Credit has a huge inclusiveness problem in the UK. It is encouraging to see companies buy now pay later (BNPL) taking steps to share their data with credit reference agencies (CRAs) ahead of regulatory deadlines. However, much more needs to be done to help millennials improve their credit, and a real risk is advising consumers to increase BNPL usage before we have clarity on how the credit bureaus will interpret this. behavior.
Over 17 million UK customers have made an online purchase using BNPL, but key industry growth statistics could be misleading. While the sector has exploded, its application remains narrow. The majority of BNPL’s clients use it to finance occasional expensive purchases of clothing or technology. The data that rating agencies receive may not be sufficient to help lenders truly understand applicants’ risk profiles and be able to offer appropriate credit products.
Klarna’s enthusiasm to collaborate with rating agencies is admirable, but the bigger issue is updating our understanding of risk in the age of big data. And this will not be solved by a regulatory crackdown on BNPL.
The UK is home to 5 million ‘credit invisible’ people who have little or no financial footprint. Many are young professionals and expats. Unable to prove their creditworthiness, they are excluded from traditional financial services or find that their options for credit products are very limited.
BNPL is a great solution for spreading the occasional large payment, but it won’t necessarily make it easier to buy your first car or home. It’s also not the best choice for someone who might get extra value from a typical credit card — like rewards or travel insurance — by using it for all their day-to-day expenses.
Lack of financial education compounds the problem of access to better credit. Few outside the industry realize that credit scores are little more than a number. It’s the information in your report that counts. Consider payday loans, for example – even if you take one out and pay it back on time, the fact that you took out a payday loan can still impact your score.
It is too early to know how credit bureaus will measure risk using BNPL data. Customers should therefore avoid the trap of thinking that increased BNPL spending could be a “silver bullet” to access cheaper mortgages or higher credit card limits. We need to find alternatives to take a more holistic view of people’s financial behavior and use them to help them access safe credit.
A modern credit adequacy assessment solution must rely on other data sources to build a complete picture of a person’s financial health and assess their ability to pay on time. One option would be to use the open banking system to review an applicant’s transaction data. It’s more inclusive, as payment cards and mobile apps are popular with young people and easy to access for immigrants soon after moving to the UK.
A fairer future for credit will reward good habits, not just the habit of borrowing. BNPL should not be the only option for those with a thin credit record to build their footprint. It’s time for financial institutions of all kinds to follow Klarna’s lead, offering their unique data and insights to help rating agencies modernize reporting. We must collectively take responsibility for the well-being of clients – lenders have everything to gain from helping applicants access the right kind of credit for their financial goals.