What's Behind the Boom in Buy Now Pay Later

Summary

Odd Lots — What's Behind the Boom in Buy Now, Pay Later

Original Air Date: September 4, 2025
Hosts: Tracy Alloway, Joe Weisenthal
Guest: Julie Morgan (President, The Century Foundation; former CFPB official)

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Episode Overview

This episode delves into the explosive rise of Buy Now, Pay Later (BNPL) services such as Klarna and Affirm. The hosts and guest, drawing on deep regulatory and consumer insights, explore how BNPL has transformed from a pandemic-era shopping option to a major force in personal finance—affecting credit, regulation, and even public policy. They untangle the models behind BNPL, its impact on consumer behavior, and the growing policy debate about its risks and future.

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Key Discussion Points and Insights

1. The Surprising Ubiquity and Allure of BNPL

• Tracy Alloway opens with a confession about her online shopping habits, noting the sudden omnipresence of BNPL options at checkout ([01:24]).
• Joe Weisenthal expresses bewilderment at why consumers wouldn't always want to spread out payments with no interest ([02:08]).
• Tracy shares a pop-culture comparison: "You know how Rebel Wilson described it in a firm commercial? Like eating a tub of ice cream but spreading out the calories over four weeks." ([03:10])

Notable Quote

Tracy Alloway [03:16]: “It’s still 600 calories. Right. That’s the issue.”

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2. What Actually Is “Buy Now, Pay Later”?: Shifting Business Models

• Julie Morgan explains that the original idea—zero interest, four-part payments—is now a small minority of transactions ([05:56]).
  • For companies like Affirm, only 20% of business is true “pay-in-four”; most activity is now point-of-sale loans or installment loans, often with interest rates from 10–30% ([06:45]).
• The industry’s framing of BNPL as benign, non-loan products soothed both regulators and the public, but the reality is now much closer to traditional consumer lending ([07:56]).

Notable Quote

Julie Morgan [07:56]: “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.”

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3. Data Blindspots: Tracking, Reporting, and Consumer Debt

• Official BNPL data is patchy; the CFPB can order transaction-level disclosures, but there is no regular reporting stream ([08:42]).
• FICO has announced plans to incorporate BNPL into credit scoring, but BNPL firms are resisting, concerned about consumer impacts and how data will be used ([10:17]).
• Most research relies on company reports or consumer surveys, sometimes blurring distinctions between true installment loans and “pay-in-four” plans.

Notable Quote

Julie Morgan [09:46]: “What we have right now is kind of snapshots in time... It really inhibits our ability to get at: Are you using pay-in-four? Are you paying interest and all those things?”

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4. Who Uses BNPL — and What For?

• Contrary to early stereotypes (financing luxury goods or clothing), BNPL usage has rapidly shifted to cover essentials like groceries, education, and medical costs ([12:21]).
• Between 14-25% of users now use BNPL for groceries; its use for medical and dental costs has overtaken spending on luxury or entertainment items ([12:21]).

Notable Quote

Julie Morgan [12:21]: “We saw that wasn’t true... People were using Buy Now Pay Later for things like groceries and education costs.”

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5. Social & Economic Risks: Is BNPL a Problem?

• The podcast tackles whether upticks in BNPL for essentials signal trouble, or just new flexibility in payment tools ([15:09]).
• Julie Morgan warns of a “silent financial crisis” for many American families—BNPL products conceal growing personal financial distress, especially as safety nets recede and basic expenses increase ([15:40]).
• Regulatory enforcement has lagged, with recent administrations deprioritizing BNPL oversight ([18:56]).

Notable Quotes

Julie Morgan [15:40]: “It’s relevant to the kind of like what I think of as like a silent financial crisis that’s happening for the vast majority of families in the United States.”

Julie Morgan [19:17]: “CFPB’s initial approach on regulation here was to really just say...you’ve got to follow some of the fundamental basics that apply to the product you are. Right. And so that was really meant to help people with some of the real kind of basic consumer protections...”

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6. The Business Case: Why Retailers Love BNPL

• For retailers, BNPL increases average basket sizes (value per purchase) by roughly 10%, and up to 80% more transaction volume, justifying higher fees than credit cards ([21:33]).
• Retailers also value the consumer data BNPL companies gather, using it to drive further sales—raising additional privacy and transparency questions ([22:40]).

