BNPL data in 2022: What’s next for risk models and scores

With the number of online purchases using BNPL services growing at a rate of 39% per year, more and more lenders are starting to become concerned with high BNPL usage, and how that data will be included within risk models and scores.

Against this backdrop, and with The Treasury set to close its consultation on the FCA’s regulation of the buy now pay later (BNPL) market, we explore what’s next for credit providers, and how to prepare.

What’s happened since the Treasury announcement? Four major updates

1.) Credit bureau updates

Since The Treasury published its update into the review of the BNPL market, one credit bureau recently announced its intention to include BNPL data in its credit scoring models. This is significant because including the data has the potential to provide a far greater picture of consumer spending habits, which could impact risk scores and (potentially) even IFRS 9 compliance. 

Interestingly, Equifax, says its research, based on a study of anonymised data from a BNPL provider, has shown that including on-time payment history from a BNPL plan can actually be beneficial to those who don’t have a long-term credit history.

2.) International regulation

The BNPL product has also seen growth internationally and many other countries are also taking a close examination of its providers. For instance, in the US, the Consumer Financial Protection Bureau (CFPB) issued orders in late 2021, to several BNPL companies, asking them to collect data on customers for use in risk scoring. The orders to collect information on the risks and benefits of these fast-growing loans went to Affirm, Afterpay, Klarna, PayPal, and Zip. The CFPB is concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.

3.) Consumer safeguarding concerns

In addition, Consumer Body Which? has called for safeguards in advance of FCA regulation. Rocio Concha, the director of policy and advocacy at Which?, said: “BNPL schemes can offer speed and convenience at the checkout, but our research shows that many users do not realise they are taking on debt or consider the prospect of missing payments.”

The consumer body also said that, “given the immediate risk,” BNPL firms should make their terms and conditions more accessible now. It added that affordability assessments should be carried out for all transactions before regulation is introduced.

4.) Amazon UK launches BNPL product with Barclays

Finally, Amazon UK announced in December 2021, that it has struck a deal with Barclays to push into the BNPL market.

Instalments will cover millions of products on Amazon but will only apply to purchases over £100. Once users apply and are approved, they will be able to reuse the credit account without having to reapply, much like a credit card.

Looking ahead

While Equifax has announced it will be the first of the “big three” bureaus to include BNPL information, it’s expected that both TransUnion and Experian will roll out similar initiatives later this year. However, this doesn’t necessarily mean the data you receive from them will all be the same.

In addition, as different bureaux have their own unique affordability assessments, it can be unclear exactly how these BNPL services will be viewed and included. BNPL providers, too, each have different reporting processes, reporting credit usage in different ways, further complicating the impact of BNPL.

Affordability models are typically built based on a customer’s known income and outgoings. This may be complemented by additional modelling on household expenditure, usually based on data provided by the ONS, to give a holistic view of the customers' affordability. But, given the profile of the typical BNPL customer, the traditional approach to modelling household expenditure may not be the right approach.

With almost a third of 20-30-year-olds now using BNPL, the debtor is more likely to be a member of a household unit and may have less responsibility for the overall outgoings. That’s why alternative approaches to affordability modelling are therefore likely to be required, such as use of transactional data available via Open Banking, to give a true understanding of a BNPL customer’s affordability.

Access the best BNPL data and scores

Once the credit bureaus start to include BNPL data in risk scores, you’ll need to ensure you get the right quality data at the best price.

But there is a lack of objective, evidence-based insight into how each bureau measures up against each other, and the variations that different lenders pay. Data benchmarking addresses this significant gap in the credit community, by providing evidence-based benchmarks, and evaluation of data quality and accuracy – with complete pricing transparency.