reporting this data won't be used negatively
to affect people. I mean, this is really just my speculation.
But what I think is really interesting about this is
the companies are playing on this kind of broader skepticism
(22:59):
about credit reporting and FYCO overall, because I think, you
know people's experience and certainly what we saw in the
research at CFPP is that credit reporting has predominantly been
used to ding people and to coerce them into making
payments they might not want to make. So like medical
debt is a great example of that. Cfb's research showed
(23:21):
it really had no value for the fundamental purpose of
credit reporting, which is evaluating people's ability to repay, and
it was mostly being used to course. So when Klarna says,
you know, we want to make sure this isn't used
to ding people, that feels very noble. But I think
at the end of the day we should be kind
of skeptical of why they don't want to report.
Speaker 4 (23:40):
Explain this further about medical debt and would you say
it has no value? But also it's been used to course,
what are the conditions with medical debt and FYCO.
Speaker 5 (23:50):
Yeah, So we looked at medical debt and credit reporting
really closely at CFPB, and what we saw was that
it didn't have predictive value. So medical debt was not
predictive of whether you would repay other types of debt.
And part of the reason is that a lot of
medical debt that is reported on people's credit reports is
inaccurate in one way or another. You know, it might
(24:11):
be that the debt collector is going after you for
a debt that is larger than what you think you
pay because you think your insurance company ought to have paid.
It might be that you actually already paid the debt
and that information hasn't gotten to the debt collector, so
it's really kind of this junk data that's sitting on
people's credit reports.
Speaker 4 (24:29):
And then explain the coercion element, like how does it
so medical debt isn't a good predictor of someone's ability
to pay a future loan, so it's not great for that.
And yet what it's still like people because it affects
their credit card scorers, feel this extra pressure to pay it.
Like explain sort of like the effect on the patient
(24:50):
in this case.
Speaker 5 (24:50):
Yeah, exactly. So the constituency that wants medical debt on
your credit reports is primarily third party debt collectors. And
why do they want that there? They want it there
so that they can call you and say, you know,
this is going to be this debt or it's going
to hurt your credit. And I think at CFB we
tried to spend a lot of time thinking this through
from the consumer perspective and what that feels like.
Speaker 4 (25:12):
So actually I was not familiar with that at all.
But just to go further, is this, like I hadn't
really thought about the sort of behind the scenes fight
of what does and doesn't go into a fight though
but obviously that's very intuitive. Is this like a common
thing across a range of either formal debt products or
quasi debt products, where they're all like sort of jocking
(25:34):
either to be in or out of the calculation basket.
Speaker 5 (25:38):
I mean, I think it is. The medical debt is
a thing because see if he be made it a thing.
I don't think we have enough research on what is
or isn't on your credit report and why. But when
regulators start to pick those fights, yeah, you start to
get this jocking for what's on there. I think student
debt is another good example where there are legitimate quessions
(26:00):
of what ought to and not not be on there.
And some of it is about the predictive value, but
a lot of it is about putting debt on people's
credit reports that we know is inaccurate.
Speaker 2 (26:11):
It is true that every few years we see like
these efforts from private companies I guess, to try to
augment credit scores with new technology. So I remember very
clearly being at a startup's offices in San Francisco in
like I guess it would have been twenty fifteen or something,
and they were walking me through the data that they
could use to make short term loans. And one of
(26:35):
the things they were talking about was like just the
basic cursor movement on the screen, like how fast you
click the button to get money, whether or not you know,
if it's a sliding bar that goes from like one
thousand dollars to ten thousand dollars, Like whether or not
you hesitate to go to ten thousand and then go
back and then go back to ten thousand again. It
(26:56):
seemed very dystopian to me, And I'm curious what those
efforts are like right now given the new emphasis on
AI and maybe you know, even more data that is
now available to private companies to look at to try
to judge whether people are credit worthy or not.
