After a request for data from Buy Now, Pay Later (BNPL) providers Klarna, Affirm, Afterpay, PayPal and Zip earlier this year, the CFPB is calling for BNPL data to be furnished to the credit bureaus, noting that the “lack of furnishing could have downstream effects on consumers and the credit reporting system.”
The CFPB argues that both positive and negative data should be reported to the credit bureaus, and that BNPL providers reporting consumer data is consistent with the Bureau’s current focus on credit inclusion. Regardless, a new trend like this will have big implications for BNPL recovery and collections.
Is it a double-edged sword for consumers?
It’s true: consumers with thin or no credit history have difficulty accessing credit, and many of those consumers have turned to BNPL in the recent past, especially those between the ages of 18-34. In fact, Afterpay reports that nearly 70% of their users are in that age bracket. Since one of the focuses of the current CFPB (and other state agencies and departments, like NY DFS) is equitable access to credit, it makes sense that the CFPB would want to ensure consumers who have a positive payment history are getting credit for it.
During the pandemic, credit scores went up about 12 points, according to Colin Tran, VP of Corporate Affairs at Trust Science. Even without the added stress of credit reporting BNPL payments, Tran says Trust Science is expecting a sharp adjustment, with credit scores dropping potentially by as many as 50 points. Considering inflation, the end of government support, and the Fed raising interest rates at intervals not seen since the early 90s, and then adding that 34% of BNPL users are behind on at least one payment, it’s hard to imagine a positive impact for those consumers. Afterall, while having a thin credit file may impair access to credit, having a negative credit score can impact job opportunities and housing.
How might it affect originators?
One of the reasons consumers, especially younger ones, are likely to engage with a BNPL product is precisely because those products are not reported to the credit bureaus, and in most cases, for balances under $250, there isn’t even a hard credit check associated with the loan. This makes it easy for BNPL providers to offer credit to consumers who have thin credit files.
Klarna, a giant in the space and one of the earliest players, announced that it was laying off 10% of its employees last month, citing the war in Ukraine, a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market and a likely recession as the reasons. The Wall Street Journal reported recently that Klarna, which boasted a valuation of $46B in 2021, is now fundraising at a valuation of just $15B.
Furnishing consumer data to the bureaus may result in a reduction in origination, but it makes sense when originators consider how they might ensure consumers continue to pay as agreed. Right now, BNPL loans typically have much smaller balances than consumer credit cards, landing somewhere between $100 and $250, and the repayment rate on BNPL loans at 90 days past due is a whopping 60%, compared to 34.5% for credit cards. However, as we approach a potential recession and as the cost of consumer necessities inflates, it stands to reason that consumers may move making their BNPL payments to the end of their priority lists. Furnishing data to the credit bureaus provides consumers additional incentive to make their payments on time, and it erases one of the key differences between traditional loans or credit cards and BNPL products.
In the event that consumer credit scores and originations dip, collections and recovery becomes an even more integral part of the strategy for banks and creditors, and if the data is furnished to the credit bureaus, consumers will prioritize paying off their past due BNPL loans.
Collecting on past due BNPL loans requires companies to invest in digital collections and self-service, because with balances averaging $149, using an expensive strategy of calling and sending letters becomes unrealistic. This is true for in-house collections and recovery departments, and for third-party agencies looking to form partnerships with BNPL lenders. Focusing on a frictionless, digital collections strategy will be critical to servicing BNPL customers who become delinquent or stop paying, and then find their BNPL loan on their credit report.
Bonus read: iA Strategy & Tech's Guide to BNPL and Digital Debt Collection
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