Rise of 'phantom debt': The risks of buy now, pay later programs

Buy now, Pay later Company a firm reporting a surge in transaction volume in the third quarter. That’s up 36% from a year ago. Our next guest says credit racked up through buy now, pay later programs is hard to measure and this, quote phantom debt could eventually create trouble in the broader economy. Join us right now is senior economist and managing Director at Wells Fargo, Tim Quinlan, good morning to you. You call it phantom debt, you say it’s not really calculated in the total numbers. Tell us sort of how it is calculated and how worried we should or should not be. Yeah, it’s it’s scary and you can’t see it. What else? What else do you call it? And it’s tricky to kind of corral the the data around it. A Federal Reserve paper lamented this and a long footnote saying how difficult it was to accumulate the data because firms understandably want to kind of protect the proprietary value of what they’ve got. So when the Consumer Financial Protection Bureau a few years ago kind of compelled a bunch of the providers to disclose data, we were able to use that as kind of a starting point and then holding one of the firm’s constant that does disclose this data back into some really rough estimates. But you know the bottom line here is we, we need, we need beg you a better environment around this to understand what it is we’re dealing with. So from your estimate slash guesstimate, what are we dealing with and what percentage of the credit market is this buy now, pay later business? Yeah, So it’s kind of a tricky thing to think about, right, because they usually paid off in 4 or 6 equal payments. So the people in the space tend to think about it in the context of transaction volume rather than a traditional credit analysis that might look at it in the context of balances for example. So what you can kind of do is look at the transaction volume in a given year and compare that to the growth in, say revolving credit or consumer credit card debt. And if you do it by that measure, you know your kind of average growth rate for consumer credit card debt is round numbers, you know 125 a $150 billion a year. Our back of the envelope estimates put the BNPL market at somewhere in the neighborhood of 50 billion. So you’re talking comfortably 1/3 of the transaction increase in credit card volume if if that’s that’s actually what it is, that’s a really big piece of, you know, kind of this shadow credit market or phantom debt. So but who’s on the policy makers and if something goes badly wrong, it varies by the provider. In the bag, yeah, Yeah, in the in the, in the early days of it, it was the the, the buy now pay later firm, whoever that happened to be. And the way they’re structuring a lot of these deals now, they’re they’re shifting a little bit of that. Sometimes the merchant shares a piece of it, but that’s problematic for, you know, one of the, the merits or the good things about this is that it helps people who are unbanked or don’t otherwise have access to credit and that that’s wonderful if you can take a large payment and break it up into small payments, who would get on the other side of that? But you know as they worry about who’s in the hook and these late fees and stuff can add up of the buy now, pay later companies that are out there, is there one or two that you think actually operate more carefully than another? Is there one that you think is more dangerous? You know, I don’t, I don’t hold any comparative value assessments of these firms, but but a firm is one of the providers that does disclose their transaction volume on a regular basis. And so that’s what we were able to do is say what share did they comprise as a total in 2021 when the CFPB kind of ordered this disclosure. And then if you kind of hold them constant and solve for X, that’s why I say it’s not very scientific, but it’s, it’s, it’s at least putting some guardrails and giving us a rough estimate of what we’re dealing with. OK. Final question. If somebody from the CFPB or the SEC or the Treasury Department is watching us now, you would be telling them what from a regulatory perspective about this? Yeah. I would say, you know there’s there’s an incentive for the the people who this is serving, right, for the consumers, the C and CFPB as consumers, right from their perspective, you don’t want them tied into a situation where a litany of small payments kind of traps them into a one really big problem. But also, you know, what about, what about policy makers in Washington? What about the Federal Reserve? What about economists who are trying to look at the the outstanding debt and make some context around where we are? It’d be useful to have. The more data the better.