Holding a mirror up to the American debt machine, with Elena Botella
“Fairness in pricing often starts with the idea of competition - if there's healthy competition, that will bring the price down. But, in the United States, if you look from the 1990s to the 2020s, credit card profits have steadily risen, and real interest rates have steadily risen and at the same time, default rates have fallen and it's just less expensive, in some ways to run a credit card company than it used to be - so I think that's the first clue that the pricing isn't fair”.
In this episode of HTLMTS, I speak to Elena Botella, a fellow CapitalOne alum who, when she realised how incentives in the modern could become misaligned in the modern lending model, decided to do something about it, something rather inspiring to a wandering soul like me - she took herself on a road trip around America to hear the human story of consumer debt.
“In the credit card industry, you see the transaction, you see what some this credit enables, but you don't always see the harm side of it... I heard from consumers who had followed a similar pattern, and came to feel that credit cards had done them more harm than good”.
Delinquent: Inside the American Debt Machine launched this week (11 October 2022) and is now widely available in all bookstores, but the folks over at https://bookshop.org/books/delinquent-inside-america-s-debt-machine/9780520380356 probably appreciate your business more than the bigger names we might gravitate to first (I’m not pointing fingers, I have my own Amazon links down below 😅)
You can find more of Elena’s writing at http://elenabotella.com/about or on Twitter as @elenabotella. While Elena’s work at Omidyar Network starts here: https://omidyar.com/omidyar_team/elena-botella/
The research of mine that looked ta price sensitivity is getting old now, but is over here https://www.linkedin.com/pulse/increased-price-transparency-shake-up-hong-kong-loan-market-brendan/
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
And if you’re in need of more banking podcasts, you can find related content at https://blog.feedspot.com/banking_podcasts/
Regards,
Brendan
The full written transcript, with timestamps, is below:
Elena Botella 0:00
Competition is not working, right. Fairness in pricing often starts with the idea of competition - if there's a healthy competition, that will bring the price down.
But, in the United States, if you look from the 1990s to the 2020s, credit card profits have steadily risen, and real interest rates have certainly risen (on average from about 8% to about 12%, so 50% increase), and at the same time, default rates have actually fallen.
So it's not that banks are lending to riskier customers, they're not, prices are rising, while every cost is falling. Loan losses are falling because of better underwriting. Of course, it's just less expensive, in some ways to run a credit card company than it used to be, right. Like we have AWS they have all these innovations. So I think that's the first clue that the pricing isn't fair.
Brendan Le Grange 1:04
"But your scientists were so preoccupied with whether or not they could, they didn't stop to think if they should". It's a quote from Jurassic Park, but in many ways could equally be from Elena Botella's incredibly important new book Delinquent: Inside the American Debt Machine.
Welcome to How to Lend Money to Strangers with Brendan le Grange.
Elena Botella, principal at Omidyar Network and author of Delinquent, which is available now from the University of California Press, bookshop.org and wherever good books are sold, welcome to How to Lend Money to Strangers.
I always start my interviews by asking my guests to describe their backgrounds, key roles that have shaped them into the person they are today. And usually, it's to warm up the conversation and get us used to each other. However, with you, your background is really a key part of the story you're telling.
In Delinquent, you tell the story about this debt machine, but you're not telling it as an outsider, you've worked in consumer credit, you've really seen how this is all put together. And I think what your book captures really well is that understanding of the very honest intentions, in some cases, that have maybe just gone awry through unintended consequences.
So before we do talk about the book, and what you've seen gone wrong with consumer lending, could you talk about your experience as an insider, and what that taught you about how lenders are thinking in the modern lending business?
Elena Botella 2:54
Yes, thank you, Brendan, it's so great to be here.
And I think my story probably starts pretty similarly to that of many of your listeners; I started in pretty traditional credit and underwriting roles. My first job out of college was with a large retail bank in the United States called CapitalOne. And so for non-US listeners, it has retail banking as well, but it has a very large credit card business in a very large auto lending business in the United States. And it's sort of well known for being the largest subprime credit card issuer.
