Bank of America flags prediction markets as emerging credit risk

As prediction markets and sports betting take off across financial services platforms, Bank of America is cautioning lenders about a brewing credit problem.

A new note from the bank's strategists warned that the explosive growth in both sports gambling and prediction market platforms – particularly since the Supreme Court struck down the federal ban on sports betting – poses a novel threat to consumer finances and lender balance sheets. These markets, which allow users to trade financial contracts tied to the outcomes of sports games, elections, and other events, are designed with mobile-first interfaces and gamified features that encourage frequent, impulsive wagering, particularly among younger and lower-income consumers.

The concern isn't theoretical. One joint study by researchers from the UCLA Anderson School of Management and the University of Southern California, which found that in states allowing online betting, average credit scores drop by nearly 1% after about four years, while bankruptcy likelihood increases by 28%. Debt sent to collection agencies also rises by 8%.

BofA strategists noted that "easy access and gamified interfaces encourage frequent and impulsive wagers," creating what they described as "heightened behavioral risk that could pressure credit quality, increase delinquencies, and impact earnings for issuers and subprime lenders."

The warning extends to lenders specializing in subprime credit, including Bread Financial Holdings, Upstart Holdings, and OneMain Holdings, which the bank identified as most exposed to lower-income, credit-stressed consumers. Already, a US News survey found that one in four bettors report missing bill payments, while 45% lack sufficient savings to cover living costs for three to six months.

Earlier this month, Rick Wurster, chief executive of Charles Schwab, aired similar concerns about how the "conflation between gambling and investing" threatens financial literacy. He pointed out that "only 5% of the people that go on gambling apps pull out more money than they put into the gambling app," a stark contrast to long-term investing outcomes.

“I just don't want young people in our country that think that betting on the Monday Night Football game is equivalent to being invested for the long term in stocks and bonds,” Wurster told an audience in his keynote session to RIAs at the Schwab IMPACT conference.

Meanwhile, platforms like Robinhood are accelerating into the space, adding new features that make prediction markets function more like traditional sportsbooks. The retail brokerage's customers traded 2.5 billion prediction-market contracts in October alone, primarily on sports.

Robinhood is aiming to go even bigger in the prediction markets business, announcing plans on Tuesday to launch a futures and derivatives exchange with market maker Susquehanna as a means to expand its events contracts around sports, elections, and other events.

Prediction markets have gained explosive traction beyond Robinhood, with competing platforms Kalshi and Polymarket seeing monthly notional trading volume exceed $8.5 billion for the first time in October.

But while proponents argue these exchanges offer fairer pricing than traditional sportsbooks, Bank of America strategists argue the distinction is semantic. The platforms' design deliberately mirrors sports betting apps, the bank said, "blurring the line between investing and gambling."