Klarna and Afterpay opt against sharing Buy Now, Pay Later (BNPL) transaction data with credit reporting agencies

Klarna and Afterpay opt against sharing Buy Now, Pay Later (BNPL) transaction data with credit reporting agencies

Buy Now, Pay Later Companies Resist Sharing Data with Credit Bureaus

Klarna and Afterpay, two prominent buy now, pay later (BNPL) companies, are resisting the move to share their BNPL loan data with credit bureaus, citing concerns that their customers could be unfairly penalized in credit scoring.

According to Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research, the current credit scoring models are built on the legacy of credit cards and traditional loans, and these models do not accurately reflect the nature of BNPL products. Klarna and Afterpay want strong consumer protections and require evidence that reporting BNPL data will improve, rather than harm, consumers' credit scores before they participate.

The companies argue that credit bureaus are not capturing BNPL data in real time, leading to inaccurate pictures of consumers’ financial health. This contrasts with Affirm, which has engaged with FICO to develop credit score models incorporating BNPL data and has started reporting to credit bureaus this year.

Klarna points to its practice of sharing BNPL data in the U.K. and reporting term loans in the U.S. visible to consumers, but currently excluding this data from credit scores because the U.S. credit reporting system does not yet effectively measure short-term BNPL usage. Afterpay has stated it will not report until there is "concrete evidence" that BNPL data reflecting responsible payment behavior will help, not hurt, consumers' credit scores.

Both companies emphasize the need for modernization of credit scoring systems that better capture the unique financial behaviors associated with BNPL versus traditional credit products. The reluctance partly stems from BNPL being marketed as a more accessible form of credit without the stricter underwriting of credit cards, so sharing data could undermine this competitive advantage if credit scoring penalizes BNPL usage.

Affirm’s participation, including collaborating with FICO on BNPL-inclusive credit scores and reporting to credit bureaus like Experian, is viewed as a more traditional credit lender approach that Klarna and Afterpay have not adopted. Affirm reports that delinquencies for BNPL loans are rare, and the impact of reporting BNPL data on credit scores doesn't seem as significant as one might think, according to Danner.

Despite objections, the inclusion of BNPL loan data in credit scores, according to FICO, didn't have widespread impacts on credit scores. Of the loans taken out through Affirm, FICO found that they affected credit scores by roughly 10 points for over 85% of those surveyed. Affirm has pushed back against the idea that BNPL lending has created substantial "phantom debt".

Klarna has been expanding its partnerships and services ahead of a potential IPO this year. The impact of reporting BNPL data on credit scores doesn't seem as significant as one might think, according to Danner. Danner stated that if Klarna's BNPL delinquency rate is below 1%, it is actually better performing than credit cards.

[1] [Source 1] [2] [Source 2] [3] [Source 3] [4] [Source 4]

1. The business models of Klarna and Afterpay, like that of Affirm, are heavily rooted in the technology sector, as they employ digital platforms for their buy now, pay later services.
2. As Klarna and Afterpay resist sharing their BNPL loan data with credit bureaus, they are seeking collateral assurances that reporting this data would not negatively impact consumers' credit scores, a concern shared by Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research.

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