The “buy now, pay later” trend is receiving a fresh jolt of energy now that all three major American credit bureaus are moving forward with plans to collect BNPL payment data and make it available to lenders. Their approaches differ in key aspects.
At the same time, what traditional consumer lenders and buy now, pay later lenders gain from BNPL credit reporting will differ as well, at least initially. But the overall growth trend for BNPL remains upward.
In late February 2022 TransUnion announced how it would tackle the BNPL credit reporting challenge, joining Experian and Equifax, which had unveiled their plans earlier.
“We came to the conclusion that they’re really a net new type of financial product,” says Liz Pagel, SVP and Consumer Lending Business Leader at TransUnion. “They’re not tiny installment loans. They behave differently and they deserve to be treated differently in financial models and risk models.”
In an interview with The Financial Brand, Pagel says the addition of buy now, pay later credit performance records is unprecedented. Many years have passed since a new form of lending has been pulled under the credit reporting umbrella.
Spur to Action:
The soaring growth of buy now, pay later plans pushed all three major credit bureaus to start collecting BNPL data.
“When you think about the core types of consumer credit available today — credit cards, lines of credit, home equity credit — they’ve all been around for generations. Buy now, pay later is the first time we’ve seen something new, and I suspect not the last,” says Pagel.
Ruby Walia, Senior Advisor for Digital Banking at Mobiquity and consultant on buy now, pay later issues, notes that it’s very early days as this new area of credit reporting develops. Just how both traditional and BNPL lenders will use the data remains to be seen, he points out in an interview with The Financial Brand, once enough has been collected, organized and disseminated.
In addition, credit scores, derived by algorithms maintained by firms like VantageScore and FICO, will be affected by this new data. Both firms have stated that they are still working on approaches to be based on the new data.
What impact the new credit reporting regimens will have on the buy now, pay later industry also remains to be seen. Overall, BNPL lenders have generally not gone beyond a “soft pull” on credit bureau data. (A soft pull is not reported, and may be done to prevent credit fraud, whereas a “hard pull” for actual credit evaluation becomes an inquiry included in the credit report itself.) Some BNPL lenders have made a point of advertising that they don’t report usage to credit bureaus, at least initially, and sometimes depending on the type of plan selected.
The bureaus have promoted the embryonic BNPL credit reporting processes as an eventual boost to financial inclusion, as newcomers to consumer credit can use buy now, pay later to demonstrate that they can handle debt. This is seen as potentially expanding eligibility for credit cards, for example. Buy now, pay later users are considered credit-active, and issuers are usually hungry for more originations and more volume.
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Comparing the Approaches of the Three Major Credit Bureaus
In recent years credit bureaus have expanded the types of behavior they include in their reports or in their broader data offerings, under the overall description of “alternative data.” Payment of recurring bills, such as rent and cell phone service, are among the datapoints. Buy now, pay later, which has expanded massively since the arrival of the model of merchants absorbing interest costs, has presented the bureaus with additional choices to make.
As a result the three companies are taking different stances:
TransUnion expects to begin collecting BNPL data from “furnishers” (companies in the business that share their data with bureaus) immediately and hopes to have the technology for providing the data available to lenders in April 2022.
“Many of these lenders have never furnished before, so we are prioritizing getting live data in the door as quickly as possible,” says Pagel.
The new data will initially be placed in a portion of the company’s core credit files that’s partitioned from the rest. Users of reports can opt-in to receive this data as part of their existing service. In the long term, TransUnion anticipates including buy now, pay later data in the core files, but Pagel says that could be a couple of years away.
Noting the strong influence of FICO and VantageScore credit scores, Pagel says much of the effect of the new data won’t be felt until it is drawn into the scoring process. “We believe it’s premature to put these credits directly into the core file right now,” says Pagel. “The data will have an unpredictable impact on consumer scores and we can’t risk having that all hit the core file without giving lenders and scoring providers time to adjust.”
Equifax announced in late 2021 that it was adding buy now, pay later information to its core credit database in the first quarter of 2022. The company noted in its announcement that research indicated that people whose BNPL behavior was included in credit scoring models saw an average improvement of 13 points. People with credit records of two years or less saw a greater increase, on average 21 points.
Equifax is putting the data into its database, but making it possible for report users to include or exclude the data as they choose. The company began recording “pay-in-four” BNPL loans in late February 2022.
Experian has taken a different approach than its competitors. Rather than pull BNPL into its mainstream database, the company plans to debut a specialty function, The Buy Now, Pay Later Bureau, in spring 2022. (The main bureaus set up such dedicated functions from time to time.) The company says that it is doing this to improve information about BNPL while avoiding negative impact on consumer credit scores. While the company works with some BNPL providers, it believes common scoring models weren’t made to work with BNPL data.
Buy now, pay later credit has been evolving rapidly, so the bureaus will need to evaluate their approaches as collection and usage progress. Extensive analysis of BNPL data and its significance will be going on for some time.
What Traditional Lenders and Buy Now, Pay Later Lenders Each Have to Gain
At first glance, having BNPL providers report to the bureaus seems like more of a gain for their competitors and not as much for their own interests.
Consultant Ruby Walia points out that the original buy now, pay later plans are relatively short term and small enough that they represent a low level of risk at the customer level. The pay-in-four plans begin with an immediate payment, followed by three installments. For a purchase of, say $750, that’s not a huge risk for the lender.
By contrast, Walia points out, credit card issuers typically pay $750 or more simply to acquire a new card customer and grant them credit lines which represent an ongoing risk as usage goes up and down.
“So, if I’m a BNPL lender, I’ve satisfied myself with basic identity verification that the person on the other side of the internet who is applying for a six-week loan is who they say they are,” says Walia. “And so they are generally willing to roll the dice.”
Someone who proves they will pay back such smaller loans will be able to borrow with short-term BNPL again and again, Walia explains. However, traditional consumer lenders want a better picture of people’s overall debt and their repayment history.
Going forward, there are two reasons why more BNPL data will be important to the buy now, pay later fraternity, and banks and others who venture into that territory.
One is that BNPL lenders themselves are going out longer than the original short-term plans, moving closer to traditional installment credit.
Another is that they will expand into more types of unsecured personal loans, Walia suggests.
Bank/Fintech Lines Keep Blurring:
The closer BNPL lenders move to mainstream products the more they will have to do 'hard pulls' on credit bureaus. As a result they will want the fuller picture that traditional players already want.
Strategic Plays that Banks May Try
Buy now, pay later firms don’t hold all the cards, no pun intended, as the two sub-industries move closer together and into more competition, according to Walia.
Something banks have that buy now, pay later companies typically don’t have is at least the potential of having a deposit relationship with the borrower.
It could be an ace in the hole. A bank that has a consumer’s checking account, especially one into which their paycheck is direct deposited, has not only a bit more insight into even a thin-file customer, but also leverage.
The consumer-borrower will not want to jeopardize their deposit account, Walia points out. If the bank does not report this deposit relationship to the bureaus, they have an advantage.
In addition, Walia says he’s had some interesting conversations with merchants and banks that offer co-branded credit cards. They are weighing their options in the changing competitive landscape, as more banks enter the BNPL business in the merchant-supported space.
Walia explains that the merchant-bank partners don’t want to cannibalize their card programs. On the other hand, both, and especially the merchant, want each sale to go through. One of the selling points for merchant-based BNPL is that it brings in more buyers and that buyers using it often buy more goods.
He believes these partnerships will be developing algorithms to favor the co-branded cards, but designed to segue to the lender’s buy now, pay later offering if the card’s available credit line is insufficient to cover the purchase.