Affirm and FICO took the first steps to incorporating short-term
New York City-based Municipal Credit Union has been continually monitoring BNPL activity and is considering how to incorporate it into its
"We as an organization aren't shying away from any data point that we feel will allow us to get our members to a financially well off place," Savino said. "As we start to do our research this year, and we're seeing a lot of these
Municipal uses a custom credit model provided by a vendor partner that incorporates more than 300 different attributes. Those attributes are then given a weight, such as 0.5%, that contributes to the borrower's overall score.
"We want to try to capture the layer of folks that are not really supported by traditional credit models," Savino said. "You look at rent payments, you look at utility payments, you look at cell phone payments, you take transaction data. How can we really reward an individual for the things they are doing versus the things that the bureaus say they're not?"
Municipal can't just start injecting BNPL data into its credit models because buy now/pay later loans, especially Pay in 4 loans with six-week maturities, does not fit within the traditional definitions of revolving or
Pay in 4 loans are challenging to traditional credit models because the high frequency at which consumers can take out the loans can look like loan stacking, which negatively impacts credit scores.
To offset those negative effects,
But aggregate reporting of BNPL trade lines is at odds with the general thesis of BNPL, which maintains that positive payment patterns should boost borrowers' credit scores. And those repayments can't be properly captured if they are reported in aggregate.
Afterpay and Klarna resist BNPL reporting
Some of the largest BNPL providers, such as Afterpay and Klarna, have no intention of furnishing consumer payment data to the credit bureaus because they contend the way the system is set up will not improve customer's credit scores.
"Afterpay does not currently report to credit bureaus in the United States, and we won't until we see concrete evidence that BNPL data reflecting responsible payment behavior will help, not hurt, the credit scores of our customers," Juan Hernandez, Block's head of underwriting and credit, said in a
Klarna also disagrees with the U.S. credit reporting system. "Klarna welcomes FICO's ambition to modernize credit scoring to better reflect BNPL use. For years we have supported credit reporting that benefits consumers. That's why we share BNPL data in the U.K. and report our term loans in the U.S., making it visible to consumers but excluded from credit scores," a company spokesperson said in a statement. "While the U.S. credit reporting framework doesn't reflect how short-term BNPL products are used, we look forward to a system where these products can contribute positively to consumers' credit standing."
That poses a potential problem for lenders that want to use BNPL payment data to make credit decisions: Credit reporting agencies need more market participants to furnish data so that it can be anonymised before they can send it to credit scoring companies such as FICO and VantageScore.
Municipal CU's Savino also avoids looking at BNPL loans as traditional term loans because their short nature has huge impacts on consumers credit scores. But he thinks there is a way to aggregate BNPL payment data and also have individual trade lines show up.
"You have the trade line show up individually, but then aggregate the length of time an individual has these products. So, [for example] I've been using buy now, pay later for a period of two years. I've had six different trade lines, they've all been paid positively. You can take the two year history, then the positive pay at the individual trade line, and then aggregate that to a score impact, versus aggregating each loan together as one loan," Savino said.
"That is the responsible way to approach it, because you're giving the consumer the benefit of responsible use, just like a credit card," he said.
When will lenders incorporate BNPL loans into underwriting?
Even if all the major BNPL providers started furnishing consumer payment data to the credit reporting agencies tomorrow and that data was made available to lenders by FICO or VantageScore, it would still be months, maybe even years, until lenders could start making credit decisions based off of those scores.
For Municipal CU, it would take between three to six months to start incorporating new data into its models and test to see how the model shifts before putting it into production, Savino said.
But that timeline will be different for every lender depending on how their model is set up.
For some lenders, the process could take years, Bruce Newmark, president of consultancy firm Fimanco, told American Banker.
"You have to come up with some assumptions. Then you have to apply the changes to the model, and you're going to have to do a regression test and side-by-side test the model," Newmark said.
Lenders may choose to start deploying the model with their riskiest portfolio, Newmark said. "I would want to see if I could get lift in my highest risk portfolio first to try to improve that tier, and if I proved that I could get lift in that tier then, of course, across the board it's gonna perform better."
Pay in 4 loans are exempt from the Truth in Lending Act, and BNPL companies are not legally required to report them to credit reporting agencies. Rohit Chopra, the former director of the Consumer Financial Protection Agency, attempted to classify Pay in 4 loans as credit cards through an
That doesn't bode well for any future BNPL reporting requirements, Newmark said.
"The reporting requirements were on the verge of being relatively robust. A lot of the compliance expectations on buy now, pay later companies are being scaled back," Newmark said. "With the change in administration and less muscular compliance effort on behalf of CFPB, I think that the migration toward more reporting by buy now, pay later is likely to diminish."
