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A new solution launched by TransUnion will help U.S. consumers using buy now, pay later (BNPL) gain credit for their payments and improve their score, while giving businesses the insight to accurately capture consumers’ credit behavior.
Consumer credit agency TransUnion has announced its new Point-of-Sale Suite of Solutions enables the inclusion of point of sale (POS) loans, such as BNPL transactions, on the consumer credit file; therefore, helping consumers to build and improve their credit.
The new solution addresses most BNPL firms’ concerns about unpredictable impacts to consumer scores, the company’s spokesperson told VIXIO.
“TransUnion understands that these loans are brand new types of credit products that need to be handled differently until the credit ecosystem can adjust to incorporate them effectively into scores and models,” they said.
Estimates largely vary, but TransUnion claims there are up to 100m U.S. adults who have used BNPL loans at least once in the past 12 months.
At the same time, a recent survey by Research and Markets predicts that BNPL payments will grow by 66.5 percent in the United States annually and reach $82bn in 2022.
Although the adoption of BNPL products has surged in recent years, there are still no consistent rules as to how businesses are required to report the payment behaviors of their customers.
Some BNPL providers in the U.S. report information to credit bureaus, but many of them are not required to do so regularly.
In addition, those BNPL providers that do report, often send data only about late payments, but they do not report if a consumer pays in time and in full.
This can be particularly detrimental to young consumers who have a thin credit file and cannot build up good credit scoring because there is no regular obligation for BNPL providers to report data.
TransUnion said 9 percent of POS applicants are thin file, and 43 percent of POS applicants fall into the subprime credit risk category, compared with 13 percent for the overall credit-active population.
Younger populations also tend to favor BNPL products over traditional credit solutions, with one in three POS financing applicants being between the ages of 18 and 30, compared with 17 percent overall.
“Inclusion of point-of-sale loans on the consumer credit file is likely to benefit the populations most in need of new tools to build and improve their credit,” the company said in an email statement.
In addition to improving consumers’ credit scores, the service will help businesses to capture the credit behaviors of consumers using BNPL products and other POS installment products more accurately.
Similar to how credit cards work, POS loans are transactional, but they are underwritten as individual unsecured installment loans, the company explained.
Therefore, a consumer with normal shopping habits could sign up for several loans per year, which most existing credit models view as risky behavior. This could cause an “undue impact” on millions of consumers’ credit scores, according to TransUnion.
The new service will capture any financing at the point of sale for individual purchases, the company confirmed to VIXIO, including other types of BNPL products that do not fall under the existing definitions of credit.
TransUnion uses unique tags and a filtering mechanism within the core credit file to enable POS data availability online.
The filtering will prevent the tagged data from entering traditional scoring models to prevent negative impacts on consumer credit scores.
Users of TransUnion credit data will be able to opt in to receive these tradelines as part of their existing credit data delivery. Default credit report delivery, which feeds existing scoring models, will remain unaffected.
Over time, the company expects the industry will work to enhance models using this data and many lenders will choose to use the information in addition to their existing models.
“The goal is to have a single standard for lenders to report data and accelerate adoption by lenders and scoring providers in the future,” the company said.
“The inclusion of point-of-sale loans including BNPL into credit reports and other risk management tools can help tens of millions of consumers gain access to more credit opportunities and potentially secure better loan terms,” said Liz Pagel, senior vice president and consumer lending business leader at TransUnion.
The firm has worked with the top BNPL lenders over the past three years to develop this solution, which also ensures compliance with the Fair Credit Reporting Act.
Long term, TransUnion plans on including POS data on the core credit file where it can, to maximize the number of credit decisions that it impacts.
“The industry needs time to adjust, and each lender will adopt the point-of-sale tradelines and attributes at its own pace. Maximizing the financial inclusion impact requires broad usage of this valuable data in more credit decisions,” added Pagel.
“Buy now, pay later is helping many consumers access short-term credit for shopping at a time when prices are rising rapidly. BNPL can enable consumers that have not traditionally had credit records to build better credit scores. We think adding this data to credit scores may help drive broader financial inclusion and we are working rapidly to incorporate this into VantageScore models,” said Silvio Tavares, president and CEO of VantageScore, a data analytics firm founded by Experian, Equifax and TransUnion in 2006.