So that was kind of my first set of experiences doing a little bit on the small business lending. But primarily in the consumer side, sort of successively, bigger scopes was lucky to do a lot of different roles at CapitalOne. My biggest stretch of time was leading credit line increases for our revolver customers. So we have credit card customers, they've been on our books for, let's say, six months or more, and the decision whether or not to extend them more credit. And here, we're talking about people who typically are already in debt, so not the folks who are using their credit cards and paying them in full every month.
It was a really interesting roll. I think the credit is such a fascinating space, right? And, to me, credit line increases were an especially fascinating space, because it's a place where you can really see and compare what happens when you extend somebody credit and what happens when you don't, right, because when you're applying for a new loan, you just don't observe what happens to a customer. If you decline them where was with credit line increases, you really actually can see both scenarios pretty clearly and that always really interested me about that work.
My last role at the company was leading our secured credit card, which was a product that started with $200 credit limits into security deposit - so that kind of most subprime/ most underserved side of the spectrum.
And really, you know, I was treated very well at the company and had a good experience in many ways. But also while I was there, my understanding of the The role that credit played in Americans lives started to change. So I started very idealistically, I think, with this mental model that people want and need to borrow money, right? Like, I think that's why many of us are drawn to this industry, right? Because we see that if you need to borrow money, it's good to have options.
That was my mental model coming into it.
Over time, I started to see really that so much of what was happening to consumers wasn't driven by how much they wanted to borrow, it was really driven by how much the bank wanted to lend. And I really wanted to understand those dynamics more.
Brendan Le Grange 5:33
As you say, we have this simple narrative in our heads, particularly in the subprime space, that if we can provide access to formal credit via a genuine lender who's been held to account by a regulator, who's pricing in an open market, that's much better than this loan shark who's going to be charging obscene rates and you know, unregulated. So we are providing better credit.
And that's a great story to tell. And it's it makes sense in our minds, and as you say, motivates us to experiment in this space.
However, you really do pick up some interesting things about what is leading what in this credit limit versus spend race, and maybe that, you know, we can start with the best intentions but as we start extending more and more credit to these consumers, we're perhaps encouraging spend and maybe changing behaviours for the worse.
So CapitalOne is actually where I started my career as well, in a relatively short run joint venture they had in South Africa, but when I left CapitalOne I joined another big international credit card issuer, and started a career that kept me within the industry, you noticed these impacts, and maybe had a bit of a clearer insight into where the industry was maybe going wrong.
So when you left CapitolOne, it wasn't to go to some other competitor, you had this Saul on the Damascus Road moment, took yourself on a road trip around America, and started really looking at the human side of the debt story. What was this road trip that ultimately led to Delinquent?
Elena Botella 7:06
I really started out wanting to understand what Americans experiences were with debt. And to really understand When did people look back on credit and say, that helped me in my life? I'm glad that I borrowed that money. You know, maybe the circumstances were ideal. I wish I didn't have to borrow money, but that loan made my life better. And under what conditions do people look back and say, in hindsight, I just should have never had that credit card.
A few years before I left CapitalOne, there was a big study by NerdWallet that said that around 80% of Americans regretted their credit card debt.
And I had shared this link while I still worked at Capital One, and we talked about it. And it was interesting, because a lot of my colleagues just didn't believe that number. And we had an interesting conversation, my boss's boss asked like, do you think it's really 80%? And I honestly didn't know. And that was part of my motivation. I knew that we didn't have the whole picture, right?
In the credit card industry, you see the transaction, you see what some this credit enables, but you don't always see the harm side of it... unless you work in collections and recoveries. So that desire to really understand the whole picture was what motivated me to go on this cross country road trip, to talk to Americans from all different sorts of life experiences, both those who had been denied credit and those who had gotten it about how they reflected on their lives, and how credit had played a role in it.
And very often, I heard from consumers who had followed a similar pattern, and came to feel that credit cards had done them more harm than good.
Brendan Le Grange 8:34
I think what's interesting is, I started a CapitalOne in my early 20s, I had no real responsibilities in my life, I was very well paid so indiscriminate spending on the weekend was kind of what a 22 year old in their first job should do. And so if I'm looking at this data, I've got no real world experience to understand what it means if I see various patterns of spend in a real person really, actually living in the real world.
