Our view of BNPL is mixed. Consumers are ready for something new, as evidenced by the product’s growth. Lenders are prepared to lend, but some lack the discipline to fortify their lending strategies with good, sound guidelines. Merchants face enough issues as the economy sours and are receptive to financing at the point of sale.
There is a pronounced shift in the fledgling market. The freewheeling lending model does not work, as seen through the Australian Stock Exchange and investor reports. PayPal redefined the market yesterday with its Long-Term Pay model that takes BNPL out to 24 months if desired. Consumer change is evident in the broader topic of installment lending. In short, the product is evolving. The market will be very different, same time next year.
Now, to the issue of credit bureau reporting. Seeing the CFPB weigh in with a blog on the confusion in BNPL reporting was good. Frankly, when I started looking at this critical consumer credit feature, the first thing that came to mind was whether a BNPL loan is an installment or revolving credit instrument.
You may want to say shame on me because the answer is obvious. But it is not. If a BNPL gives you a credit line, and you use only part of it, does that mean it revolves or is it a mini-installment loan within a line of credit? There were different answers with no standard definition.
The CFPB blog has a similar reaction to this question. And wow, what timing, as Equifax, Experian, and TransUnion scramble on other bureau reporting issues.
Until recently, few BNPL lenders furnished information about consumers to the nationwide consumer reporting companies (NCRCs).
This lack of furnishing could affect consumers and the credit reporting system downstream. It could be bad for BNPL borrowers who pay on time and may be seeking to build credit, since they may not benefit from the impact that timely payments may have on credit reports and credit scores.
It may also impact both BNPL lenders and non-BNPL lenders seeking to understand how much debt a prospective borrower is carrying.
And here is the crux of the issue:
In recent announcements, each of the three largest NCRCs—Equifax, Experian, and TransUnion—has described its plans to accept BNPL payment data.
However, the NCRCs plans vary, and the Bureau is concerned that this inconsistent treatment will limit the potential benefits of furnished BNPL data to consumers and the credit reporting system.
The issue remains open, and the strategies are unaligned. This is a big one for the consumer credit industry and right down the strike zone for CFPB to help figure out. BNPL reporting should not be a new revenue stream for credit bureaus. A loan is a loan, and revolving debt is a revolving debt – pick one and apply it to all. Or, if that does not work, add a new BNPL flag on the file.
With the holiday season soon approaching, stressed-out consumers can use something like BNPL, and merchants can surely use the business. As to bureau reporting, it should be just the facts, as they say.
Until then, keep your credit card handy. You can always make bi-weekly payments there, and if you time it correctly, pay minimal interest. And if you do not have a card, look for a secured credit card. Plenty of good options exist there today.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
