Are you one of the 15 million people in the UK using Buy Now Pay Later (BNPL)? If not, you might be soon. The sector is growing fast, already more popular than credit cards with the under 30s and aiming to win over more older consumers too.
Although some BNPL providers use soft searches to assess customers at the moment, they don’t need to apply the same level of credit and affordability checks as other lenders operating under FCA regulations. Customers are backing the move to a more regulated approach, according to research from BNPL provider LayBuy, “81% of BNPL consumers agreed that credit checks on financial history should be carried out before a customer can access the product “.
This unprecedented boom in a new type of credit has the attention of all our clients. They want increased transparency and are calling for BNPL data to be incorporated into credit files so there are no hidden debts, allowing them to make smart and informed decisions when lending and have a whole view of a customer’s financial commitments, and Equifax UK supports this stance. Many of our clients are also offering BNPL products themselves and so they want to use data to make better products and deliver robust but smooth affordability checks.
Today, BNPL providers are not yet required to provide a data feed into credit reference agencies like Equifax. So unless a lender is using a service like Open Banking in their assessment of affordability, they will not yet have full visibility of an individual's credit commitments (including BNPL payments)
In the same LayBuy survey, “71% of respondents agreed that sharing the information on use of BNPL products with other credit companies is necessary”.
Our plans to help all lenders make better decisions
Equifax is there to help. We will start to add BNPL to credit files as soon as summer 2022. This will benefit customers who use BNPL and pay their bills on time, as well as increase fairness and transparency for customers and businesses alike. In the US, we found adding on time BNPL payments to credit files boosted consumers’ credit scores, especially if they had a thin credit file. It will also protect customers who use BNPL from overindebtedness. That’s important because in Australia we have found consumers who use BNPL regularly tend to have lower credit scores and are more likely to fall behind on their other credit products.
This is a big change though because BNPL’s popularity means there is a lot of new data. It is also a different type of product with short term, interest free debts used in high frequency to make mostly low value payments. We see in bank account data that almost 30% of consumers are making BNPL payments, with an average 5.7 transactions a month for £125 in total. So to make sure this transition works for clients and consumers, we will do it in phases. After all, the success of BNPL as a product can largely be put down to its ease of use and great user experience, so we must factor that into our approach if this is to work well for customers and BNPL providers alike.
First, we will add the data to credit files but we will ringfence it so it does not feed into scores. We will use a new BNPL search type, different from the usual hard or soft searches we use today. This search will be immediately visible to all lenders when a BNPL provider pulls a consumer's credit file. The consumer will be able to see it too. We will also use a new BNPL account type to record the credit data.
Then over time, we will begin to develop fair and accurate credit scores and characteristics for creditors that include BNPL data. We will also continue to develop products like our Open Banking services and fraud capabilities for our BNPL clients to help them grow their business, give consumers a great experience and get ready for the requirements of FCA regulation.
Ultimately, this is all about fairness and transparency for customers and for businesses. The benefits to customers are that it will help boost the financial profiles of those typically associated with thin file and reward those using BNPL well, and for businesses, they will have a better and more full view of the circumstances in which they are making a lending decision - being able to see a customer’s full financial commitments and not having to worry about hidden debt.
The regulatory impact on BNPL lenders
We expect FCA regulation of BNPL to begin in late 2022 or early 2023. While the exact rules are still to be finalised, the FCA will expect BNPL providers to meet high standards for creditworthiness assessments, treating vulnerable consumers fairly and fair debt collection.
So it’s likely providers of BNPL services will be required to implement some level of affordability checks and will need to evidence the process behind their decisions. But it’s not yet clear what level of assessment will be required and what impact this will have on BNPL lenders.
One factor to consider is that BNPL consumers will have the right to complain to the Financial Ombudsman Service (FOS), under FCA rules. This means BNPL lenders will need to mitigate the risk of redress claims. All FCA regulated lenders need to be able to demonstrate transparency of affordability decisions in the event of customer complaints to the FOS. Redress claims can occur when an individual regrets a decision to apply for credit in hindsight (as they feel they’ve taken on more credit than they can afford) and feel the lender should have done more to assess their affordability at the start of the customer journey.
The cost of redressing FOS claims is only one factor to consider though, as the actual process of managing FOS complaints can be resource heavy. So new-to-FCA regulation lenders need to factor this into future business plans.
The extent of the new Consumer Duty being proposed by the FCA is yet to be fully realised, but we expect this new guidance ( to be introduced on 31 July) to add even greater pressure for all lenders to deliver good outcomes for retail customers.
They’ll need to ensure the data and processes they use to onboard new retail customers, help them to make the most accurate decisions. Many retail lenders will look to implement the highest level of affordability assessment possible to ensure they remain compliant.
How Open Banking could help
Right now, Open Banking provides the highest level of affordability assessment, offering the most detailed level of up-to-date insight, and even matters like financial vulnerability. But it needs to be used in combination with bureau data to help lenders accept or reject customers based on a more accurate financial picture. Here’s what some Equifax clients had to say about the benefits of Open Banking in the BNPL space…
“I think BNPL offers a lot of benefits in terms of convenience for consumers. But I think there are some challenges with it, particularly where you see customers gradually amassing significant amounts of debt with lots and lots of buy now pay later purchases across one or many providers. I think Open Banking has a role to play in helping BNPL lenders implement rapid affordability assessments.”
Gerald Chappell, CEO and Co-Founder, Fintern
“BNPL data isn’t as visible through traditional CRA data. Open Banking presents a much better way of seeing whether a customer is taking any BNPL transactions. Being able to see the prevalence and recency of these recent BNPL transactions can help you make a much more accurate lending decision. “
Michael Hoare, Chief Credit Officer, Metro Bank Consumer Finance
Our own analysis suggests clients could accept more customers than they would reject though, as credit risk scores would on average improve when bureau data is combined with Open Banking. On average, we expect 50% of credit scores to increase when transaction data from Open Banking is included.
In a recent Equifaxclient interview with Fintern, they told us they were “able to accept six times as many customers as they rejected for personal loans by using Open Banking at the front of their customer journey”.
But Open Banking would no doubt add a little friction into what seems an almost frictionless journey. Despite this some BNPL providers like Butter and Payl8r have already integrated Open Banking into their credit decisioning process.
We spoke to Sam Fogerty, MD of Payl8r and she offered her view on the potential of Open Banking within a BNPL context…
“Historically, to get anything on credit you needed a good credit file which meant younger people were being penalised for not having credit. We found many 18-35s have good jobs and low outgoings and are more than able to afford loan repayments but the systems used to check affordability only look backwards at a person's credit history.
“Payl8r's journey started in 2015 with a mission to revolutionise the finance industry by offering fair, ethical and responsible lines of credit. We used Open Banking technology to view a digital statement of a customer's bank account and worked out if the monthly payment is affordable based on the income and essential expenditure. This allowed us to offer credit to a whole new market that was previously untouched. Building Open Banking into our application has allowed us to assess a customer’s affordability in real time, giving an instant decision in most cases"
We believe BNPL firms should prepare to put in place the right processes to ensure readiness for the regulatory changes to come. Only Equifax has the credit data, open banking and debt collection expertise to help BNPL providers with every stage of that journey.
1Source: LayBuy research featured in AltFi article