Speaker 5 (27:14):
Yeah, if you listen to the earnings calls where CEOs
are talking to investors about their underwriting models for a
variety of different products, whether it's kind of traditional credit
cards or things like bnpl ai comes up a lot.
You know, everybody sort of wants to say that they've
got this proprietary am that's exactly it.
Speaker 2 (27:32):
Yeah, they were saying the same thing ten years ago. Yeah.
Speaker 5 (27:35):
Yeah, And I think there's a lot of things to
unpack there and to be concerned about so I think
we should You know, we know that AI models often
bake in racial biases, so we know that there's some
concern there about these models, you know. But I also
think to your point there, we're dragging in a lot
of extraneous data about people into the way we look
(27:58):
at their credit worthiness, some of which should be relevant,
some of which really should not. And what I think
is most important to think about there is that those
models are completely opaque, and company is often when they're
faced with regulatory scrutiny say kind of like the AI
did it right, as though the people at the companies
are not responsible for the outcomes of the technology. So
(28:21):
you know, under the Biden administration, the approach there had
really been to say you're responsible. It sounds so basic,
but the laws are the laws, whether it's about consumer
protection or about you know, basic discrimination among credit applicants,
the laws are the laws, and you're responsible for the
outcomes of those models. And I think that shift is
or that kind of approach is really really important here
(28:44):
to drive some accountability, because otherwise it does kind of
get out of hands.
Speaker 2 (28:49):
So I mentioned in the intro that the parallel that
I reach for when thinking about buy Now, Pay Later
is sort of private credit. So this idea that you know,
it's a more opaque market and people are worried about
its size, and they're worried about transparency and hidden leverage
and all of that. But on the other hand, you know,
it is an extra credit bigot that companies can tap
(29:14):
in times of emergency, and we certainly saw that over
the past five years or so. Net net. When you
look at buy now, Pay Later, would you say the
effects are good, more good or more bad? This is
a tough one.
Speaker 5 (29:27):
It is a really tough one because I don't I
said this earlier. I don't want to single out buy
Now Pay Later as the bad guy here. I think,
first of all, there are a lot of bad guys.
There are a lot of good guys too. But you know,
I think the thing to really focus on is, like
we're in what the Trump administration is describing as like
(29:50):
a relatively good economy, and we're sitting here talking about
like turning on this pigot for these kind of like
new and interesting types of debt to help people handle
really basic expenses. That seems like a problem we should
not be in an emergency situation and yet we are,
and so I'm concerned that that availability of these credit
(30:12):
products is obscuring, like the kind of growing emergency around
people's cost of living, which often you know in the
news is about their grocery prices, the eggs, their sneakers
for back to school, and those are really important, but
it's also their healthcare, the cost of college, being able
to retire. So families are feeling really squeezed, and you know,
(30:36):
to me, the most important thing there is like where
I think we're seeing the Trump administration sort of test
out this theory that they can keep the high level
metrics of whether the economy is on track, steady or
growing while letting somewhere around sixty percent of people have
these private financial crises. We're going to see that play
(30:56):
out over the next couple of years. And so that's
that's the way I think about these. It's not really
like is the individual one good, but it's like, do
you know what we're doing overall? And is anyone doing
the math? All right?
Speaker 2 (31:07):
Julian Morgan, thank you so much for coming on all
thoughts really appreciated.
Speaker 5 (31:11):
Thank you, thanks for having me.
Speaker 2 (31:26):
Joe. I'm glad we finally did that episode We've been
talking about doing one on BNPL for a while. BNPL.
It always reminds me of like it sounds like BNP
Paribo's like Italian subsidiary or something. But there are a
bunch of things to pick out there. I mean, number one,
it's clearly a nuanced issue, yeah right, and like clearly,
as you laid out in the intro, it can have
(31:47):
a smoothing effect. The second thing that always seems to
come up is this idea that like, well, it's not
that big now, right, Like it's not big enough to
have an effect right now. But as Julie mentioned, we
are seeing, you know, volumes slowly pick up, and I
guess slowly, not that slowly, Yeah, yeah, right, And I
(32:08):
guess like I kind of wonder what happens like as
more and more of this activity actually stretches into services
forus goods, like that seems to be quite a big shift.