And yeah, it was quite easy, I think, to forget that. Or to not think about it too hard. And to just carry on with this goal of ever-tweaking the algorithm.
What was behind the writing? Is writing something you've always done, or was this more of a break to kind of get to the bottom of it with no clear intention at the end?
Elena Botella 9:29
Yeah, I mean, it was a big leap of faith. Part of it was possible because people who work in banking usually have pretty good salaries. So it was not as big of a leap of faith as it could have been, because I had some nice savings built up. But it was still a leap of faith in the sense of going down this journey without knowing what would come at the other side.
And I had a little bit of experience writing before. I had written for my college newspaper as a columnist, I've done a little bit of writing for my home town paper - I'm from Charlotte, North Carolina - so the Charlotte Observer. I had some friends who were freelance journalists. So I knew a little bit about what media was like, but not much.
And so yeah, I took a leap of faith that the stories were important. I took a leap of faith that I had something to offer to the conversation.
And particularly one of the things I knew from the outset was that both on the left and on the right of American discourse, everybody was really operating with an assumption that the goal in regulating the financial sector should be to encourage more access to credit.
And just from my time working in banking, I could see how that was playing out day to day, you get some of the unintended consequences of that. So I knew I had some insight to share about how all these forces were working together, but also knew that there was so much more I didn't understand. So I started pitching articles to some financial outlets like American Banker, then kind of more mainstream outlets like Slate and Vice.
And yeah, at the same time I started doing research for what I hoped could maybe be a book or a long article - I started agnostic about what form things will take. And eventually, yeah, this is this is going to be a book. But yeah, it was a scary and but also very rewarding, too.
Brendan Le Grange 11:21
Yeah, so let's talk about that.
Delinquent: Inside the American Debt Machine starts with a quote that, to me, was really jarring because of its nonchalance. You're speaking to Joe, and you've asked him whether there's been a time that he was not sure how he was going to pay his credit card bills. And he says no, seemingly with quite a lot of confidence. But in saying no, he goes on to tell you about the times he hasn't eaten for a few days in the run up to a payment falling due, as if not eating for a few days is normal, and that's manageable debt.
For me that's underlined how normal it's become, for many of us, obviously, in America is where you're writing. But I think it's true in developed markets around the world, where it's just a natural part of life, to have this unaffordable or barely affordable debt. Is this true? Have we always lived in a world with so much debt? Where debt is such a big part of our budget and we're always wondering, can we afford it, can we not?
Elena Botella 12:22
That conversation I had with Joe was actually also one of the first interviews I did really opened my eyes and got me thinking about some of these questions around for people who are struggling, how do we even know that credit cards are helping Right? Like how do we know that they're not making things worse, and people even have a hard time teasing that out about their own lives? And I'm glad you kind of segued into this. What are the other possibilities, right?
Because when we look at American history, we see that there's always been a significant portion of Americans that are struggling financially, right, like we've always seen some folks who are unemployed, many people whose income is barely sufficient to make ends meet or insufficient to make ends meet. There's no point in American history, even though we sometimes idealise, like the 1950s 1960s, or some people do, even during that time, a very high proportion of Americans are struggling. And what's different about today?
So I would characterise today, as basically 1992 - 2022, the percentage of Americans who have a credit card and kind of the profiles of indebtedness have been similar over that time period. So today, versus really the time period between, let's say, 1900 to 1970, there's a pretty stark difference. In both situations, you have a lot of struggling families, there were struggling families, and they're struggling families now. And the difference is today, most struggling families are in debt. And before most struggling families weren't, whose life is better is struggling family today, where you kind of have this cycle or this situation where you get a credit card for some period of time, that gives you extra liquidity.
And then for many years after that, your payments are like, obviously much higher than the amount you originally borrowed. And then frequently, you're gonna charge off, and then at the end of that cycle, you're gonna get a law suit, they're gonna garnish your paycheck. Do you want to be in that situation? Or do you want to be in the situation where you have very little buffer month to month if you don't have the cash to buy something? You actually cannot buy it?
