Credit has a major inclusion problem in the UK. It is encouraging to see BNPL (buy-now-pay-later) companies taking steps to share their data with credit reporting agencies (CRAs) ahead of regulatory deadlines. However, much more needs to be done to help millennials improve their credit scores, and one real risk is advising consumers to increase BNPL usage before we have clarity on how credit bureaus interpret this behavior will.
Over 17 million UK customers have made an online purchase with BNPL, but headline stats on the growth of the sector could be misleading. While the sector is booming, its application remains limited. The majority of BNPL customers use it to fund occasional high-ticket clothing or tech purchases. The data that rating agencies receive may not be sufficient to help lenders truly understand applicants’ risk profiles and offer appropriate loan products.
Klarna’s enthusiasm for working with CRAs is admirable – but the bigger issue is updating our understanding of risk in the age of big data. And that won’t be solved by a government crackdown on BNPL.
The UK is home to 5 million “credit invisible” people who have little to no financial footprint. Many are young professionals and expats. They cannot prove their creditworthiness, are locked out of mainstream financial services, or find their options for credit products severely limited.
BNPL is a great solution for splitting up the occasional big payment – but it won’t necessarily pave the way to buying your first car or house. It’s also not the best choice for someone who might get extra value out of a typical credit card — like rewards or travel insurance — by using it for all of their day-to-day expenses.
A lack of financial literacy exacerbates the problem of accessing and better credit. Few outside of the industry realize that credit scores are little more than a number. It’s the information in your report that matters. Consider payday loans, for example—even if you take out one and pay it back on time, the fact that you took out a payday loan can still affect your score.
It’s too early to know how credit bureaus will measure risk using BNPL data, so customers need to avoid the trap of believing that spending more BNPL is a “silver bullet” to access cheaper mortgages or higher credit card limits could be. We need to find alternatives to look at people’s financial behavior more holistically and use these to make it easier for them to access secure credit.
A modern credit assessment solution should leverage other data sources to get a complete picture of an individual’s financial health and assess their ability to pay on time. One possibility would be to view an applicant’s transaction data via Open Banking. It’s more inclusive as payment cards and mobile apps are popular with young people and immigrants can easily access them soon after moving to the UK.
A fairer future for credit will reward good habits, not just borrowing habit. BNPL shouldn’t be the only option for those with a thin credit record to build their footprint. It’s time for financial institutions of all stripes to follow Klarna’s example and volunteer their data and unique insights to help CRAs modernize reporting. We must share responsibility for the well-being of customers – lenders can only win by helping applicants find the right type of loan to meet their financial goals.