BNPL shines a light on the credit data reporting problem

Christian Widhalm is the CEO of Bloom Credit, an API platform that enables real-time credit reporting, improves reporting accuracy, and expands the breadth of alternative consumer-permissioned data. He was the former CRO at LendKey.

The way consumer creditworthiness is assessed is in dire need of a makeover. Traditional methods no longer provide a complete and accurate picture, especially in the era of alternative lending products like Buy Now, Pay Later (BNPL). Increased complexity in the lending landscape calls for a unified, holistic approach that incorporates BNPL payment information among other alternative data. Ensuring all relevant data is reported accurately benefits both consumers and lenders alike. 

An examination of the current shortcomings of credit reporting and BNPL’s role reveals that these limitations need to be addressed sooner rather than later. The solution should provide for more robust lender insights, subsequently creating a more transparent and inclusive credit system. 

Limited lender insights negatively affect consumers
Lenders today still face significant gaps in their understanding of consumers' financial health. Traditional credit reports typically fail to capture a person’s full range of financial commitments, such as BNPL transactions, rent, telecommunications and utility payments. 

Some argue the exclusion of data like BNPL payments might cause lenders to underestimate the risks associated with consumers who have substantial unreported financial obligations. Yet, BNPL services can help consumers manage their cash flow more effectively. A consumer who might not appear creditworthy by traditional standards but has a history of on-time payments for purchases made through installment plans could be overlooked by lenders if the data gap is not addressed.This alternative information is often missing from credit reports, rendering lenders unable to fully assess the risk. The result is the unnecessary exclusion of consumers with thin or nonexistent credit files. 

The challenges of reporting BNPL data
What’s often at the root of these gaps in insight is BNPL providers’ reluctance to report their data to the credit bureaus. Despite the proliferation of BNPL services and the valuable data they generate, several factors contribute to their resistance:

• Technical hurdles: Traditional credit scoring models were not initially designed to accommodate the high frequency and low dollar value of BNPL transactions, making integration challenging.

• Operational burdens: BNPL providers face significant administrative requirements if they report data, ranging from the management of consumer disputes to ensuring compliance with the Fair Credit Reporting Act (FCRA).

• Concerns about undercutting BNPL's value proposition: BNPL is attractive to consumers because of its accessibility, especially for those who don’t have traditional credit scores. There’s a concern that reporting this data could undermine its appeal because of the risk it might negatively affect credit scores. 

• Data Retention: BNPL providers are reluctant to share their first-party data with credit bureaus without clear benefits.

Obstacles for credit bureaus
On the flip side, credit bureaus also encounter challenges incorporating non-traditional data, including BNPL transactions, into their systems, which were originally designed to handle traditional credit products like mortgages, auto loans and credit cards. Adding BNPL and other modern financial products to credit reports may require a revamp of infrastructure and processes.

Additionally, how data providers report to the bureaus — and which bureaus they report to — is fragmented. This dynamic leads to inconsistencies in consumer credit profiles and potentially varying credit scores across bureaus, causing confusion and challenges for consumer credit reports.

The case for a unified approach to credit reporting
The industry needs to adopt a holistic approach to credit reporting in order to address these challenges. Credit bureaus, lenders, and data providers need to collaborate to ensure that all relevant financial data is accurately identified and reported. This unified approach would:

• Improve data accuracy: A standardized approach to reporting would ensure all relevant data is included in credit reports, providing a more accurate assessment of consumer creditworthiness.

• Reduce risk: A comprehensive picture of credit data and a holistic account of a lender’s risk associated with unreported obligations reduces potential defaults and financial instability for the consumer. 

• Expand Access: A unified approach would promote fairness and inclusivity in credit decisions by ensuring that all consumers  — including those with thin credit or no credit files — are evaluated based on a complete set of financial data. 

This approach can lead to more accurate credit assessments and result in lower costs of credit for potentially millions of consumers.

What’s ahead

Streamlining and structuring a unified way to report alternative data goes well beyond a simple technological upgrade. It is a strategic imperative for the financial industry. If we’re serious about improving access to credit for consumers based on data-driven decision making, credit bureaus, lenders, and technology providers need to come together and work collaboratively to design a more equitable and efficient credit system that benefits everyone.