Responsible borrower or financially unstable: How will lenders view BNPL customers?

In light of the recent news that buy-now-pay-later firm Klarna will be reporting to credit agencies about how customers are keeping up with payments from 1st June 2022, I recently spoke to Ben Allott, Commercial Director at Infinian about how this development might impact BNPL customers looking for loans from traditional lenders. With over 16 million Briton’s having used Klarna at some point, this news has widespread implications and sets a precedent for the unregulated BNPL sector.

Is BNPL usage an indicator of financial vulnerability? 

On its own, BNPL usage does not indicate financial vulnerability or instability. Allott commented that “some customers will use this form of credit for convenience and because it is low cost, but others will need access to it because of the lack of alternatives and/or because they need to spread payments out.” Therefore, provided the credit reference agencies introduce this data as a separate product type then lenders will be able to differentiate the use of this product in assessing the different behaviours between those in difficulty and those who are not.

Could BNPL repayment be used to build up someone’s credit score?

Credit reporting has been described as a ‘double-edged sword’ and it remains to be seen whether BNPL customers, even those who keep up with their repayments, are likely to benefit from or be hindered by lenders’ perception of their financial stability. Allott suggests that claims that BNPL could be used to build up credit scores should be made cautiously, as “positive repayment histories are likely to help but this could be offset by the presence of multiple open accounts or regular account openings.” Initially, the move may serve to deter shoppers from using BNPL if they are concerned about their long-term lending approval prospects.

It has been suggested that Klarna’s credit reporting could be beneficial in cases such as immigrants and those with minimal credit history, providing customers an opportunity to build and improve their credit score by repaying BNPL loans in a timely manner. If the aim of this move by Klarna is to reward healthy financial habits, then those who make their repayments on time should theoretically have nothing to worry about. But is this true in practice? Only time will tell. 

How will BNPL data feed into affordability assessments? 

In terms of informing affordability and vulnerability assessments, Allott comments that in theory “this data should provide a more accurate view of a customer’s credit outgoings and assist positively, therefore, in looking at disposable income levels.” However, he adds that care is required where the loan repayment terms are short as lenders have traditionally reported to credit reference agencies once a month. For short term loans this could mean that the balance is largely repaid before the next update and may overstate a person’s outgoings leading to a decline decision.

Overall, it seems that this type of credit would be highly useful if it was able to be reported in real time as well as monthly, but Allott warned that as with any new data source, care is required in interpreting it properly to the benefit of lenders and customers.