Currently, most “buy now, pay later” products can only hurt a user’s credit — if there’s even an impact on their credit score at all. But major BNPL companies, consumer advocates and credit bureaus all say they are trying to change that.
The effort began to gain steam in June, when the CFPB urged “pay-in-four” BNPL companies, credit bureaus and scoring companies to work together on incorporating BNPL data into users’ credit scores in a way that rewards responsible behavior. But BNPL companies say they are hesitant to trust credit bureaus with the data.
Most BNPL companies today do not report data from their 0% APR, pay-in-four credit products to credit bureaus — that is, unless a customer is delinquent on their payments and the debt is sold to collections. Some companies claim to not report delinquencies either. (Affirm, which offers a distinct, longer-term product, reports some loan data to Experian.)
BNPL companies say they are hesitant to trust credit bureaus with users' data.
If firms reported BNPL user data to credit bureaus, it could hurt many users' credit scores. FICO Score 8 — still the most commonly used credit scoring algorithm — best responds to revolving lines of credit, while BNPL services are treated as something more akin to an installment loan. That means there’s a risk to BNPL customers’ credit scores based on their average age of credit and credit utilization percentage. BNPL customers tend to use the products an average of 3.8 times throughout the year, according to C+R Research. Additionally, users are approved for lines of credit matching individual purchases — essentially “maxing out” the credit line each time they choose pay-in-four at checkout. (Financial Technology Association, an industry group, disputes the characterization of BNPL as a “line of credit," arguing that implies users are approved for a credit line above the purchase price.)
When the data is not included in credit reports, it poses another risk: Lenders don’t know which BNPL products a customer is using. This may “impact both BNPL lenders and non-BNPL lenders seeking to understand how much debt a prospective borrower is carrying,” says the CFPB.
“We want to ensure that consumers can use this product to build credit — positive credit — and can show, demonstrate and believe that if they are individuals using this product responsibly, it will have a positive impact on their score,” Penny Lee, CEO of the Financial Technology Association, told Protocol. The group represents BNPL companies Klarna, Afterpay and Zip.
Consumer advocates, on that point, agree. Attorney Chi Chi Wu of the National Consumer Law Center recently argued in an op-ed that one solution may be for credit bureaus to evaluate BNPL as a revolving line of credit, like a credit card. But Wu told Protocol she feared BNPL companies may be hesitant to agree, because the companies don’t want to deal with regulations that apply to credit cards. These regulations include limitations on late fees, requirements for regular statements and — likely to be particularly troublesome for BNPL companies — chargeback rights.
BNPL companies say the credit card model just isn’t a good fit. “We don’t want to be subject to credit card regulation, because we’re not a credit card company,” Harris Qureshi, head of public policy and regulatory affairs at Afterpay, said in response to that argument.
Instead, Qureshi argues, there are key structural differences between pay-in-four BNPL products and credit cards. For example, payments are typically done on a bi-weekly basis, rather than monthly, and BNPL companies have their own set of protections against irresponsible use such as cutting off users after one missed payment, ostensibly preventing users from incurring as much debt as they could on a credit card.
In lieu of finding a uniform process for furnishing BNPL data to FICO and VantageScore to use in numerical credit scores, each of the main credit bureaus has designed an alternate process. BNPL companies are not required to submit their data to the bureaus by law. But if they do, the big three — which, notably, are in the business of aggregating and selling data — say they can use it. Experian, for example, has a separate “BNPL bureau,” where data is recorded but “stored separately” from users’ other credit data. Equifax says it will list BNPL trade lines in reports for lenders who want to see it, while TransUnion launched a “suite of solutions” that also allows for BNPL data to appear in a credit report without affecting a user’s score.
“We don’t want to be subject to credit card regulation, because we’re not a credit card company.”
BNPL companies say this is insufficient. “Ultimately what matters is that there’s a uniform approach, not just for the credit reporting, but for the end score as well,” said Qureshi.
The CFPB, meanwhile, is concerned about BNPL companies hoarding the data for anticompetitive reasons. “Super apps, BNPL, and embedded commerce all allow for data to be kept within the confines of the tech platform and deepen and secure consumer reliance on these products,” researchers Martin Kleinbard and Amy Zirkle said in a recent CFPB blog post.
BNPL companies, credit bureaus and the CFPB all have a shared interest: Theyallagree that BNPL products have potential as a credit-building tool. The products, when used responsibly, demonstrate a record of timely repayment and the foresight to budget.
But with data comes power. Both BNPL companies and credit bureaus want to be the arbiter of BNPL consumers’ data, leaving the parties at a stalemate. It may take action from the CFPB to break it.
Equifax and Experian declined to comment for this story. TransUnion did not respond to requests for comment.