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Payments Briefing: BNPL will soon play a much bigger role in credit scores

  • Credit bureaus in the US are working to implement standardized credit reporting plans on BNPL loans.
  • BNPL use may start to play a much bigger role in consumers’ credit ratings.
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Payments Briefing: BNPL will soon play a much bigger role in credit scores

Even though Buy Now, Pay Later has become a very popular payment option, it hadn’t really caught the attention of regulators and credit agencies until recently. That’s about to change. Credit bureaus in the US are now working to implement credit reporting plans on BNPL loans.

At present, although some BNPL plans for major purchases are included in credit reports, many of the smaller installment plans involving everyday items go by unnoticed, even though they add up to billions of dollars. 

In December, Equifax became the first consumer credit bureau to announce that starting this February, it will implement a standardized process for incorporating BNPL transactions – including smaller purchases – in credit reports. Its two major competitors, TransUnion and Experian, aren’t too far behind. They've teased their own BNPL approaches, as the regulatory noise around BNPL continues to grow louder. 

This development closely follows some recent news about the Consumer Financial Protection Bureau, which issued a series of orders to five of the largest BNPL players – Affirm, Afterpay, Klarna, Zip and PayPal – to share information on the risks and benefits associated with BNPL loans. Among other issues, the CFPB expressed concern about how BNPL companies use the data they collect from customers, and how these loans could lead to growing consumer debt.

BNPL providers are currently in talks with credit bureaus about regularly reporting their data in a move that they say should benefit both lenders and consumers. Will it, though?

“The data that's currently not being reported fully in this regard is really a blind spot to lenders,” said Tom Aliff, risk consulting leader at Equifax, in an interview. He argues that adding these installment plans to credit reports will help provide lenders with a more comprehensive look at consumers’ financial obligations. On the other hand,  consumers with thin credit files who make regular on-time payments could build a respectable credit history over time and boost their FICO scores by as much as 21 points, according to an Equifax study.

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But that’s only half of the story, at least from a consumer’s perspective. Missing an installment payment can already harm a shopper’s credit rating, even though a lot of activity is currently not being reported. A Credit Karma study found that more than a third of BNPL users (34%) missed one or more payments. Furthermore, almost three-fourths (72%) of these consumers believed that their credit score had declined as a result of missing the payments.

So, how will this development impact the future of BNPL in particular, and alternative payments as a whole? Siamac Rezaiezadeh, director of product marketing at payments firm GoCardless, shared his thoughts on the matter with me. This is what he had to say.

“I think Equifax’s move to include BNPL payments within credit card reporting could lead to heightened awareness among consumers of how their spending can hurt their scores. But I think this awareness can only be a good thing, particularly if it encourages consumers to shop responsibly, but also to keep a better handle on what they are spending across different BNPL providers. A recent study by GoCardless found that close to half (46%) of Americans say they find it difficult to keep track of how many buy-now-pay-later plans they have open.

When it comes to a better payment solution, paying with your bank account is the best way to minimize the chances of missing a payment – simply because bank accounts don’t expire, they don’t get lost, and the vast majority of payments fail – if they do fail – because of insufficient funds. You can’t say the same about card-on-file payments, where card expiration and blocks by the issuing bank are the root cause of a high proportion of payment failures. Typically around 10% of card payments will fail, but when consumers are paying directly from their bank account, this drops to around 2.5%. In a world where credit scores are impacted when a payment fails, this now really matters.”

Podcasters are getting their own payment services

Stripe has partnered with Spotify to help podcasters accept payments and launch recurring revenue streams. The move is the latest in a series of major collaborations announced by the payments firm. Earlier this month, Stripe entered a five-year agreement with Ford to modernize its ecommerce and payments infrastructure.

As part of the new deal with Spotify, Stripe will develop podcast payment services and make it easier for content creators to monetize their content. Spotify recently launched Podcast Subscriptions, a service that allows podcasters on its platform to offer paid monthly content. The streaming platform will use Stripe Connect – which facilitates purchases between third-party buyers and sellers – to streamline payments and identity verification for podcasters.

This will enable Spotify to expand its podcast subscription service to support dozens of currencies for creators across more than 30 countries. These creators will now be able to accept payments in their preferred currency. For example, a podcaster in France can receive a payment in euros, even if listeners are paying monthly subscriptions in dollars.

Stripe says Spotify has joined the hundreds of companies that are using its infrastructure to power payment services and boost the creator economy. An analysis by the firm last October showed that creators on 50 Stripe-powered platforms had earned nearly $10 billion in revenue.

Stripe also teamed up with creator platforms such as Patreon and Substack on payments tech, and recently worked with TikTok to launch a new feature for tipping creators.

What we’re reading

  • Zip ‘in discussions’ to buy Sezzle amid BNPL market upheaval (Insider)
  • Expensify debuts card for CPAs and accounting firms (PYMNTS)
  • Can banks snatch up BNPL companies in an overcrowded marketplace? (The Financial Brand)
  • Mastercard launches virtual card for instant B2B payments (Finextra)
  • Chase to launch Instacart co-branded credit card (CNBC)
  • Temenos launches AI-driven BNPL offering (Finovate)
  • On a mission to be the ‘Affirm for B2B,’ Vartana secures $57 million in debt, equity (TechCrunch)
  • Google hires PayPal exec to help reset its banking and payments ambitions (Finextra)
  • Affirm's Max Levchin talks about fintech's stock slump (Axios)
  • How will BNPL evolve? (Tom Noyes)

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