FTT Embedded Finance


Caveat Emptor – Buy Now Pay Later – the Credit Score Risk?

It’s not hard to see why consumers have embraced Buy Now Pay Later (BNPL) services with open arms in recent years. According to research from Finder.com, 37% of Brits say they have used a BNPL service in the past with more than half of BNPL users reporting to use these services more since the beginning of COVID. 

While BNPL is growing increasingly popular, especially among Millennials, thanks to the convenience it offers, customers may not be aware of the impact these services have on their credit score. Depending on the lender, users of BNPL may be viewed as having a worse credit profile than a non-user, due in part to automated credit checks flagging these transactions. 

Some lenders perceive usage of BNPL to be a sign of an individual living beyond their disposable income and therefore potentially having affordability issues. As BNPL services are technically short-term point-of-sale loans, even if they are repaid on-time, they can bring down the average age of a potential borrowers’ credit history. If even a single BNPL payment is missed, this negative mark would be stored on a credit search for years. 

Negative impact 

A number of recent reports have found users of BNPL products have faced challenges in obtaining a mortgage. A customer of Klarna, one of the largest BNPL providers, said they were turned down for a mortgage after using BNPL, with the lender being concerned the customer was living beyond their means. 

Some traditional lenders have been relatively slow to update their lending methodology to incorporate the BNPL lending model. When mortgage applicants submit their documentation, some lenders consider active BNPL agreements as part of the long-term affordability assessment, despite the short-term nature of these loans. 

As different lenders have their own unique affordability assessments, it can be unclear exactly how these BNPL services are viewed. BNPL providers, too, each have different reporting processes, with some reporting credit usage to credit bureaus in different ways, further complicating the impact of BNPL. 

Growing issues 

With the number of online purchases using BNPL services growing at a rate of 39% per year, more and more consumers are going to deal with lenders being concerned with high BNPL usage. Of BNPL users, 51% believe using these products will actually improve their credit scores, according to Finder.com, yet in practice, they can often cause more red flags than benefits. 

E-commerce firms have benefited considerably by introducing the BNPL option at checkout, but for this trend to continue, customers will need reassurances that BNPL will not damage their chances of gaining a mortgage or other credit. 

Automatically grouping BNPL services with regular debt payments or high-interest short term payday loans is clearly an ineffective process, as many younger customers simply use BNPL for its ease and have never missed a payment. To ensure that BNPL products continue to benefit millions of consumers, BNPL providers need to work with lenders to communicate the ways customers use these products, so that affordability assessments are more realistic. 

There is clearly a lot to discuss given both the growing use of BNPL products and the impact they may have on users credit profiles. Join us for FTT Embedded Finance North America on September 1st at 9:00 am PT as we discuss whether or not regulation is keeping pace with innovation. Register before August 25 to secure your complimentary delegate pass and add your voice to the debate.

Written by Finbarr Toesland, Editorial Contributor, Fintech Talents