And I think the answer isn't clear. So I'm not saying explicitly the past was better than today, or that today is better than the past. But I do think it's important to grapple with that comparison, because it's our entire regulatory scheme and the life work of so many people, right.
So many people work in the financial sector in one way or another. If all of the effort and time is going to be rooted in taking the current system of indebtedness and entrenching it and expanding it then I think there needs to be evidence that it's making people's lives better. You know, I'm like many people who work in underwriting I have a math background, and I originally started trying to go down the path of I'm going to add up all of the good and all of the bad and come to an answer. And I think I've concluded it's actually not that straightforward.
But I do think by telling people's stories by looking at the history and by using data where it's available, and there's a lot of rich data sources that can describe our economy, we can come to some, some answers and some hints.
Brendan Le Grange 15:18
Yeah, and as you say, this is not an anti-debt book, you're not a debt prohibitionist, and you actually write with some hope for a better future in lending, where there's a more humane model. And you call out two key aspects to that.
Firstly, Americans regret a huge proportion of the principal debt they take on. So credit cards are possibly funding a whole lot of goods that actually are not adding any meaningful long term value. And secondly, that the debt that consumers are taking on while they're overpaying for that debt.
Now, pricing is a topic that in the last few years of my career with the credit bureaus really interested me, and I did quite a bit of research in that space. So I'm looking forward to talking to you about what you've seen there, but before that, let's talk about that idea of regret, and, finding purchases that aren't adding long term value to the consumers life. Why do lenders bear responsibility for this debt that's taken on by customers?
Elena Botella 16:18
Yeah, I want to start with an example. And for me, this was pretty typical of like many people I interviewed. So weddings, and I'm not talking about your own wedding but I'm talking about going to other people's wedding, because this is something that actually spans a wide variety of class backgrounds. You want to go to your friends and family's weddings, right, you have a cousin, you have a sister, a best friend, you want to go to the wedding. But weddings are also expensive to go to.
Of course, the actual specifics of cultural celebrations depend a lot on your background and your geography. But some of the basics are often fairly similar in the United States, you know, like you buy a president, you might need a plane ticket. And like, let's say it's a cousin, as an example, are you going to get into debt to go to the wedding? If you have open to buy on your credit card, many people are like, I will enter my credit card number on the website to buy the plane tickets and I'll figure out if I can really pay for this later because the prices are just gonna go up.
Versus if you had to walk down the street and say, I want to borrow $500 to buy plane tickets something in your head clicks, where you're like, actually, this doesn't make any sense. Like, I just can't afford it.
And I don't want to dismiss people go into their cousin's weddings. But why do people come to regret it is that if next year, not only can they not go to their siblings wedding, because they don't have any money, but then they also can't pay rent. And it's worth noting that in the United States, and in many other parts of the world, credit cards are the dominant borrowing instrument, right for day to day living expenses, credit cards are the dominant borrowing instrument by a pretty large margin, that there was this was a magic wand, you could wave to completely change your life circumstances and be able to afford everything you ever wanted for all time. Of course, that would be different, right?
But people regret it when they realise that past decision, that means they have to cut out things that are even more important in their life.
Brendan Le Grange 18:00
It also changes the perceived social pressures. You think, well, people are just going to assume 'why don't I put it on my credit card?' So it feels harder to say, no, what feels harder to spend a small amount, because there is this easy liquidity available to you and to everybody around you.
And as you said, the sort of industry narrative is more limited is good, because if I don't want to use it, I don't have to use it. But it's there if I need it. But the reality is, it's theory, if I need it, is maybe putting a little bit of pressure on me to say it's there, so use it.
And you've got a great quote in there, I'm going to read back to you that there's been a tripling of per capita consumer debt in the US from the late 70s to today. And your argument is that it hasn't been driven primarily by Americans wanting or needing to borrow more money. Instead, "it's been driven by the fact that deregulation has made lending more profitable, and the banking industry's desire to supply credit has risen as a result of that".
So I think that's where it gets tricky that you know, how much of our race to win market share to be the most profitable credit card provider is creating these situations that are encouraging spin that a consumer wouldn't have done in isolation, they wouldn't have done on a debit card only, or maybe wouldn't have even done in a world where they had to ask for a credit limit increase.