Notable Quote

Julie Morgan [22:40]: “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.”

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7. Hidden Consumer Costs and Complicated Choices

• The multiplicity of BNPL products, providers, and terms makes it hard—even for researchers—to compare costs to traditional credit card debt or judge the total cost to consumers ([23:41]).

Notable Quote

Julie Morgan [24:06]: “It’s difficult for us to understand from a research perspective. It’s even more difficult for a consumer...”

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8. The Opaque World of Credit Scores & Machine Learning

• FICO’s inclusion of BNPL remains contentious; BNPL firms claim to want safeguards against unfair penalization, but may also seek to avoid negative scoring ([24:59]–[26:17]).
• Julie warns that both medical and student debts on credit reports can be inaccurate or non-predictive, mainly serving as leverage for debt collectors ([27:06]).
• The rise of AI-powered credit underwriting brings potential for both innovation and for embedded bias and lack of transparency ([29:51]).

Notable Quote

Julie Morgan [30:12]: “What I think is most important...those models are completely opaque. And companies often, when they’re faced with regulatory scrutiny, say, kind of like the AI did it. Right. As though the people at the companies are not responsible...”

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9. Macro Outlook: BNPL and the Hidden Safety Net

• The episode closes with reflection about the role of BNPL and other new credit tools in obscuring the true cost-of-living crisis, especially as official metrics (GDP, unemployment) look favorable ([32:04]).
• Morgan emphasizes we must not focus solely on individual products, but ask whether letting consumer debt fill policy gaps is really wise ([32:04]).

Notable Quote

Julie Morgan [32:04]: “We’re sitting here talking about, like, turning on the spigot for these kind of like new and interesting types of debt to help people handle really basic expenses. That seems like a problem. We should not be in an emergency situation. And yet we are.”

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Important Timestamps

• 01:26 — Tracy’s admission of compulsive online shopping and the rise of BNPL offers
• 02:08–03:20 — Joe and Tracy break down the core BNPL model (“O% interest, but...”) and compare to “spreading out the calories”
• 05:56–07:45 — Julie explains how BNPL’s model and use have evolved, debunking early narratives
• 09:46–10:17 — The lack of good data about who borrows, for what—credit reporting and FICO controversy
• 12:21 — Real use-cases: groceries and medical costs now topping BNPL spending categories
• 15:40 — Julie reframes BNPL as a symptom (not a cause) of household financial stress
• 21:33–22:40 — Retailers’ motivations: Increased basket size, data, and targeted sales
• 24:59–27:49 — BNPL’s thorny impact on credit scores and the inclusion/exclusion battles (“junk data” and coercion in medical debt)
• 29:51–31:26 — Concerns about AI-powered credit scoring, bias, and accountability
• 32:04 — The big-picture danger: Consumer credit as a substitute for sound social policy

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Tone and Memorable Moments

• The conversation is candid and witty—Tracy’s “ice cream” metaphor ([03:16]), Joe’s persistent questions about why everyone doesn’t use BNPL ([02:08]), and playful banter about their own shopping habits and personal finance.
• Tracy muses: “BNPL—it always reminds me of, like, it sounds like BNP Paribas’ Italian subsidiary or something.” ([34:03])
• Joe on changing perceptions: “If there’s this other rapidly growing source, and it’s pretty crucial for keeping headline figures of consumption or GDP, my sense is like, yeah, it’s not that huge yet, but it’s definitely not nothing.” ([35:56])

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Conclusion

The Odd Lots episode brings nuance—and some warning bells—to the BNPL boom. While initially billed as a simple, handy payment tool, BNPL has ballooned into a complex, sometimes risky segment of the debt market. The lack of transparent data, shifting business models, and regulatory blindspots raise questions, especially as more Americans now use these tools to cover essentials amid sluggish wage growth and receding social protections. The big takeaways: BNPL is no longer just for “treating yourself” and is now central to millions’ financial lives—and, crucially, to the way consumer debt interfaces with policy and economic measurement.

