Bank of America has issued a warning about the explosive growth of prediction markets and sports betting, cautioning that it could lead to excessive consumer debt and loan defaults. Strategists, including Mihir Bhatia, noted in a report that the rapid expansion of such betting activities is introducing new credit risks for lenders, as gambling losses may strain consumers' finances.
Since the U.S. Supreme Court overturned the federal ban on sports betting, online wagering has surged in popularity. Recently, platforms like Kalshi Inc. and Polymarket have gained traction by offering financial contracts tied to sports events and other outcomes, "creating a new form of speculative participation."
The negative financial impact of these activities is likely most pronounced among low-income consumers, particularly young men. The strategists stated, "Easy access and gamified interfaces encourage frequent and impulsive betting. For investors, this blend of entertainment and speculative finance heightens behavioral risks, potentially lowering credit quality, increasing default rates, and affecting profitability for card issuers and subprime lenders."
Research from UCLA Anderson School of Management and the University of Southern California found that in states permitting online gambling, average credit scores dropped by nearly 1% after about four years, while bankruptcy likelihood rose by 28%. Additionally, debt sent to collections increased by 8%.
Bank of America strategists highlighted that aggressive marketing of gambling products "amplifies engagement, translating into rising credit balances and higher loan loss rates." They warned that companies such as Bread Financial Holdings (BFH.US), Upstart Holdings (UPST.US), and OneMain Holdings (OMF.US) are most exposed to "low-income or credit-stressed consumers."
"Online betting markets introduce new risks that lenders historically haven’t managed, and underwriting models may need adjustments," they added. Concerning signs have already emerged in certain consumer stress indicators. A survey cited by the bank found that a quarter of bettors reported missing bill payments, while 45% lacked sufficient savings to cover three to six months of living expenses.
Prediction markets have recently surged in popularity by offering binary "yes/no" contracts tied to election outcomes, sports results, and other events. According to Dune Analytics, Kalshi and Polymarket's monthly notional trading volume exceeded $8.5 billion in October, largely driven by sports-linked contracts on Kalshi. The exchange leverages its financial license to offer "event contracts" nationwide, despite opposition from state gambling regulators.
Bank of America strategists remarked, "Though marketed as prediction tools, their mobile-first, gamified interfaces mimic sports betting platforms, blurring the line between investing and gambling." This convergence raises concerns about compulsive behavior and liquidity stress, especially among younger and lower-income consumers.
Prediction market operators argue their models are fairer than sportsbooks, as they provide neutral trading venues and do not bet directly against customers. Jack Such, a Kalshi spokesperson, said, "As a federally regulated exchange, Kalshi offers fairer, more transparent pricing without exploiting consumers like casinos. We don’t profit from client losses because we aren’t the 'house.'"
Polymarket announced on Tuesday that it cleared one of the final regulatory hurdles to reopen in the U.S. after years, following a settlement with the Commodity Futures Trading Commission that previously forced its exit from the market.
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