Certain lenders offering buy now, pay later services are concealing customer payment history from credit reporting agencies.
In the rapidly evolving world of finance, buy now, pay later (BNPL) services have gained significant traction. Companies like Klarna and Afterpay have become popular alternatives to traditional credit products, offering consumers the convenience of splitting large purchases into smaller, manageable instalments. However, when it comes to reporting payment activity to credit bureaus in the United States, these major BNPL providers have remained cautious.
According to a white paper published by Afterpay called "A Modern Approach to Credit," the traditional credit system struggles to adapt to new forms of financial behavior, including BNPL loans. The paper argues that regulators should embrace alternative data, such as real-time transactions and spending behavior, for more inclusive and accurate credit assessments.
Juan Hernandez, the Head of Credit and Underwriting at Afterpay, stated that the company does not currently report to credit bureaus in the United States. This is primarily because they fear that sharing BNPL data could unfairly penalize consumers and negatively affect their credit scores. Hernandez emphasised that someone's financial health should be measured through real behaviour, such as how someone earns, saves, spends, and repays.
Klarna, another significant player in the BNPL market, shares data in other markets, such as the UK, and reports some types of loans in the U.S. However, it excludes most BNPL installment plan data from credit reporting until the system is more modern and better suited to reflect BNPL behaviour accurately. Klarna has also stated that it will ban someone from using its service if they miss payments.
FICO's announcement in late June that its new FICO Score 10 BNPL and FICO Score 10 T BNPL models would incorporate BNPL data represents progress. However, providers feel the broader credit reporting ecosystem needs further modernization to avoid consumer harm. Affirm is an exception, having started to share BNPL data with Experian and TransUnion, signalling some movement towards reporting.
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. As BNPL services continue to grow in popularity, it is crucial to ensure that policymakers and consumers are informed about the benefits and risks associated with these loans. This includes understanding the implications of credit bureau reporting and the potential for late fees.
In conclusion, major BNPL players are hesitant to report payment activity in the U.S. due to concerns about the fairness and accuracy of credit scoring methods regarding BNPL loans and consumer protection considerations. They prefer to wait for proven, consumer-friendly reporting frameworks before fully participating in credit bureau data sharing. As the financial landscape continues to evolve, it is essential that regulations adapt to reflect modern financial realities while ensuring that creditworthy individuals aren't unfairly excluded from financial opportunities.
- Despite the preference of buy now, pay later (BNPL) services like Klarna and Afterpay for not reporting payment activity to credit bureaus in the United States, the traditional credit system, including FICO, seeks to incorporate BNPL data to improve credit assessments.
- Affirm, a BNPL provider, is ahead in sharing BNPL data with credit bureaus, suggesting a potential movement towards reporting in the BNPL industry.
- The reluctance of major BNPL providers to participate in credit bureau data sharing is due to concerns over the fairness and accuracy of credit scoring methods regarding BNPL loans and consumer protection, which urges regulators to embrace alternative data for more inclusive and accurate credit assessments.
- Considering the growing popularity of BNPL services, policymakers and consumers should be informed about the benefits and risks associated with these loans, including understanding the implications of credit bureau reporting and the potential for late fees, as well as the need for modernization of credit reporting systems to better reflect BNPL behavior accurately.