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For a deeper dive:

• Full transcript and further discussion at Bloomberg Odd Lots
• Join the ongoing conversation in their Discord: Discord.gg/oddlots

Transcript

[Lisa Mateo]

Hi, I'm Lisa Mateo, introducing you to the new Stock Movers report from Bloomberg. These are short audio reports, five minutes or less, delivered right to your podcast feed. Throughout the day, Stock Movers fills you in on the day's winners and losers on Wall street and tells you about the news and data that's driving those gains and losses. If you want to stay plugged into the stock market but don't want to spend all day watching tickers scroll across your screen, then Stock Movers is a place for to get informed. Listen a couple times throughout the day to find out what's moving equities and why. Search for Stock Movers on Apple podcasts, Spotify, or anywhere else you listen. Get the latest stock news and data backed by reporting from Bloomberg's 3,000 journalists and analysts across the globe. Subscribe to Stock Movers wherever you get your podcasts.

[Julie Morgan]

Bloomberg Audio Studios Podcasts Radio news.

[Tracy Alloway]

Hello, and welcome to another episode of the Oddlaws podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

Joe, I have a confession to make.

[Joe Weisenthal]

Yeah?

[Tracy Alloway]

I do a lot of online shopping. Like, a lot, really. More than is healthy, probably more than.

[Joe Weisenthal]

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. But I still do it.

[Tracy Alloway]

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

[Joe Weisenthal]

I can guess.

[Tracy Alloway]

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

[Joe Weisenthal]

So, like, I've certainly seen all these buttons. I've never used it. I don't really know why I haven't because, like, why shouldn't I spread out? Why shouldn't I? Like, for real? My understanding is that the core of the business model works is that there's no, like, formal interest, right? So if you make a $100 purchase, you get to spread it out, say, in four payments of $25. And so whether it's $100 right now or $100 in four months, it's the same from the end buyer. Which, of course, in theory, because there's a time value of money, is not intuitive. But the idea is that the retailer implicitly pays the interest because it's a form of customer acquisition. And so the retailer is explicitly willing to take $100 or maybe whatever over X period of time rather than all at once in exchange for essentially making it easier for customers to buy. But from the customer perspective, like you and 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?

[Tracy Alloway]

You know how Rebel Wilson described it in a firm commercial?

[Joe Weisenthal]

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

[Tracy Alloway]

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

[Joe Weisenthal]

Exactly. Why don't we.

[Tracy Alloway]

It's still 600 calories. Right. That's the issue. But I think. Okay, so this is obviously a nuanced subject.

[Joe Weisenthal]

Yes.

[Tracy Alloway]

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

[Joe Weisenthal]

Then the penalties are building up.

[Julie Morgan]

Right.

[Tracy Alloway]

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.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

And that is growing, Right. I think that is the key.

[Joe Weisenthal]

So here's how I see the issue, which is that if I could have a tub of ice cream and spread out the calories over four months, I would certainly do that. That sounds pretty great because I burn a certain number of calories in a day. And so if I had four months to burn, burn them, 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 the question of like, okay, maybe there's not a formal interest or maybe there's penalties, but I'm buying a lot more with today's buying power. And that may still yet prove to be unsustainable to the end consumer, even if it doesn't formally clock as what we measure as consumer debt.

[Tracy Alloway]

Here's the added layer. Say you're trying to lose weight or trying to be healthy and you have like a dietitian, imagine eating the ice cream, but him never knowing that you're eating the ice cream. Right. Like, this is.

[Joe Weisenthal]

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

[Tracy Alloway]

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

[Joe Weisenthal]

How much, Zindy? Well, you know, like once a week I like go through a 3 milligram thing. I did actually quit, and I'm saying that.

[Tracy Alloway]

But you told me this this morning. You said you were not going to have any more Zins for the rest of my life. And I think I would take the opposite side of that bet. But now you've committed in public, so we'll see how it goes. Okay. Rather than us talk about this, we do in fact have the perfect guest. We're going to be speaking with Julie Morgan. She is a president of the Century foundation, formerly at the Consumer Financial Protection Bureau, the cfpb, where she thought a lot about the Buy now, pay later phenomenon. So we're going to get some of her thoughts right now. Julie, welcome to the show.

[Julie Morgan]

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

[Tracy Alloway]

So how did this happen? Like, how did this business model actually come about? Because it, 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.

