Buy-now-pay-later companies get cold feet about handing data to credit bureaus
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Multiple fintech companies are balking at sending buy-now-pay-later data to credit bureaus, citing concerns about whether the products will be interpreted fairly for consumers.
Why it matters: With over 90 million Americans expected to use BNPL for purchases this year, critics argue that existing credit scores paint an incomplete picture of an individual's likelihood to pay back loans.
Zoom in: Klarna and Afterpay won't send BNPL data to the credit bureaus for now, WSJ reported Tuesday.
- "The goal is to ensure that no consumers are harmed" by companies furnishing it, Financial Technology Association spokesperson Miranda Margowsky tells Axios.
- "If each BNPL loan is seen as opening a line of credit, that could ding creditworthiness," she added. "Similarly, it appears the bureaus are still not capturing real-time BNPL data, which could lead to not having an accurate picture of a consumer's financial health."
Between the lines: BNPL functions differently than credit cards and auto loans. And the companies are concerned that credit scoring methods used by the bureaus might not be sufficient to correctly interpret what the data says.
- Afterpay confirmed to Axios that it's not sending its data to the credit bureaus. That won't change "until we see concrete evidence that BNPL data reflecting responsible payment behavior will help, not hurt, the credit scores of our customers," the company said in a recent statement.
- A Klarna spokesperson did not respond to a request for comment.
State of play: BNPL provider Affirm recently began reporting its loans to Experian and TransUnion.
- It is collaborating with credit bureaus to bring the credit-reporting and scoring systems up to date, but it and the bureaus say the rest of the industry needs to participate to make that happen, WSJ notes.
- In the meantime, its BNPL data isn't yet visible to lenders and doesn't affect credit scores.
- "Full industry participation in reporting BNPL loans to credit bureaus can change that," an Affirm spokesperson said. "It will enable people to get credit for managing their money well and allow lenders to make smarter, fairer decisions. As borrowing evolves, the credit system needs to evolve with it."
The other side: BNPL critics say it amounts to hidden debt that can become detrimental to the borrower's financial health.
- "The real danger of Buy Now, Pay Later isn't whether it appears on your credit score—it's that it normalizes spending money you don't have, on things you don't need, without fully understanding the consequences," Noah Kerner, CEO of fintech firm Acorns, tells Axios in an email.
What we're watching: Fair Isaac Corp., which runs FICO, said in June that it would launch two separate credit scores incorporating BNPL data.
- "These scores provide lenders with greater visibility into consumers' repayment behaviors, enabling a more comprehensive view of their credit readiness which ultimately improves the lending experience," FICO said in a statement.
- The company has said that BNPL data might improve credit scores for customers who pay on time.
