For now, Klarna and Afterpay have declined to participate in the new credit scoring model that incorporates consumers’ buy now, pay later (BNPL) loan information.
In contrast, competitor Affirm has been working with FICO to develop two credit score models that include BNPL data. These models aim to give lenders a clearer picture of how leveraged a consumer is with installment loans. Affirm has also begun reporting its loan data to Experian and other credit bureaus earlier this year.
However, according to the Wall Street Journal, Klarna and Afterpay are pushing back on following Affirm’s lead, citing concerns for their customers. The companies said credit bureaus aren’t receiving real-time, accurate data on BNPL loans, which could negatively impact consumers’ creditworthiness.
“A strong differentiator for BNPL products is to be a way for their customers to use a form of credit without having to necessarily rely on the stricter underwriting of a credit card,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “This is built into the fabric of BNPL firms’ marketing strategies.”
“I see two main issues,” he said. “First, Klarna and Afterpay view the current scoring models as built on the legacy of credit cards and these models are not updated to reflect the novelty of BNPL. Second, Klarna and Afterpay want FICO to guarantee that the scoring data will not penalize the scores of their customers.”
Assessing Phantom Debt
Despite these objections, data from FICO showed that the inclusion of BNPL loan data didn’t have widespread impacts on credit scores. Of the loans taken out through Affirm, FICO found that they affected credit scores by roughly 10 points for over 85% of those surveyed.
Separately, Affirm pushed back against the idea that the surge in BNPL lending has created substantial “phantom debt” that isn’t captured by traditional credit scoring models. It stated that BNPL loans amounted to only a fraction of credit card debt and that delinquencies were rare.
A Tough Ask
Considering this data, the decision by Klarna and Afterpay to withhold their data is perplexing—especially in the case of Klarna, which has been expanding its partnerships and services ahead of a potential IPO this year.
For their part, Klarna and Afterpay argue that if each BNPL loan is treated as opening a new credit line, it could quickly affect customers’ creditworthiness. Afterpay stated it would not share data with credit bureaus until it has concrete evidence that doing so wouldn’t negatively impact its customers—a high bar to clear.
“To satisfy that demand, FICO could only use positive behavior in their scoring, which isn’t objective,” Danner said. “If Klarna’s BNPL delinquency rate is below 1% as they report, it is actually better performing than credit cards—so the impact of reporting does not seem as significant as one might think.”
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