With over 100 million BNPL users in the US alone, there is a huge amount of untraceable data floating around regarding BNPL debt, applications and repayments. This poses a risk to lenders, merchants, the industry and even the economy.

The three leading credit bureaus, Equifax, Experian and TransUnion, are all on a mission to change this by including Buy Now Pay Later (BNPL) data on their credit reports.

What is the implication of this move for lenders, merchants and consumers – and for the BNPL industry as a whole? 

Do BNPL companies report to the credit bureaus today?

Right now, there’s no structure when it comes to credit reporting for BNPL. While things may change once the industry becomes regulated, BNPL providers are currently not required to report to the credit bureaus. 

This makes it very difficult to track BNPL activity and measure its impact on consumer debt.

There are some providers that already do report to the credit bureaus of their own volition, but they do so without clear guidelines. 

While accessibility is the core of BNPL and is a key driver of financial inclusion, it needs to be achieved within the framework of responsibility. 

How can lenders hit the sweet spot between financial inclusion or accessibility and responsible lending?

The answer is this: transparency.

Do BNPL solutions require a credit check?

The answer is: it really depends.

Some BNPL solutions require hard credit checks, others require soft credit checks, and others – none at all.

Split Payments don’t currently require credit checks during the application process because they are considered a payment method and not a loan.

But split payments are less risky than other loan products as there is an initial credit check done when the cardholder gets the credit card in the first place. Since this type of BNPL is just a split of an existing approved credit line, it doesn’t really need another credit check. There is also reduced risk with split pay as one-third or one-quarter of the payment is taken at checkout, and there repayment schedule is short-term.

Point-of-sale financing is typically a longer-term loan for a larger amount and generally entails a hard credit pull, which would then impact the consumer’s credit score. 

Short-term BNPL options may require a soft credit pull, but this doesn’t impact the consumer’s credit score.

 

What’s on the credit bureaus’ roadmap for 2022?

Equifax, Experian and TransUnion have all made it clear that BNPL is high on their agendas for 2022. 

Here are the different approaches they are taking:

Credit BureauApproachBenefits
EquifaxImplementing new data processes for BNPL.
Created new industry code to classify BNPL payment history.
Including BNPL repayments into credit reporting can help consumers increase their credit scores if they repay on time.
ExperianLaunching first-of-its-kind Buy Now Pay Later Bureau
BNPL providers will provide data on all point-of-sale products.
Provides full insight into:
– # of outstanding BNPL loans
– Total BNPL amounts
– BNPL repayment status
– Promotes financial inclusion
– Improves risk assessment
TransUnionShort-term: BNPL data to be tagged and filtered within a new segment of TransUnion’s core credit file, similar to Equifax.
Long-term: To include POS financing data in core credit file.
Gives industry a chance to adjust, in order to maximize financial inclusion and fair credit reporting. 

Equifax predicts that its new data processes will encourage more and more BNPL providers to report their data and also believes that “BNPL can be a powerful way for new-to-credit consumers to build their credit profiles”.

Experian can ensure that responsible BNPL repayments will help consumers improve their credit scores. To ensure that consumers’ credit scores won’t take a hit from the sudden surge of BNPL data, Experian will store the data separately from the rest of their credit reporting data as its own BNPL bureau. 

TransUnion’s strategy for BNPL is more similar to that of Equifax than Experian in that they will initially tag and filter the BNPL data, instead of setting up a BNPL credit bureau.

Meet the typical BNPL user

This is the profile of your average consumer in the US who uses Buy Now Pay Later products:

BNPL user profile

This data shows that BNPL users aren’t necessarily credit-strapped individuals. More often than not, they’re younger consumers who either don’t possess a credit card or are looking for alternative ways to manage their cash flow with a method that has more attractive repayment terms and interest rates than a credit card. Data shows that 75% of BNPL users are Millennials or Gen Zers, but that BNPL providers are increasingly targeting Generation Xers and even Baby Boomers. 

The average BNPL user is equally interested in using BNPL services in-store as they are online.

When consumers aren’t keeping track of their BNPL usage and debt accumulation, that’s when they risk damaging their credit scores and risk profiles.

Mandated credit reporting for BNPL services, will give consumers more visibility of their credit activities, helping them make wiser financial decisions. 

What are the benefits of including BNPL on credit reports?


1. Responsible repayments can improve consumer credit scores

Consumers that repay their BNPL payments on time aren’t getting rewarded when their BNPL activity isn’t reported. This is a tremendous loss of opportunity for responsible BNPL users to build, or rebuild, their credit scores.

“The inclusion of point-of-sale loans, which BNPL loans are a part of, on a consumer credit file is likely to benefit the populations most in need of new tools to build and improve their credit,”TransUnion.

2. Promotes financial inclusion 

By enabling responsible BNPL users to build a credit history, the credit bureaus are unlocking future financing opportunities for these users, thereby promoting financial inclusion. This is particularly beneficial to the typical BNPL user who generally has a thin credit history.

3. Gives lenders insight into responsible borrowing

If a consumer is accumulating untraceable BNPL debt from multiple providers, lenders don’t get a full picture of their creditworthiness. While all these intentions of the bureaus are a step in the right direction, there won’t really be an impact until regulation makes reporting a necessity.

4. Protects consumers 

By adding a certain level of friction into the customer journey, credit checks encourage consumers to evaluate whether they can afford their purchase and are able to take on the debt.

5. More transparency

When too much consumer debt accumulates due to lack of visibility into borrowing, it can lead to a major economic crisis. Credit reporting will lead to more transparency into BNPL in general. If it becomes mandatory for all BNPL providers to report their data, then the regulator will be able to track the debt accumulated due to BNPL products.

BNPL, credit reporting and financial inclusion

The ultimate goal for BNPL providers is to hit that sweet spot between credit accessibility and responsibility. 

Mandatory credit reporting will benefit lenders, consumers and merchants alike. More visibility will promote financial responsibility and ultimately maximize financial inclusion for consumers. 

BNPL Handbooks for Banks and Lenders

Disclaimer: The information in this article is for informational purposes only, and should not be construed or relied upon as legal advice on any subject matter. The author is not responsible for any consequences whatsoever arising from the use of such information.