Elena Botella 19:49
Yeah, and I want to circle back to that phrasing that you said before, which is how do we know that the bank is responsible for the amount that the person is borrowed? How do I know if I didn't learn this person? money that they wouldn't just go to another lender and get the loan and maybe that loan would be worse, it would have a higher price or other unfavourable terms. And I think we actually do know this.
And so I want to talk about why I feel so confident that if the amount of lenders out there were to decrease the amount of consumer debt, but also decrease and like maybe in a good way, but in the United States, there's this really good study that I referenced in the book by Scott Fulford and Scott Shubh, two economists, and they looked at the credit reports of a random cross section of Americans.
They looked at what happened when people have a higher credit line. And what they found was that for revolvers, so for people who borrow money, basically 90% of additional credit limit ends up being reflected in additional debt. Here's the implication because I know that's a little bit of a technical way of explaining that: a pretty high percentage of consumers will borrow whatever amount is offered to them on a credit card. And it's not necessarily like, okay, I lend somebody $10,000, they get, they then accumulate $10,000 in debt, more of a ratio. So if somebody was using 80% of their credit line before credit line increase, they're gonna use 80% after.
And we also see this in other product categories, too. So two major ones are instalment loans and buy now pay later, where what we see is that as people are offered more loans, they take on more debt. And there is basically no diminishing point for most consumers.
And what's also interesting is that there's no evidence that people would have sought out that credit otherwise.
And I'll from my own life, I'll say like, think about like the office doughnuts, right? Somebody comes into your office and brings doughnuts. I know the post COVID world this is less common, but pre COVID, we can all remember somebody bringing in doughnuts, and the doughnuts are there. They look really good. You're like, I'm gonna have a doughnut, right? But would you have gone downstairs that your office cafeteria and paid five cents for a doughnut? Sometimes? Yes. And if that's the case, that's great. You should have the doughnut, but like, often no, right?
It's very tempting, because it's there.
And some people don't enjoy that feeling of temptation, right? They're like, I actually wish those doughnuts were not even here, because I actually already know even when I see it, that I don't really want to eat it. And that's most ordinary consumers experience is that sense of ambivalence of like, even just the fact that this is there is creating, for me, this negative sensation of having to be in a constant posture of resistance, which eventually becomes very difficult not to succumb to.
So that's the I would say the modal experience of Americans in debt is that they experience additional liquidity as a mixed blessing. At best.
Brendan Le Grange 22:47
I think that it's very clear, as soon as any of us sudden think about it, it's a question of when do we have these conversations when we force a consumer into a difficult position by saying no, instead of always trying to please? And also, yeah, really, who are we trying to benefit at the end with these arms races for credit? So I think that is a section that anyone in the credit card industry in particular, should be reading. But as you say, these patterns reflect in other consumer data as well. So maybe anyone working in lending should read that section of the book, and think about where are their incentives, and what are they doing with their consumers, they're aligned.
If we talk about pricing, now, I used to show a slide in a presentation I did, where I had the median, APR, the median interest rate being charged on personal loans in Hong Kong by the different school bands. And it was a lovely exponential downward curve that showed how you know when I adjusted for value, and for term, a borrower's cost of borrowing was heavily dependent on the credit score that we had really nice strong risk based pricing in the market.
But one day, I asked my analysts not to to give me just the median APR in sort of 25 and 75% window that I used to use, but to give me all the raw data. And what I saw was most consumers, the most common position was that your risk quite fairly dictated your cost of borrowing. There were so many outliers, consumers paying 25% for a loan, where most their peers were playing around about 5%. I took this data and I looked at it and I want you to try and understand why could this exist in a in a world where 5% is available to you? Why are you paying 20% and, to cut a long story short, what I saw was that consumers, in terms of benchmarking, they benchmark an offer they see today compared to their previous loan, so if the last loan was taken out three years ago, where they were new to credit, or maybe they had some financial problems, even if then are super prime on the credit bureau, and they could get a 5% interest rate. If they used to pay 20% they'll jump at 18%.