Speaker 4 (32:19):
Well, I'd say, like, I think Julie's last point is
very relevant, which is like, you know, when we think
about household borrowing, and again probably you and I because
we're sort of children of or you know, grew up
during the financial crisis, you know, we sort of think
about like.
Speaker 2 (32:34):
We weren't children, No, we're children, But.
Speaker 4 (32:37):
You know what I'm saying, Yeah, you know, I think
you and I often think about credit from the effects
of defaults and so forth, and that could be an effect,
and that's not something to be dismissed. But the other
idea is like how much of like sort of like
aggregate economic conditions consumption is sort of debt financed and
in a way that we can't like fully measure, right,
(32:59):
because we comfort we can measure credit card dead and
so we have some sense of credit card dead is
the size of incomes or whatever, But if there's this
other rapidly growing source and it's pretty crucial for like
sort of keeping the headline figures of consumption or GDP,
you know, like my conclusion or like my sense it's like, yeah,
it's not that huge yet, but it's definitely not nothing,
(33:19):
and it's definitely not you know, it's bigger than.
Speaker 2 (33:21):
A rounding air, right, And it certainly says something to
Julia's point about like the state of the average American
consumer who probably is struggling to pay something like dental fees.
Speaker 4 (33:33):
Yeah, yeah, no, and like the fact in like, you know,
I think there's I thought it was interesting too that
like maybe both of us are least just me had
a certain.
Speaker 3 (33:41):
Maybe already outdated view of what BNPL is.
Speaker 2 (33:44):
Oh yeah, because like the idea of like I'm going
to polize that they have like actual apps, yees.
Speaker 4 (33:48):
So the idea that like, oh, I'm going to buy
a television that's a thousand dollars and make it like
four two hundred and fifty dollars purchases, like that sounds great.
Should I should be doing this? But if that's just
sort of like on business model, but that there's like
this growing business model that looks more like installment loans
where there is a formal interest rate, but it also
sort of looks like the same thing and you also
get a card, et cetera. But it's just like a
(34:09):
slightly different structure, and formerly it isn't called debt or
isn't categorized or is it reported as debt than then
I think obviously we need to continue to get a
better handle on you know.
Speaker 3 (34:19):
How big this is. Yeah.
Speaker 2 (34:20):
Absolutely, Also Klarna says it's a bank now, which is
kind of confusing.
Speaker 4 (34:25):
Yeah, it's like the hottest thing everyone wants everyone for
bank charters these days.
Speaker 2 (34:30):
Oh yeah, that would be interesting to look at because
we went after the financial crisis, speaking of two thousand
and eight, we went years and years in brand.
Speaker 4 (34:38):
Everyone, so every like every random brokerage or fine, we
got a bank charter. We acquired a company that has
a bank charter.
Speaker 2 (34:44):
Time is a flat circle show? Yeah, all right, shall
we leave it there.
Speaker 3 (34:47):
Let's leave it there.
Speaker 2 (34:48):
This has been another episode of the Odd Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (34:53):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 4 (34:55):
Follow our guest Julie Morgan, She's at Jay Margetta, follow
our producers and Rodriguez at Carmen armand Dashel Bennett at
dashbod and Kale Brooks and Kale Brooks. For more Odd
Lots content, go to Bloomberg dot com slash odd Lots.
We have a daily newsletter and all of our episodes,
and you can chat about all of these topics twenty
four to seven in our discord Discord dot gg slash odlocks.
Speaker 2 (35:17):
And if you enjoy odd Lots, if you like it
when we talk about the state of consumer debt, then
please leave us a positive review on your favorite podcast platform,
and remember, if you are a Bloomberg subscriber, you can
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Apple Podcast and follow the instructions there. Thanks for listening,
(36:01):
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