[Julie Morgan]

I'm really excited to answer this question for a number of reasons, including the way that you all introduced this because you spent a lot of time talking about Buy now pay leader as this pay in for zero interest, maybe like no fee or low fee model. And we did see that model arise during the pandemic and become a salient part of the way consumers were paying for goods during the pandemic. And so if I could take you back to kind of those early years at the CFPB where we're coming out of the pandemic, we're seeing this rise in Buy Now, Pay Later. You know, regulators and researchers started to investigate this to understand what it meant for consumers and what the risks were. And I think there were kind of two fundamental assumptions about Buy Now, Pay later at that time. One was just what we said, it's a pay in for no interest, low or no fee model. And then two people were using this in kind of the, like, what I think of as a stereotypical Gen Z kind of way. They were using it to finance a purchase that was slightly larger or more extravagant than what they would have bought. And it was usually on something like a purse or an item of clothing. What we found over time is that both of those assumptions turned out to be wrong. Right. So number one, what we're Seeing right now as Buy Now Pay later. And calling Buy Now Pay later is not in fact always that pay in for no interest product. And in fact, many of the companies that we associate with Buy Now Pay later, like Affirm or Klarna are mostly not offering that product. So Affirm says that product is only 20% of their business. The rest of their business is what I would think of as like a like point of sale loans or short term installment loans with interest rates ranging from, you know, 10 to 30% and terms that range from 30 days to 6 or 18 months.

[Joe Weisenthal]

So it's Buy now, pay later, but it's more like just a formal loan. Yeah, I mean it's payment and installment and there's a schedule, but also there is a nominal interest rate that's visible to the consumer.

[Julie Morgan]

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

[Joe Weisenthal]

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

[Julie Morgan]

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

[Joe Weisenthal]

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

[Julie Morgan]

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 binance Pay later space. But it's really not enough. And, and then we have survey data. And that's where you see LendingTree and Axios and others asking consumers. And I think it's important to understand that there you're just kind of getting what the consumer thinks they have. And it's. It really inhibits our ability to get at Are you using payin for, Are you paying interest and all those things.

[Tracy Alloway]

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

[Julie Morgan]

Yeah. So we don't know this information right now. FICO announced recently that they plan to start using Buy Now Pay later as part of their scoring model. And we've seen the companies be extraordinarily resistant to that. So Klarna and others are saying that they're not going to turn over data until they get certain assurances from FICO about how that data is going to be used. So what we have right now is kind of snapshots in time to understand how people are stacking Buy Now Pay later on top of credit card debt and on top of other products. And the research that we have there, which is somewhat limited, does suggest that people are stacking this. You know, it tells us that about 60% of the people who are using Buy Now Pay later have a subprime credit score. It tells us that they are mostly using it on top of credit card debt. And it's also suggesting that before people take on Buy Now Pay later, there's a slight uptick in their use of their credit card. So there's a suggestion that it's really like you're maxing out one form of debt and then taking on another.

[Joe Weisenthal]

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

[Julie Morgan]

We have numbers that are reported by the companies. We don't have data that is reported by a government source like that. I think that the best we have is that the transaction volume is around 116 billion and that's up from about 13.8 billion in 2020. So this is growing pretty rapidly.

[Joe Weisenthal]

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

[Julie Morgan]

That's right.

[Tracy Alloway]

Okay, 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?

[Julie Morgan]

We are seeing an uptick in people's use of Vineopilator and we're seeing shifting patterns of what they're using it to purchase. So I think I said earlier that there was this assumption that people were using this to purchase clothing or other kind of luxury goods. And you know, Even back in 2022 when the CFPB put out its first report here, we saw that that wasn't true. People were using Buy Now Pay later for things like groceries and education costs. The surveys that have come out recently showed that that's growing. So there was, I think an Axios survey and a LendingTree survey. They showed somewhere between 14 and 25% of buy now Pay later users are using it to purchase groceries. They're showing that a bigger percentage of people are using Buy Now Pay later for medical and dental costs than for the things people might assume. Stereotypically, it's used for like dining out or ordering in or even like purchasing concert tickets. Things like that. This message is brought to you by nuveen. How would you invest if you knew the future was watching at Nuveen? This isn't a theoretical question. It's a perspective that comes from navigating 125 years of market cycles, using foresight to innovate and adapt to the changing needs of investors around the world and remaining steadfast in the pursuit of lasting performance for clients, communities and the global economy. Nuveen Invest like the Future is watching. Visit Nuveen.com future to learn more. Investing involves risk. Principal loss is possible.

