Credit has a big inclusion problem in the UK. It is encouraging to see Buy Now Pay Later (BNPL) companies taking steps to share their data with credit reference agencies (CRAs) ahead of regulatory deadlines. However, there is much more to be done to help millennials improve their credit, and there is a real risk in advising consumers to increase their use of BNPL before we are clear on how the credit bureaus will interpret this behavior.
Over 17 million UK customers have made an online purchase using BNPL, but overall statistics on the growth of the industry can be misleading. Although the sector has boomed, its application remains limited. Most BNPL clients use it to finance occasional purchases of high-value clothing or technology. The data CRAs receive may not be enough to help lenders truly understand the risk profiles of applicants and be able to offer appropriate loan products.
Klarna’s enthusiasm for collaborating with CRAs is admirable, but the biggest challenge is updating our understanding of risk in the age of big data. And that will not be solved with 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 locked out of major financial services or find their credit product options very limited.
BNPL is a great solution for splitting up those big one-time payments, but it won’t necessarily pave the way to buying your first car or home. It’s also not the best option for someone who could get additional value from a typical credit card, like rewards or travel insurance, by using it for all their everyday spending.
The lack of financial education aggravates the problem of accessing better credit. Outside of the industry, few realize that credit scores are little more than a number. It is the information within your report that matters. Consider payday loans, for example, even if you take one out and pay it off on time, the fact that you took out a payday loan can still affect your score.
It’s too early to tell how credit bureaus will measure risk using BNPL data, so clients should avoid the trap of thinking that spending more BNPL could be a silver bullet for cheaper mortgages or credit limits. higher credit cards. We need to find alternatives to take a more holistic view of people’s financial behavior and use that to help them access secure credit.
A modern solution for assessing credit adequacy must draw on other data sources to create a complete picture of a person’s financial health and assess their ability to repay on time. One option would be to use open banking to view an applicant’s transaction data. It is more inclusive, as payment cards and mobile apps are popular with young people and easily accessible to immigrants soon after moving to the UK.
A fairer future for credit will reward good habits, not just the habit of taking on debt. BNPL should not be the only option for those with a small credit file to build their footprint. It’s time for financial institutions of all kinds to follow Klarna’s lead and volunteer their unique data and insights to help credit rating agencies modernize reporting. We need to take collective responsibility for the well-being of clients: Lenders have much to gain by helping applicants access the right kind of credit for their financial goals.