Buy now, pay later loan information still isn’t being widely reported to credit bureaus, more than a year after those firms announced efforts to collect such information.
At issue is the short-term, no-interest installment loan that BNPL providers have popularized with consumers. In recent comments on the task, they said current credit scoring models are incompatible with the new loan type, and credit bureaus attempts to collect that data and incorporate it into consumers’ credit histories have fallen short thus far.
While BNPL use climbed in recent years, the slow pace of change for credit reporting in this area points to the complexity involved with fitting the burgeoning payment method into the traditional credit scoring framework.
Spokespeople for some of the biggest BNPL providers, Klarna, Afterpay and Zip, said last week their companies are not reporting transaction and account information to national credit bureaus Equifax, Experian and TransUnion.
By contrast, a top executive for a fourth major player, Affirm, asserted last week during a Bank of America Securities payments conference that it’s the only provider sharing positive and negative loan information with credit reporting agencies. Affirm is “leading the charge” on that front, said Rob O’Hare, Affirm’s senior vice president of finance.
Complicating that assertion though is the fact that many of the BNPL providers, including Affirm and PayPal, offer both short-term, interest-free financing, as well as longer-term, interest-bearing loans. Affirm and PayPal still are not reporting their short-term, interest-free loan data yet.
In the smaller tier of BNPL players, Sezzle appears to be the only lender reporting such information. The BNPL provider is sharing that data but only for customers that have opted into Sezzle’s credit building service, a spokesperson said. She declined to say how many have opted in.
In late 2021 and early 2022, Equifax, Experian and TransUnion each announced they were taking steps to enable BNPL companies to submit short-term loan data, so consumers’ credit histories would be more accurately depicted.
Those efforts included the creation of a new code identifying short-term, no interest loans and establishing a specific platform where BNPL lenders could input loan information that would be kept separate from “core” credit bureau data due to the unique nature of the BNPL loans.
Not long after, in a June 2022 blog post, the Consumer Financial Protection Bureau said it wanted credit bureaus to take a standardized approach to BNPL and incorporate that data into consumers’ core credit files as soon as possible.
CFPB Director Rohit Chopra noted the slow pace of credit reporting protocol development when the agency released its report on the subject last September, and said staff would “continue to surface options on how the industry and consumer reporting companies can develop appropriate and accurate credit reporting practices.”
Since then, little progress appears to have been made. The Consumer Data Industry Association, a trade group representing the credit bureaus, on Friday pointed to the initial changes made by the credit bureaus and said the industry is “highly motivated” to increase visibility of BNPL transactions, but didn’t cite any recent developments.
Although Equifax “encourages” BNPL providers to furnish payment data, short-term, no-interest loans are not broadly reported to that bureau currently, a spokesperson said last week. “Larger dollar and longer term BNPL loans are reported today and appear on consumer credit reports as revolving or installment lines of credit,” the Equifax spokesperson said in an email.
A TransUnion spokesperson declined to comment on the reporting habits of individual lenders. The agency said in a March 10 blog post that top U.S. BNPL lenders committed last year to full file reporting with the agency, but it’s not a quick process. TransUnion is aiming to have that data incorporated into consumers’ credit histories this year, the blog post said.
In late January, an Experian spokesperson said its BNPL bureau infrastructure was complete, but wasn’t receiving much BNPL loan data. Last week, the spokesperson said Experian’s “primary focus has been to ensure BNPL providers have the foundation, technology, and processes in place to report data to us efficiently,” and the credit reporting bureau is “in active conversations” with lenders.
“The concern has been that if BNPL transactions are treated the same as mainstream credit products by conventional consumer credit scores, consumers may be negatively impacted based solely on the choice of BNPL as their payment option,” the Experian spokesperson said in an email. “We’re working closely with BNPL providers to either establish or expand their data reporting using an industry standard approach that will protect consumer credit scores while increasing transparency of BNPL accounts.”
BNPL providers said they support sharing data with the bureaus, because it’s a benefit for consumers and the financial system. Sweden-based Klarna is working with the bureaus to create a reporting system “that works for all of our products,” a company spokesperson said in an email.
“There’s encouraging signs we’re moving in the right direction,” an Affirm spokesperson said.
Despite the CFPB’s preference, TransUnion is keeping BNPL information separate within a consumer’s core credit file for now, citing the “unique qualities of these data,” the blog post said. Long term, TransUnion aims to incorporate the data into the core file, “but we still expect this industry transition to take several years — as all users will need to reconfigure their models and attributes first,” the post said.
Leslie Bender, a senior attorney with firm Eversheds Sutherland who focuses on privacy and consumer finance, expects the groundwork has been laid for BNPL data reporting and some of the standardized points have been agreed upon, but believes BNPL lenders are somewhat reluctant to get into the data furnishing business.
Since the CFPB has expressed concerns with loan stacking, or taking on multiple loans with different lenders in a short period of time, the CFPB is likely to push BNPL providers to submit data to credit reporting agencies this year, said Ed deHaan, who is a professor at the University of Washington’s Foster School of Business.
“There’s a very strong disincentive to be the first mover in this space among the BNPL providers,” because they don’t get much benefit from furnishing information and it’s costly, deHaan said in January. That’s why regulatory mandates can help put BNPL providers on the same footing, he said.
The CFPB declined to comment Thursday on whether it planned to take regulatory action on the matter. Given its long list of priorities, regulation on this issue may not make the cut this year.
However, “this bureau is really quite effective at publishing what its compliance expectations and priorities are when it issues enforcement action,” Bender said. Theoretically, if the CFPB found an example of BNPL customers experiencing unfair or deceptive behavior, the agency could pursue an enforcement action that sends a message about policy priorities.