And yeah, it's just again, human nature, consumers don't study the market, they don't know all the prices that they could get reading through your research, you found some similar things that pricing of debt, it's not clean cut, like, you know, we would like to think as analysts doing complicated risk based pricing offers. So what would you say is a fair price of credit? And how should lenders be thinking about what they are charging consumers?
Elena Botella 25:24
I think the question of what is a fair price is really essential. And I think that's a really important starting point to all of this. And I think for myself and for many other people, fairness in pricing often starts with the idea of competition, right?
I know not everybody uses this framework, but for people who came from some sort of training in economics or analysis, they often think, okay, if there's a healthy competition, that will bring the price down to the minimum viable price, you could say. And what's really interesting in the credit card industry, and this is a United States example, so bear with me, but in the United States, if you look from the 1990s to the 2020s, what you see is that credit card profits have steadily risen, and real interest rates have certainly risen. By real interest rate is I mean, basically the nominal interest rate minus either cost of funds or the federal funds rate. And it's actually risen by about 50%. At the same time, the number of Americans who have a credit card has not increased and default rates have actually fallen.
So it's not that banks are lending to riskier customers, they're not their machine learning their big data investments have gotten better and better over time, they're doing a better job underwriting, their prices are going up. And they're going up significantly, on average, from about 8% to about 12%. So 50% increase, and their profits are going up. And that is a very basic way of saying that competition is not working, right?
Because when you have competition, you have people fighting with each other to bring down the price and the price falls. And we can ask why did this happen? Right? But if we were to return in the United States to that 8% spread, instead of the 12% spread - you can ask whether the 8% spread is fair, I would say also probably not - but at that, if you could return back to the 8% spread, you would save American families about $300 each. So it's a significant difference that's really going to shareholders.
Brendan Le Grange 27:22
Yeah, and I think what would be a good question to ask yourself are working in the industry is what are we advertising when we advertise our credit card products? And yeah, I don't work in the US haven't worked in credit cards directly for some time, so perhaps I'm referring to more old techniques, but when I was in credit cards, we would never talk about the interest rate. It's something you don't want the consumer to be thinking about, necessarily.
So you've got your air miles offers, you've got your cash backs, or your discounts, the colour of the card or some celebrity endorsement - that's what you're pushing forward. And that's what you're competing on who's got the better air miles, the better brand that you can get on your card. And that's what competition is driving, it's driving all these things to be improved. But if we're not talking interest rate, then competition doesn't work to bring pricing down.
If not everybody's out there advertising. I'm doing 20%. I'm doing 19%. And I think that's something that the industry tires need to grapple with this transparency. If you're a credit card issuer who doesn't want to talk about your prices, then maybe you need to have a good think about why that is.
Elena, you mentioned BNPL a bit later. And obviously, that's now a big trend of the moment and a big selling point of buy now pay later is the more transparent model, the pay in for approach, which is what more transparent but also faster and cheaper. If everything's done within contract. What are your thoughts on Buy Now Pay Later, is this some of the answer?
Elena Botella 28:52
Yeah, I think that there's some things to really like about Buy now pay later. And some things that anybody who's looking at the industry should be worried about. In many parts of the United States. If you have four or fewer periodic payments, that allows it to avoid being regulated as credit. So it's not a coincidence a bit, that they came up with the number four for how many payments it usually is.
A major benefit of by now pay later is that the pricing is often quite favourable, very frequently, actually, there's no interest charged. And I think that it's not a super complicated product. Those are good things. And I think we should just celebrate that.
There's also things to be worried about. And to me, the biggest is there's this wonderful report, it was done by one of the big three credit unions - I now wish I remember whether it was Experian TransUnion, or Equifax that wrote it - it was a technical report really written for people in the industry, but they said one good thing about BNPL is that it's not cannibalising other forms of debt. So they're like this is a reason for banks to be excited about this, because it's new debt and it's not cutting into market share. It's just growing the pie of the industry.
If your goal is to make more money as a bank, that's good news. But if your goal is to help people, that's scary, right? Because it means that people are not choosing BNPL, instead of credit cards, which are high priced. Either they wouldn't have used a credit card at all, or they're doing it on top of their credit card. And we can actually see that there's a good chunk of both, right, because the credit bureaus looked at how much overlap there is it just skewed towards people who are already in debt, and they use it to take on more debt.
