More transparency in buy now, pay later

Its rapid growth is increasing the need for credit-related insights for would-be lenders.

The global growth rate of buy now, pay later (BNPL) has been nothing short of phenomenal in recent years, in terms of the number of consumers using the alternative payment method, the value of their purchases and the many competitors crowding into the space.

It is proving especially popular among younger Americans, with research in 2021 showing that more than 60% of millennials and Gen Z consumers surveyed had used the service at least once. The same survey found that usage in the over-55 set doubled to 40% in a year.

BAI recently connected with Greg Wright, chief product officer for consumer information services at Experian, to learn more about its new Buy Now Pay Later Bureau, which goes into operation later this year to help lenders with their BNPL decision-making.

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The interview has been edited for length and clarity.

Fundamentally speaking, buy now, pay later looks in many ways like a run-of-the-mill installment loan product. What is it about them that makes them less run of the mill, to the degree that Experian has set up a new specialty bureau to assess them?

The Buy Now Pay Later Bureau will address the unique needs of BNPL without negatively impacting consumer credit scores. Reflecting BNPL information on credit reports as traditional loans or lines of credit may create negative impacts to consumer credit scores, even when BNPL products are used responsibly. If treated the same as mainstream credit products, hard inquiries would show for each purchase, each purchase would show as a new short-term tradeline and each tradeline would have a utilization rate of 100%. These are all factors that can negatively impact credit scores.

You have said that one of Experian’s goals is to bring better transparency to the BNPL market. Tell us more about what you mean by that.

Concerns about the negative impact on consumer credit scores have prevented many BNPL providers from reporting information. Traditional lenders are unable to gain a complete view of a consumer’s financial obligations, which limits their ability to accurately assess risk. At the same time, BNPL providers don’t have a view of how or if a consumer has managed BNPL payments with other providers. Our solution provides lenders with real-time insights needed to drive responsible and inclusive lending, while protecting consumers.

One of the key attributes cited for BNPL, including by Experian, is its ability to provide broader access to financial services for underserved populations. How is what you’re doing going to foster greater financial inclusion?

We believe greater transparency around how consumers manage their BNPL accounts can increase access to credit for those with limited credit histories or who are currently credit-invisible. For example, if a consumer has limited experience with traditional credit, but a lender sees the consumer has responsibly managed BNPL accounts over time, the lender may be more inclined to extend an offer of credit. Over time, we plan to incorporate more BNPL account information directly into a consumer’s traditional credit report using a method that will help them build credit.

What about those with a spotty BNPL repayment history – how will that information be incorporated into their credit standing?

Missed BNPL payments or derogatory information will not be hidden from the industry or the economy. Transparency about this activity is the right thing to do for responsible lending and to ultimately protect consumers. Derogatory information, or missed payments, is included in our plan to incorporate more BNPL account information directly into a consumer’s traditional credit report.

BNPL’s phenomenal growth has come during a time of prolonged rock-bottom rates. How do you see BNPL’s growth and overall place in the market changing as U.S. monetary policy tightens?

We believe the growth of BNPL is here to stay. We also know that consumers choose BNPL because of convenience and choice, not because of a lack of access to more traditional forms of credit. Our research shows 80% of consumers who use BNPL products also have a credit card. BNPL providers are providing fast and flexible options, which is what’s driving the explosive growth we’re seeing globally for BNPL.

Once you have the BNPL Bureau up and running, what does success for it look like in both in the near term and further out?

Our solution will allow BNPL providers to furnish data on all types of point-of-sale products to enable a comprehensive view of consumer payments, including the number of outstanding BNPL loans, total BNPL loan amounts and BNPL payment status. As we amass industry data, we will have the ability to better understand these merchandise purchasing and payment behaviors and how this information can be most effectively used to assess and manage risk.

For more industry insights on payments, please read “Payments: Increasing competition in the fast lane,” a BAI Executive Report.

Terry Badger, CFA, is the managing editor at BAI.