[Lisa Mateo]

Hi, I'm Lisa Mateo, introducing you to the new Stock Movers Report from Bloomberg. These are short audio reports, five minutes or less, delivered right to your podcast feed. Throughout the day, Stock Movers fills you in on the day's winners and losers on Wall street and tells you about the news and data that's driving those gains and losses. If you want to stay plugged into the stock market but don't want to spend all day watching tickers scroll across your screen, then Stock Movers is a place for you to get informed. Listen a couple times throughout the day to find out what's moving equities and why. Search for Stock Movers on Apple podcasts, Spotify, or anywhere else you listen. Get the latest stock news and data backed by reporting from Bloomberg's 3,000 journalists and analysts across the globe. Subscribe to Stock Movers wherever you get your podcasts.

[Joe Weisenthal]

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

[Julie Morgan]

I think it's bad that we're seeing an uptick in the use of credit products to pay for essentials. That's not to say that buy now, pay later is particularly the enemy there. But, you know, this is part of the reason I've been interested in consumer credit overall is that, you know, we see these broader changes go on in the policy space. In particular, recently, we've seen Donald Trump and Republicans in Congress push through a bill that cuts Medicaid cuts food assistance, you know, makes education more expensive, and the availability of consumer credit products that are kind of waiting in the wings there blunts our ability to really understand what those changes mean. So, you know, we know that the Medicaid cuts will result in people having more expensive 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 CareCredit. And so it's relevant to our overall economic situation. It's relevant to the kind of like what I think of as like a silent financial crisis that's happening for the vast majority of families in the United States. But. 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 are kind of sitting around the kitchen table talking about Klarna and Affirm and Sallie Mae and Navient.

[Tracy Alloway]

When you were at the cfpb, how are you thinking about Buy Now, Pay later from a sort of regulatory perspective?

[Julie Morgan]

Yeah, so we were looking at the risks of the products, and then we were kind of trying to look. You know, we've had this phenomenon with consumer credit products across the board, not just specific to Buy Now, Pay later, but it was really evident at CFPB that you have these sort of like new entrants into a market whose products are framed very differently than a traditional consumer credit product. And it's often part of the marketing pitch. It's like, we're not alone, we're not equity. We're this totally different thing. It preys on consumers hesitance to use debt. And then also, you know, this idea that we might float above any regulatory scheme. So for Buy Now, Pay later and for these other products like earned wage access or income share agreements, you know, we were looking at like, what is this under the law? And with Buy Now, Pay later, particularly the products like where Klarna or a firm is offering basically like eight digital or physical card where you can make repeated purchases, where you have a. Certainly sounds like a credit card. Starts to sound like a credit card. Right. And so, you know, CFPB's initial approach on regulation here was to really just say, like, you've got to follow some of the fundamental basics that apply to the product that you are. Right. And so that was really meant to help people with some of the real kind of basic consumer protections around managing disputes and getting accurate billing statements. The other thing CFPB was doing was on the enforcement and supervision side. So really taking a look at these companies the same way we do any other financial institution and making sure they're following the law. And I think it's important to talk about that piece because we've seen the Trump administration pull back on the proposed regulations, but we've also seen them pull back on enforcement. They specifically said they would deprioritize Buy Now, Pay later in enforcement. And so there are these other real basics that we're seeing fall apart. You know, if you look at what consumers are complaining about right now, they're saying, I had autopay on my, you know, my Klarna or my afterpay, and I tried to take it off and the company continues to charge me. These are like really basic questions of whether the companies are following consumer financial laws. And, you know, CFPB is just off the job.

[Joe Weisenthal]

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

[Julie Morgan]

Yeah, I think we need to take a deeper look at credit utilization because I do think there are people who are flipping over and they're using their available credit balance and then they're shifting to Buy Now, Pay Later. But I think there are a lot of other people who are just trying to juggle their essentials, you know, their groceries and their kids back to school clothes, and they're doing it through whatever feels like the most convenient payment method. So the Buy Now, Pay later companies have made a real effort at being that convenient payment method, both through kind of point of sale, but also through their apps. So they're pushing their users towards an app that both makes it more convenient to make the payment but also pushes you advertisements for different products. And so I think we see people brought in there. But you mentioned earlier why you don't use Buy 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 later where if you talk to consultants who look at this really closely, they're seeing people like you or I who can. I'm making an assumption about your finances.

