Rise of ‘buy now, pay later’ creates a blind spot

THERE’S a glaring contradiction in the “buy now, pay later” (BNPL) business.

Companies are building empires on serving the unbanked and underbanked populations, which have long been starved of credit. By providing often interest-free instalment plans to those too young or disenfranchised to have a credit history, these companies argue they are helping users manage their cash flow and make higher-value purchases they could only dream of before.

Credit data is important for those trying to build enough of a credit history to move from alternative sources of financing – often used by the underbanked – to the more traditional (and typically cheaper) sources.

Keeping this data in the hands of individual BNPL players creates a “blind spot” for other lenders. It works against individuals hoping to build a good credit score, but whose timely payments are not captured by the system.

Meanwhile, lenders, including competitor BNPL companies, are stuck with an incomplete view of a person’s track record. Individuals could have credit histories across several BNPL providers.

Consider that 1 in 5 people in Australia, one of the most mature BNPL markets, were found by regulators to have missed payments on their BNPL debt. When this data is left out, it affects lenders’ ability to assess risk.

BNPL data does not fit neatly into existing credit models. These payments, which some view as repeated unsecured short-term loans, are unlike credit lines or mortgages that the bureaus are familiar with. But that does not mean such data cannot be integrated.

Efforts are already underway in the UK. BNPL company Klarna began sharing transaction data with 2 credit reference agencies in June, after having worked with them for 2 years to update their systems.

In the United States, the 3 main consumer credit bureaus have announced initiatives to collect and understand BNPL data.

TransUnion said BNPL data will be reported to a specific section of core credit files, and excluded from scoring models until these systems have had a chance to adjust.

Experian’s Buy Now Pay Later Bureau stores BNPL transaction information separately from core credit bureau data.

The last bureau, Equifax has formalised a process for the acceptance of BNPL information in traditional consumer credit reports. The company recently analysed data from over a million BNPL applications in the US, and found that 1 in 5 users were completely new to credit and were building their file. BNPL applicants also tended to have lower median household income.

More work is needed to standardise approaches. The US Consumer Financial Protection Bureau noted that the Big Three bureaus’ plans vary, and is concerned that “this inconsistent treatment will limit the potential benefits of furnished BNPL data to consumers and the credit reporting system”.

There are lessons from these other markets for Singapore, even if local BNPL usage has yet to substantively take off. (Out of S$103 billion in credit and debit card payments made in 2021, only S$440 million were BNPL transactions.)

Locally licensed credit bureaus collect data from members, which are approved by the Monetary Authority of Singapore (MAS). But BNPL companies do not have such approvals.

In response to queries from The Business Times on whether MAS is looking into requiring BNPL players to become approved members, a spokesperson said MAS is supportive of an industry working group set up in March to develop a general framework for the sector. The group was established by the Singapore Fintech Association to create a code of conduct for all BNPL providers.

One of Singapore’s licensed credit bureaus is keen on working with BNPL players. In a recent interview, Credit Bureau (Singapore)’s executive director William Lim said: “The BNPL models continue to evolve. It will be necessary for the bureau to work with the industry to create a data template or common account definition, so there is consistency in the understanding and interpretation of the uploaded data elements by the lenders.”

He added that the process is no different from other industries outside traditional banking, such as telcos, that already provide different data sets to credit bureaus.

Integrating BNPL information into formal credit models does more than promote financial inclusion. It encourages consumer responsibility.

In calling for BNPL-related spending data to be included in credit reports, Melvin Yong, the president of the Consumer Association of Singapore, said consumers should be made aware of how the usage of BNPL services impacts their credit score. This could maximise the self-regulating effect on users, he said.

“Consumers can then opt to have a holistic view of their credit standing including BNPL credit status, which will help them gain a better understanding of their financial situation before choosing to use the service,” Yong wrote in a Jun 24 blog post.

Regulators and the industry need to think seriously about the effects of BNPL before the situation becomes too large to ignore. With BNPL transactions in Singapore projected to grow 40 per cent yearly till 2025, according to the Worldpay 2022 Global Payments Report, it would be more prudent to prepare now than to worry later.