BNPL Regulation Has the Opportunity To Improve Consumer Credit Scores

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Buy Now Pay Later (BNPL) has become known for its easy access. Credit checks are often soft, if there are any in the first place, when applying to use the payment method so many have come to the conclusion that it is not taken seriously. There has been a belief that paying back the fees on time would not affect your credit score – but this is entirely incorrect. 

BNPL is a Form of Credit

Though it does not always charge interest (depending on the payment plan you choose), BNPL is still a type of credit. Therefore, as pointed out by the Mail Online, it shouldn’t be a surprise that mortgage lenders consider BNPL as a type of debt and something that will impact an application.

The Mail Online looked at Which?‘s research that examined at how 10 mortgage lenders would deal with outstanding BNPL payments in principle online. Barclays, Halifax, Nationwide and TSB – specifically asked for details of BNPL arrangements alongside other credit commitments such as loans and credit cards. HSBC, NatWest, Santander, Virgin Money and Yorkshire Building Society – made no mention of BNPL on their online decision in principle forms. Coventry Building Society did not accept online applications, but confirmed that it did not ask about BNPL when customers apply for a decision in principle.

This has come as a shock to many consumers, as BNPL giants like Klarna and ClearPay do not report your borrowing to credit bureaus. However, when doing a ‘hard’ check, lenders have looked at bank statements to see transactions with BNPL companies, allowing them to understand the consumer’s usage of the service, even if payments are made on time.

Longer BNPL repayment plans often do include some form of interest. Nationwide and Coventry Building Society said they only looked at formal BNPL agreements which looked like a traditional finance agreement bearing interest, and those that had more than six months left, when calculating affordability.

Not having to pay interest has created a false sense of security surrounding BNPL. According to Which?, Barclays took the strictest view on BNPL, saying that all active BNPL arrangements (interest included or not) were considered ongoing financial commitments, like loans or credit cards.

Mark Walker Editorial DirectorMark Walker, Co-Founder and COO at The Fintech Power 50

This is justified according to Mark Walker, co-founder and COO of The Fintech Power 50: “It’s very difficult to argue that BNPL isn’t credit. So it would make sense that it’s considered. If they consider you being three months late on your mobile phone payment why wouldn’t they consider you being three months late on your BNPL payment?”

BNPL’s Usage

The negative association surrounding BNPL is often driven by what makes it so popular – its ease of access. In making it so accessible, some experts have claimed it makes compulsive shoppers fall into debt incredibly easily. Laybuy, another BNPL company, conducted research to examine if credit checks should be brought in to use BNPL products in the first place, to stop those susceptible to debt from endorsing their bad habits.

Laybuy asked how frequently customers used BNPL products. The most common response was less than once a year (35%). 5% said they used it weekly. This number jumped to 13% with those aged between 18 to 24; by age, this group claimed to use BNPL products the most, with 28% using BNPL at least once monthly.

Gary Rohloff, Managing Director and Co-founder of Laybuy said: “BNPL is growing in popularity and for many customers, it is a far better way of budgeting than credit cards. However, responsibility is crucial. Just because there is no interest on BNPL, we should never forget that this is a credit product and consumers have the right to be protected. It is pleasing to see that many of the measures we have taken including hard credit checks are widely supported by the public at large. The Government’s consultation has now been published – it’s important we use this opportunity to raise standards across the board.”

BNPL Companies Have a Responsibility To Report Everything

Nigel Morris, Co-Founder and Managing Partner at QED InvestorsNigel Morris, Co-Founder and Managing Partner at QED Investors

Though 81% of Laybuy’s respondents wanted some form of credit check before using BNPL, a slim majority preferred soft credit checks. The UK government has expressed the possibility of regulating BNPL, and this is an idea further supported by Nigel Morris, Co-Founder and Managing Partner at QED Investors as he believes it would not only prevent people from falling into debt, but could also reflect positively on their credit scores:

“The industry needs to come of age. BNPL providers need to be reporting to the credit bureaus, as they’re currently not mandated to do so. Right now, it is decided on an issuer-by-issuer basis – some will report everything, some will only report negatively and others won’t report at all in an effort to protect their proprietary data.

“If BNPL companies start reporting to the credit bureaus, consumers can start to build a credit history with a track record around small transactions. Credit Karma, a QED portfolio company, published the results of a survey in September which showed that 34% of the users polled have missed at least one payment, and that almost three-quarters of those customers who had fallen behind believed it caused their credit scores to decrease. If customers are better-trained in how to use credit-based products, the disclosures around when one has to make payments were clearer, and if customers can routinely build a positive credit history, BNPL has the ability to be truly disruptive.

“In the near future, regulators are going to start focusing more and more on BNPL and eventually they will require greater disclosure, which will mean all repayments will affect one’s credit score. Handled correctly, BNPL will be overwhelmingly net positive – it will be a perfect marriage for issuers, consumers and merchants as fintechs help their partners sell more products and drive greater loyalty with their customers.”

If all BNPL transactions are recorded and taken into account, even if it is for a £50 jacket, this should positively reflect on your credit score, in the same way that missed payments should reflect negatively.

When explaining what mortgage lenders looked for, Which? said, “A £50 jacket that you choose to defer paying for 30 days, interest-free is unlikely to scupper your mortgage, as this will most likely be paid back by the time your mortgage is granted.

“However, a £500 washing machine you’ve chosen to split into six payments would be a debt commitment that will impact how much spare cash you have each month and therefore will need to be taken more seriously.”

As noted by Laybuy, it is the younger age demographic using BNPL, and if their credit scores were positively impacted by small payments paid back on time, this would increase the chance of them getting approved for a mortgage which as Morris said, would benefit the issuer, consumer and merchant.

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