[Joe Weisenthal]

I get paid well.

[Julie Morgan]

Yeah. Okay, cool. 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 up front. So there are people using it in that way too.

[Joe Weisenthal]

Interesting.

[Tracy Alloway]

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

[Julie Morgan]

Yeah. So the pitch is basically basket sizes and then overall transaction volume. Right. So they're showing that they're getting the retailers about 10% more in terms of the basket size. So the amount of things that people are purchasing and then some of the companies are reporting up to 80% more in terms of the actual transaction. So that's pretty significant for retailers. And I think it is what is propelling retailers to cut deals with Klarna or afterpay and to pay the costs, which are higher than interchange on a credit card. So in many cases, you know, we're looking at costs that are somewhere between 1 to 8% of the transaction, plus, like a flat fee that might be like 30 cents per transaction. So it's pretty significant. I think the other part of the pitch is, and this is, this is one of the pieces that was really kind of consuming a lot of our attention at cfpb is the ability to use people's data to drive those purchases. So I think if you're a merchant looking at those big fees, if you're Walmart or Amazon or whoever, you're not just saying, like, let me put this in Klarna or a firm's hands to hope that people use it more, but let me use the data I have on hand to try to drive more purchases. And like a company that has a lot of information about what I like to buy and a lot of information about how much money I have to do it has, like, a pretty potent set of data to help drive those purchases. So I think that's part of the appeal for merchants as well.

[Joe Weisenthal]

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

[Julie Morgan]

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

[Joe Weisenthal]

Sure.

[Julie Morgan]

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

[Tracy Alloway]

Just going back to the data aspect of this for a second, you said that some of the platforms are reluctant to report to FICO and are asking for certain assurances. What exactly do they want here?

[Julie Morgan]

I mean, I've looked into this question. They haven't been super clear, I think, about what they want. They've sort of made some general statements that they want to make sure that, you know, reporting this data won't be used negatively to affect people. I mean, this is really just my speculation, but what I think is really interesting about this is the companies are playing on this kind of broader skepticism about credit reporting and FICO overall. Because I think, you know, people's experience and certainly what we saw in the research at CFPB is that, you know, credit reporting has predominantly been used to ding people and to coerce them into making payments they might not want to make. So, like, medical debt is a great example of that. CFPB's research showed it really had no value for the fundamental purpose of credit reporting, which is evaluating people's ability to repay. And it was mostly being used to coerce. So when Klarna says, you know, we want to make sure this isn't used to ding people, that feels very noble. But I think at the end of the day, we should be kind of skeptical of why we don't want to report.

[Joe Weisenthal]

So explain this further about medical debt and when you say it has no value, but also it's being used to course, what are the conditions with medical debt in fico?

[Julie Morgan]

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 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.

[Joe Weisenthal]

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

[Julie Morgan]

Right.

[Joe Weisenthal]

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

[Julie Morgan]

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.

[Joe Weisenthal]

This is going to hurt your credit.

[Julie Morgan]

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

[Joe Weisenthal]

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

[Julie Morgan]

I mean, I think it is the medical debt is a thing because CFPB made it a thing. I don't think we have enough research on what is or isn't on your credit report and why. But when regulators start to pick those fights, you start to get this jockeying for what's on there. I think student debt is another good example where there are legitimate questions of what ought to and not be on there. And some of it is about the predictive value, but a lot of it is about putting debt on people's credit reports that we know is inaccurate.

[Tracy Alloway]

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

[Julie Morgan]

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 AI model.

[Tracy Alloway]

That's exactly it. Yeah, they were saying the same thing 10 years ago.

[Julie Morgan]

Yeah. 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 at their creditworthiness, some of which should be relevant, some of which really should not. And what I think is most important to think about there is that those models are completely opaque. And companies often, when they're faced with regulatory scrutiny, say, kind of like the AI did it. Right. As though the people at the companies are not responsible for the outcomes of the technology. So, 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 basic discrimination among credit applicants, the laws are the laws, and you're responsible for the outcomes of those models. And I think that shift is. Or that kind of approach is really, really important here to drive some accountability, because otherwise it does kind of get out of hand.

