In a significant move for the buy now, pay later (BNPL) industry, Affirm will begin reporting data on all its products to credit bureau Experian.
As borrowers seek alternatives to high-APR credit cards, BNPL installment have gained traction. These loans often come with little or zero interest and are typically available regardless of the consumer’s credit score.
Until now, BNPL companies haven’t been required to report their loan data to credit bureaus like Experian and Equifax, unlike credit card companies. The growing demand for BNPL, coupled with the lack of transparency surrounding the debt consumers are racking up, has prompted greater scrutiny of BNPL providers like Affirm and Klarna.
Affirm’s decision to start reporting its customers’ data to Experian aims to promote greater transparency and encourage responsible lending.
“This is a major change for the BNPL industry that once differentiated itself from other credit products with not reporting to the credit bureaus,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “Now, lenders will have Experian pay-over-time history, which will allow them to have a more holistic picture of the credit applicant.”
The Phantom Debt Crisis
While more clarity will no doubt be welcomed by lenders, Affirm’s move is intriguing because one of the main selling points of BNPL has been its availability to all consumers, regardless of creditworthiness.
Affirm’s leadership has repeatedly defended BNPL against criticisms that the lack of data on installment loans could lead to a crisis of “phantom debt” with far-reaching impacts.
The company has pointed out that total transactions make up less than 1% of the over $1 trillion in consumer credit card debt, and that delinquencies are rare.
Affirm also recently conducted a yearlong study, in collaboration with FICO, to determine the effects BNPL loans have on credit scores. The study found that any ramifications on credit scores was negligible, and when there were impacts, they were often positive.
Responsible Lending Practices
Considering these efforts, the new integration with Experian may seem at odds with Affirm’s philosophy. However, it could signal that the company anticipates more regulation in the industry and is taking proactive steps to stay ahead of it.
Although Affirm will begin reporting its data next month, the BNPL data won’t immediately be factored into consumers’ credit scores, as a new model will need to be developed. Still, lenders will be able to see the number and amount of BNPL loans a potential customer has borrowed.
“BNPL had been scrutinized for lack of transparency when it comes to reporting, with so-called ‘phantom debt’ looming among consumers,” Danner said. “Now, responsible lending practices will ensure that customers are not being consumed with a debt they aren’t able to pay. It’s a move that we view as fiscally responsible and part of any good credit lending program.”
