The Evolution of Credit Scoring Models and ‘Buy Now, Pay Later’ Services
The increasing use of ‘Buy Now, Pay Later’ (BNPL) services has led to an evolution in credit scoring models. BNPL services such as Affirm have started reporting customer repayment data to credit bureaus. However, this practice has not been universally adopted by all major short-term loan providers.
The Role of Short-Term Loan Providers
Affirm is currently sharing payment activity data with Experian and Transunion. However, other key players in the space, such as Klarna and Afterpay, are pushing for robust consumer protections. These protections would ensure that users are not unfairly penalized if payment data is shared with credit bureaus.
FICO’s Incorporation of BNPL Data
This discussion has gained momentum following FICO’s announcement in June that its new FICO Score 10 BNPL and FICO Score 10 T BNPL models would be the first from a leading credit scoring provider to incorporate BNPL data. This advancement reflects the growing influence of BNPL in the U.S. credit ecosystem.
Afterpay and Klarna’s Stance on Credit Reporting
Afterpay has stated that they do not currently report to credit bureaus in the United States. They have no plans to do so until it is clear that including BNPL data reflecting responsible payment behavior will enhance, not harm, the credit scores of their customers.
On the other hand, Klarna has stated that they support credit reporting that benefits consumers. Klarna currently shares data in the U.K. and reports term loans in the U.S., ensuring customers can see this data, but it doesn’t affect their credit scores. Read more about how BNPL loans impact credit scores.
The Importance of Credit Scoring for BNPL Services
Credit scoring is crucial for fast-growing credit products like BNPL loans. In the past, these loans, which allow consumers to split payments over time, have not reported timely payments to credit bureaus. As a result, punctual payments did not improve credit scores. However, late payments would still incur penalties, and Klarna has confirmed that they would ban users from their service for missed payments.
The Popularity of BNPL Services
Over the past decade, BNPL services have gained popularity as an alternative to credit cards. Initially used online for retail purchases, they have expanded to include a diverse range of products, from electronics to travel tickets. In fact, a June 2023 survey by the Federal Reserve found that nearly two-thirds of consumers had been offered a BNPL product in the past year. Read more about how BNPL loans will now impact American’s credit scores.
The Need for Transparency on BNPL Loans’ Benefits and Risks
Given its significant rise in popularity, experts argue it’s essential to educate both policymakers and consumers about the benefits and risks of these loans. This includes the implications of credit bureau reporting and the potential for late fees, among other factors.
Modernizing the Credit Scoring System
Afterpay has published a white paper titled “A Modern Approach to Credit.” This paper argues that the current system, built around outdated products and assumptions, struggles to adapt to new forms of financial behavior. The report suggests that regulators should embrace alternative data, such as real-time transactions and spending behavior, to create more inclusive and accurate credit assessments. This would ensure that creditworthy individuals are not unfairly excluded from financial opportunities.
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