[Tracy Alloway]

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

[Julie Morgan]

It is a really tough one because I don't, I said this earlier, I, 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 are in what the Trump administration is describing as, like a relatively good economy, and we're sitting here talking about, like, turning on the spigot for these kind of like new and interesting types of debt to help people handle really basic expenses. That seems like a problem. We should not be in an emergency situation. And yet we are. And so I'm concerned that that availability of these credit products is obscuring like the kind of growing emergency around people's cost of living, which often, you know, in the news is about their grocery prices, the eggs, their sneakers for back to school, and those are really important. But it's also their health care, the cost of college, being able to retire. So families are feeling really squeezed. And, you know, to me, the most important thing there is, like, we are, I think we're seeing the Trump administration sort of test out the theory that they can keep the high level metrics of whether the economy is on track, steady or growing while letting somewhere around 60% of people have these private financial crises. We're going to see that play out over the next couple of years. And that's, that's the way I think about these credit products. It's not really like, is the individual one good? But it's like, do we know what we're doing overall? And is anyone doing the math?

[Tracy Alloway]

All right, Julie Morgan, thank you so much for coming on Opal. It's really appreciate it.

[Julie Morgan]

Thank you. Thanks for having me.

[Tracy Alloway]

Joe. I'm glad we finally did that episode. We've been talking about doing one on BNPL for a while. Bnpl, it always reminds me of, like, it sounds like BMP Paribas, like Italian subsidiary or something. But there are a bunch of things to pick out there. I mean, not number one. It's clearly a nuanced issue. Right. And like, clearly, as you laid out in the intro, it can have a smoothing effect.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

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.

[Joe Weisenthal]

Probably not.

[Tracy Alloway]

But as Julie mentioned, we are seeing, you know, volumes slowly pick up and.

[Joe Weisenthal]

I guess not that slowly.

[Tracy Alloway]

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

[Joe Weisenthal]

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

[Tracy Alloway]

We weren't children.

[Joe Weisenthal]

No, we were children, but you know what I'm saying. You know, I think you and I often think about credit from the effects of defaults and so forth. And that could be an effect. And that's not something to be dismissed. But the other idea is, like, how much of, like, sort of like aggregate economic conditions, consumption is sort of debt financed and in a way that we can't like, fully measure. Right. Because we comfortably can measure credit card debt. And so we have some sense of. Credit card debt is the size of incomes or whatever. But if there's this other rapidly growing source, and it's pretty crucial for sort of keeping the headline figures of consumption or gdp, my conclusion, or my sense is like, yeah, it's not that huge yet, but it's definitely not nothing. And it's definitely not. It's bigger than a rounding error.

[Tracy Alloway]

Right. And it certainly says something to Julia's point about the state of the average American consumer who might probably is struggling to pay something like dental fees.

[Joe Weisenthal]

Yeah, yeah. No, and like, the fact. And like, you know, I think there's. I thought it was interesting too that, like, maybe both of us, or at least as me, had this certain maybe already outdated view of what BNPL is. Oh, yeah, because like, the idea of.

[Tracy Alloway]

Like, oh, I'm gonna buy that. They had like actual apps.

[Joe Weisenthal]

Yeah. So the idea that, like, oh, I'm gonna buy a television that's $1,000 and make it like for $250 purchases, like, that sounds great, I should be doing this. But if that's just sort of like one business model, but that there's like this growing business model that looks more like installment loans where there is a formal interest rate, but it also sort of looks like the same thing, and you also get a card, et cetera, but it's just like a slightly different structure. And formally it isn't called debt or isn't categorized or isn't reported as debt then, then I think obviously we need to continue to get a better handle on, you know, how big this is.

[Tracy Alloway]

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

[Joe Weisenthal]

Oh really? Yeah, it's like the hottest thing everyone wants. Everyone's always filing for bank charters these days.

[Tracy Alloway]

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

[Joe Weisenthal]

Now everyone. So every, like every random brokerage or fintech. Oh, we got a bank charter. We acquired a company that has a bank charter.

[Tracy Alloway]

Time is a flat circle, Joe.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

All right, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway.

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our guest Julie Morgan. She's Margetta. Follow our producers Carmen Rodriguez, Armenurman, Dashiell Bennett at dashbot and Cale Brooks at Cale Brooks. For more Odd Lots content go to bloomberg.com oddlots we have a daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord, GG Oddlauts.

[Tracy Alloway]

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

[Joe Weisenthal]

Sam.