I think that's scary.
Particularly if it's purchases a consumer wouldn't have made otherwise. And we're also seeing like on both BNPL and personal loans. We're seeing growing delinquencies, which indicates that not everybody who takes these on is equipped to manage it. And I think that it gets to an important issue, right, which is that pricing is fundamental, and it is very important. And also, at the same time borrowing money, even if the interest rate is zero does not always make sense for people.
Brendan Le Grange 31:01
Yeah, that sounds like it's raising some of the same questions in the debt consolidation, balance transfer sort of world where you bring your old debt across to us, we'll give you three months, six months, twelve months interest free, and that will help you consolidate your various debts and pay them off cheaper. In the ideal world, that's exactly what happens, somebody closes credit card A and brings it to credit card B at a lower rate, but we know that in reality, people kept open credit card A and so they moved the debt to credit card B and now they've got more exposure, more balances and and not insignificant group of people would end up maybe a year down the line having twice as much debt as they used to. And yeah, that non cannibalization is an interesting one.
Now, in Delinquent, you've taken a look at this American debt machine, and you're calling the industry to account. There's also hopefully some silver linings, some role models that are out there working today that you think are making the right sort of decisions, the right sort of changes, are you seeing organisations that we should maybe look towards as good examples of how to do this right, of organisations that maybe we should try to emulate or work with to provide this more humane lending for our customers?
Elena Botella 32:20
Yeah, I think there's a few types of models. So I want to start with a model on the regulatory side of the country that I think is doing something really interesting, which is Chile. So as I talk about my book, they introduced a new law, where what they said was that if you were going to offer consumer loans, you could continue, continue to offer whatever you wanted. But you would also have to offer this type of loan like a standard loan.
And under that standard loan, all of the terms were held constant. And you could only change the term length and the interest rate. Those are really the two things people care about. Everything else is kind of the detail.
And what they found is that when they did that, and people had the option to comparison shop based only on interest rate and term length, did the average prices fell substantially. And it was because people could actually figure out their best option. And I think that that is a role model for lenders, and for banks for credit unions to say how can I make it as simple as possible for the consumer so they can really decide if it's right for them or not.
And it's a role model for regulators, which is to strip things down to the most fundamental and see if that can equip competition to work better.
On who's doing it, right. I'm very inspired by the credit union movement, and got to spend a lot of time with folks in and around it. And for those who maybe are coming from a different international context, some places use the same terminology and other places. It's called a cooperative, but basically a nonprofit lending institution and in the United States, there's quite a few of them. But actually, the American Bankers Association has basically pretty actively lobbied against credit unions being able to offer credit cards nationally. So they say you need to come up with some specific limitation on who can get your credit card. It can either be only people who belong to the Methodist church, or only electricians, or only people who live in Santa Fe, New Mexico, but you can't just offer it to everybody, which then stops economies of scale from really working.
There's a lot of people who believe in this concept. But if folks who work in the lending industry, I would if you are in the United States, I would encourage you to look and see if your bank belongs to ABA, and maybe take a look at whether you are think implicitly through participating in this trade organisation trying to block credit unions from being able to offer an alternative.
So those are two models, I would say that are top of mind for me.
Why did I not offer more examples? I just want to also make it clear that I think what is the problem is the rules and incentives in the market if you're a publicly traded company, and you know that There's a profitable strategy around driving consumers into debt. It's very hard to avoid that strategy. Right. And actually, it's even questionably like argue in breach of your fiduciary duty if you avoid that strategy. The rules and incentives in the capital markets prevent us from creating a system that works for everyday working people around the world.
Brendan Le Grange 35:23
And for the other players in the industry. If somebody's listening and saying, Well, maybe they should be doing sort of a moral audit of their businesses, and they should be rethinking maybe if they doing everything in their customers interest. What are the key things that they should be thinking about in terms of their business models? What would be two or three headings for them to take away from this to go back and think about?
