Good morning, and welcome to Protocol Fintech. This Tuesday: BNPL credit reporting, Galaxy Digital reports a big loss and Tornado Cash is sanctioned by the Treasury Department.
8/9/2022
Give me some credit
Most “buy now, pay later” products can only hurt a user’s credit score — if they have any effect at all. But major BNPL companies, consumer advocates and credit bureaus all say they’re trying to change that.
It all started when the CFPB launched an inquiry into BNPL credit reporting in December. Part of that inquiry looked at BNPL’s impact on users’ credit scores. The CFPB now wants the three major credit bureaus — Experian, Equifax and TransUnion — to work together with BNPL companies to find a way to incorporate BNPL data into credit reports in a way that rewards responsible use.
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.
When the data is not included in credit reports, it poses a big 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.
But BNPL companies are hesitant to trust credit bureaus with user data. 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. If the services reported BNPL user data to credit bureaus, it could hurt many users' credit scores.
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.
“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.
BNPL companies want a tailor-made solution and aren’t accepting any of the possible fixes that have been proposed. BNPL is neither a revolving line of credit nor an installment loan, and BNPL companies argue they shouldn’t be treated like either.
“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.
Each of the main credit bureaus has designed an alternate process where BNPL data is collected but not factored into a numerical credit score. 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.
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.
That leaves BNPL companies, credit bureaus and the CFPB at a stalemate. They all agree BNPL products have potential as a credit-building tool, but both BNPL companies and credit bureaus want to be the arbiter of BNPL consumers’ data. It may take a nudge from the CFPB to force one side to give in first.
Protocol link: https://www.protocol.com/newsletters/protocol-fintech/cfpb-bnpl-credit-scoring
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