Experian, TransUnion bringing buy now/pay later loans into credit reports

Buy now/pay later lending has sparked worries about mounting consumer credit risk, and part of the issue is the lack of data available to other lenders.

Beginning in the next few weeks, Equifax will add a business industry code for BNPL to classify data such as payment history, a move that will make BNPL loans visible on credit reports. Equifax says this will provide clients and scoring partners the ability to decide how to include BNPL payments into their own decision making for new financial services. At the same time, TransUnion is working on its own BNPL credit reporting service.

"There's a huge opportunity to better understand what's going on in this market," said Mark Luber, chief product officer at Equifax U.S. Information Solutions in Atlanta. "Everyone is responsible for responsible lending … to make loans that can be paid back. This credit reporting will help with that."

The bureaus' moves come as BNPL lending continues to expand, with traditional financial services firms, the e-commerce industry, fintech specialists such as Affirm and Klarna, and payment technology companies like Square and PayPal all targeting the market. The fast growth has led to concerns from regulators that consumers are accumulating debt. Adding BNPL loan performance to a consumer's broader credit report can help assuage the concerns of both lenders and regulators, according to Brian Riley, director of Mercator Advisory Group's credit advisory service in Tampa, Florida.

"Traditional lenders will be able to benchmark usage and identify lending opportunities. Regulators interested in understanding lending quality will not have to look further than anonymized bureau data," Riley said. "And merchants will benefit through the mainstreaming of BNPL lending."

BNPL loans, also called installment loans, are typically offered online or at the physical point of sale as a "pay in four" option for a single purchase. Some banks also present the option to pay for individual credit card purchases in installments after the fact, though most providers offer BNPL loans separate from any specific card account.

Equifax internal research, conducted with FICO, found that on-time payments for BNPL lending can boost credit scores. Consumers who paid BNPL installments on time had an average FICO score increase of 13 points, according to Equifax's study. The study also showed that consumers with a thin credit file (two or fewer trendlines) or a young file (less than 24 months old) had an average FICO score boost of 21 points by adding on-time BNPL payments. Equifax did not answer questions on how missed BNPL payments specifically change FICO scores, though it did say there is an adverse impact.

Studies from sources as varied as the Australian government and Motley Fool have found consumers often use BNPL to buy things they can't afford, or to avoid adding to an already-high level of credit card debt. In the U.S., 41% of consumers used BNPL loans between September 2020 and September 2021, according to research from Clifton, New Jersey-based Piplsay, which surveyed 31,000 consumers in late September. Of these consumers, 26% reported missing at least one BNPL payment during that time, Piplsay reports.

Additionally, 39% reported using BNPL because they did not want to make the full payment for the product (generally $500 or less) all at once, 37% said the product was over their budget and 24% said they did not have enough money to pay. Piplsay also found 34% of consumers have used BNPL once or twice in the past year, 26% three or four times, 21% five to seven times, and 19% more than seven times.

"Folks are using BNPL to buy stuff they can't afford rather than the luxury of paying for it later," said Ted Pulsifer, an executive vice president at the Schlesinger Group, an Iselin, New Jersey-based market research firm. "The data is demonstrating that there's an awareness of the risk that needs to take place."

Regulators in the U.K., Sweden (Klarna's home country) and California have scrutinized BNPL lending over the past year. Concerns over credit risk led the Consumer Financial Protection Bureau in December to order BNPL lenders including Affirm, Afterpay, Klarna, PayPal and Zip to provide information to help the CFPB to measure the impact of point of sale credit on consumers.

Data from credit reporting can provide regulators with visibility into BNPL's impact on consumers, according to Riley, who added it can also help the consumers who do pay their BNPL loans successfully build their own credit profiles for much larger purchases.

"Credit reporting on BNPL loans is an important facet of the product's maturation," Riley said. "Although these are relatively low-ticket financial products, they do offer insight into how the borrower repays. For the many people with thin or invisible credit files, BNPL can offer a way to help them into the mainstream of credit."

Experian's website says BNPL payments can impact a consumer's credit score, and Affirm reports some BNPL loan data to Experian. In an email, an Experian spokesperson said "We are working with partners across the financial services industry to add even more of this [BNPL] information to credit reports. We are currently innovating new solutions that will provide additional insights into how these transactions impact consumer’s financial health and overall credit risk."

In an email, TransUnion spokesperson Liz Pagel said: "BNPL and POS installments are net new types of credit obligations that the existing credit ecosystem in the U.S. is not ready to support."

Pagel added that it's important that TransUnion's reporting to reflect the total indebtedness of the consumer, and "we are well on our way to bringing a solution to market that will make this data available without having an undue impact on existing scoring models."

TransUnion also has partnered with the buy now/pay later lender Sezzle to allow consumers to build credit using their repayment history with Sezzle.

"By turning BNPL into a credit-building tool, BNPL providers benefit by improving their value proposition to their users, Equifax expands its utility as a bureau and at the same time banks benefit by gaining more insight into and increasing the size of the targetable base of creditworthy borrowers," said Rick Oglesby, president of AZ Payments Group in Phoenix.