Klarna and Afterpay voluntarily decide to withhold Buy Now, Pay Later (BNPL) data from credit reporting agencies.
Two popular BNPL companies, Klarna and Afterpay, have expressed concerns about sharing their loan data with credit bureaus, fearing that current scoring models may unfairly penalize their customers.
The companies argue that the legacy credit scoring models, which were primarily built for credit cards and traditional loans, may not accurately or timely integrate BNPL data, potentially harming consumers' credit scores, even when payments are made responsibly.
Protecting Consumers is Key
Klarna and Afterpay's concerns center on protecting consumers from potential harm. They want strong consumer protections to ensure that responsible BNPL payment behavior positively, or at least neutrally, impacts creditworthiness rather than undermining it. Afterpay has explicitly stated it will not share data until there is concrete evidence that BNPL data helps rather than hurts credit scores.
The Impact of BNPL Data on Credit Scores
The impact of reporting BNPL data to credit bureaus doesn't seem as significant as one might think, according to Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. Of the loans taken out through Affirm, FICO found that they affected credit scores by roughly 10 points for over 85% of those surveyed. However, BNPL loans account for only a fraction of credit card debt, according to Affirm.
The Novelty of BNPL and Legacy Scoring Models
BNPL is distinct from credit cards and traditional loans, often offering easier access without strict underwriting. Introducing BNPL data into legacy credit scoring risks misinterpreting this new credit form. Klarna and Afterpay view the current scoring models as not yet adapted to the novel characteristics of BNPL and want assurances that reporting will not penalize consumers unfairly.
The credit reporting system may take years to fully modernize; meanwhile, these firms seek to avoid harming a customer base that often includes subprime or credit-invisible users, who are vulnerable to potential credit damage.
Affirm's Approach
Affirm has been working with FICO to develop two credit score models that include BNPL data. Affirm has also started reporting its loan data to Experian and other credit bureaus this year. However, Affirm has pushed back against the idea that BNPL lending has created substantial "phantom debt" not captured by traditional credit scoring models.
In summary, Klarna and Afterpay’s reluctance reflects a protective approach based on uncertainty about how BNPL data will affect consumer credit scores, concerns about data accuracy and timing, and the legacy design of scoring models ill-suited for BNPL credit products. They argue that treating each BNPL loan as opening a new credit line could affect customers' creditworthiness. If Klarna's BNPL delinquency rate is below 1%, as they report, it performs better than credit cards.
The business strategies of Klarna and Afterpay prioritize protecting their customers from potential harm caused by the integration of BNPL data into legacy credit scoring models, which may not accurately reflect the timely and responsible payment behavior of BNPL users. Technology advancements in the field of finance, such as the development of new credit score models by Affirm and FICO, aim to bridge the gap between traditional and BNPL loan data, ensuring a more accurate and timely representation of consumer creditworthiness.
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