Fintech

Credit where it’s due: BNPL wants in on credit reports

The CFPB, “buy now, pay later” companies and credit bureaus all think BNPL data should be factored into credit scores. So what’s the hold up?

An illustration of a cauldron with a bubbling green liquid inside and green, running numbers "678." A stream of unidentifiable green stuff and a stream of unidentifiable red stuff are pouring into the cauldron and mixing.

Currently, most “buy now, pay later” products can only hurt a user’s credit, but major BNPL companies, consumer advocates and credit bureaus all say they're trying to change that.

Illustration: Christopher T. Fong/Protocol

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: They all agree 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.

Fintech

Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep Reading Show less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep Reading Show less
FTA
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.
Enterprise

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep Reading Show less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep Reading Show less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.

Enterprise

Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep Reading Show less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories
Bulletins