Elena Botella 35:47
You're trying to say, is this lending product, helping people or harming people? I think the starting point two questions I would say is, what am I able to figure out about what people would have done in the absence of this loan? Right? How can I develop information about that either through customer interviews or through data? And if the answer is I would not have borrowed - and it could be that you truly were giving access to somebody who like really didn't have it for something that they really valued - but it should be a warning. So what you want to hear is, I would have gotten a higher price alternative, right? And so I think that that piece of what would have people done otherwise?
And the second piece would be, I would say around pricing. So how does this the price of my product compared to the prices of other products I know to be available to people with a similar credit profile? And I think a lot of times people excuse away price? And they say, Well, yes, my price is 26%. And yes, they could have gotten 12%. But if they picked me over the 12%, there was probably a reason.
And I will tell you, the reason is probably that you spent more on marketing.
And I guess as a third thing, I think typical credit card solicitation in the United States has more than 20 separate price points in it. So separate numbers that influence how much a person is going to pay in totality. So this is a pretty complicated product. And I think it's just impossible for anybody to juggle all those numbers. I don't care how smart you are, how good you are at math, like it just is very challenging. I think there is a tendency to intentionally or unintentionally focus on what is flattering, and basically try to hide what is unflattering.
Take a pretend customer, like I mean, do customer research and vocalise to them, the worst things about your product, the things that you're ashamed of, that could be I make my payment due at 5pm Eastern time in the United States, even though I market to people in California, and I know that they're going to try to pay it at 4:30pm, California time and then go late. And I do that on purpose, right? It could be that or it could be, it could be even just the price and like what the cost is over time.
Go through the exercise of are you relying on people not actually understanding the product to think it's a good deal. I mean, like I'll say, a vacuum cleaner I bought, I said only about one vacuum cleaner in my life, like they last for a while. But like, I knew really exactly how much the vacuum cleaner cost when I bought it, and I was able to make a good decision. So that's what you want. You want people to make the decision, knowing everything that you know about the product.
So if there's things that you know about the product that the customer really doesn't, that's the reason why do you think it's a good deal? I think that's the thing to closely scrutinise.
Brendan Le Grange 38:23
It wasn't so long ago that if you were getting a airline flight, particularly a budget flight or renting a car, you would go to price comparison websites, and you'd see a cheap-looking flight, and then you'd choose it. But then there was various fees. And this scenario, sadly, the actual cost of the flight was two or three times more, or the rental cars, they did the same. So you'd have to go back and you forever searching because it was so complicated, that out of frustration, you just picked one and you went with it knowing you're paying extra money somewhere.
And I think you're right, like you need to ask yourself, Is this how you want to make your money. And I think that's a great takeaway.
So for people who want to do a bit of a deeper thing, they want to read the book and look at all these points that you raise up, Delinquent: Inside the American Debt Machine. It was published this week. So congratulations on that. Where can listeners find the book? And indeed, where can they go to follow more of your writing and find out more of your thoughts on the broader financial industry?
Elena Botella 39:20
Yes, for delinquent, it's available at all major US bookstores, including our recommended bookshop.org. But it's also available from Amazon, Target, Walmart, etc. And it's also available on Audible for those who prefer audiobooks. And those who want to find out more about my work can find me at www.elenabotella.com
Brendan Le Grange 39:40
Great Elena, well, thank you very much. I will put those links in the show notes as well for anyone who wants to have an easy access to those. It's been really great talking to you and it was really great reading the book as well. So I think that for anyone working in the industry, I greatly encourage them to go out and find a copy to read or to listen to and then to think about what you've said in there. Yeah, an important book for the industry a fun read as well. So congratulations on that. Thank you again for your time.
Elena Botella 40:08
Thank you so much, Brendan. It was great being on the show.
Brendan Le Grange 40:11
And thank you all for listening. If you enjoyed that, please do rate and review on your preferred podcast platform and share widely including on LinkedIn. And while you're there, send me a connection request.
The show is written and recorded by myself Brendan Le Grange in Brighton, England and edited with assistance by Kane Hunter. Show music is by Iam_Wake and you can find full written transcripts, show notes and more content at www.HowtoLendMoneytoStrangers.show
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