Gambling, prediction markets create new credit risks, Bank of America warns
The bank says that there are already worrisome signs in some indicators of consumer stress, citing a US News survey
[NEW YORK] Bank of America (BOA) is sounding the alarm over the explosive growth of prediction markets and sports gambling, warning it could lead consumers to take on too much debt and default on loans.
The rapid expansion of such bets is creating a new credit risk for lenders as gambling losses create financial stress for consumers, BOA strategists, including Mihir Bhatia, wrote in a note.
The strategists point to the rising popularity of online betting since the Supreme Court struck down a federal ban on sports gambling. More recently, prediction market platforms such as Kalshi and Polymarket are “creating a new form of speculative engagement”, with their financial contracts tied to sports games and other events, the strategists said.
They warn that the negative financial effects of these wagers may be most pronounced for low-income consumers and especially for young men.
“Easy access and gamified interfaces encourage frequent and impulsive wagers,” wrote BOA strategists. “For investors this convergence of entertainment and speculative finance signals heightened behavioural risk that could pressure credit quality, increase delinquencies, and impact earnings for issuers and subprime lenders.”
Researchers at the UCLA Anderson School of Management and the University of Southern California previously found that in states that allow online betting, the average credit score drops by almost 1 per cent after about four years, while the likelihood of bankruptcy increases by 28 per cent. Additionally, the amount of debt sent to collection agencies increases by 8 per cent, they reported.
The BOA strategists note that the marketing of gambling products “amplify participation and translate into rising credit balances and increased loss severity for lenders”.
They warned that firms in their coverage universe, including Bread Financial Holdings, Upstart Holdings and OneMain Holdings, are most exposed to “lower income or credit-stressed consumers”.
“Online betting markets introduce a new risk for lenders, one that they have not had to deal with historically and underwriting models may need to be adapted,” they wrote in a note published on Friday.
The bank says that there are already worrisome signs in some indicators of consumer stress, citing a US News survey that found that one in four bettors report missing bill payments and 45 per cent say they don’t have money to cover living costs for three to six months.
Prediction markets have exploded in popularity in recent months by offering binary yes-or-no financial contracts tied to the outcome of elections, sports games and other events. Kalshi and Polymarket saw monthly notional trading volume rise above US$8.5 billion for the first time in October, according to data collated by dunedata on Dune Analytics.
The recent growth has been driven in large part by the popularity of contracts tied to the outcome of sports events on the New York-based exchange Kalshi, which has used its financial license to offer so-called event contracts nationwide, in defiance of state gaming regulators.
“While marketed as tools for forecasting, their mobile first design and gamified interfaces mirror sports betting platforms, blurring the line between investing and gambling,” the BOA strategists wrote. This convergence raises similar concerns to gambling about compulsive behaviour and liquidity stress, particularly among younger and lower-income consumers.
The prediction markets have said that their model is more fair for customers than sportsbooks because they offer a neutral trading venue and do not face off directly against customers.
“As a federally regulated financial exchange, Kalshi’s model provides fairer, more transparent pricing and doesn’t extort consumers like casinos do,” Jack Such, a Kalshi spokesperson, said. “Since we aren’t a ‘house,’ our revenue doesn’t come from customer losses.”
Polymarket said on Tuesday that it cleared one of the final regulatory hurdles to reopen in the US a few years after a settlement with the Commodity Futures Trading Commission forced it offshore.
Polymarket did not immediately respond to a request for comment. BLOOMBERG
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Sign up here to get Decoding Asia newsletter. Delivered to your inbox. Free.
Share with us your feedback on BT's products and services
