FICO® and Equifax Answer Your Questions on BNPL
FICO® and Equifax Answer Your Questions on BNPL
We had an overwhelming attendance and response at this month’s Market Pulse webinar on the rising financial service, Buy Now, Pay Later (BNPL). During our February 10 Market Pulse webinar, our panel of experts discussed details pertaining to potential score changes with the inclusion of BNPL trades in reporting,as well as, the latest economic update, small business insights, and consumer credit trends.
This month’s presenters included Amy Frasher, Senior Director & FinTech Product Manager at Equifax; Suna Hafizogullari, Senior Director of Data Science at FICO®; Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates; Sarah Briscoe, Lead Commercial Statistical Analyst at Equifax; and Bob Hofmann, Risk Solutions & Consulting SME at Equifax.
Presenters followed up with audience members’ questions* about consumer spending, inflation, delinquency trends, and more. Bob Hofmann, Amy Frasher, Sarah Briscoe, and Suna Hafizogullari answer the many critical questions below.
Buy Now, Pay Later
Are BNPL tradelines currently included in FICO® scores when reported? Which score versions (5, 8, 9?)
Suna Hafizogullari: FICO® Score considers BNPL accounts in the score calculation, provided that those accounts are reported in the main consumer credit bureau file.
What frequency of payments do we expect to see for the Buy Now, Pay Later product?
Amy Frasher: There are variances amongst different BNPL product types, but the typical pay-in-4 model starts with a 25% down payment at the time of purchase, with 3 additional biweekly payments spread over 6 weeks.
When you say “revolving has more impact on Buy Now, Pay Later,” do you mean revolving BNPL trades are riskier than installment?
Suna Hafizogullari: No, this aspect of the FICO® score is not specific to BNPL tradelines. BNPL tradelines reported as revolving rather than installment may reserve a different impact (in either direction) on FICO® score.
From the initial presentation, if most of the BNPL users are those that cannot get access to traditional credit products, how do you explain an increase in FICO® 8 when BNPL tradelines are included? I can understand positive score impact for thin-file, but how do you explain the positive score impact for Prime and super prime population?
Suna Hafizogullari: This can be explained by the specific characteristics of the BNPL tradelines included in this study: low utilization (17.5% on average), and longer payment history (5.5 months on average) of on-time BNPL payments added to the credit profile.
Do BNPL lenders/providers have to report to the CRAs?
Amy Frasher: No, there is no requirement that requires any lender (BNPL or otherwise) to report to a CRA.
How many transactions are you estimating will be reported to Equifax in the BNPL category at launch?
Amy Frasher: Tradeline volume is expected to slowly ramp-up. With our new policy and industry code, we are encouraging more qualified BNPL providers to report consistently, giving Equifax customers and scoring partners the ability to view and decide how to incorporate the information into their decisioning to potentially open up new mainstream financial services opportunities to more consumers.
Is the impact similar to other trade lines - such as a credit card?
Suna Hafizogullari: BNPL accounts reported as revolving could have a similar impact on FICO® as other revolving credit products such as credit cards, especially if the two products had similar credit lines and amounts outstanding
Are there regulatory policies or guidelines for businesses to adhere to for BNPL? Are the demographics and geographic location data of BNPL users known?
Amy Frasher: In the U.S., BNPL remains largely unregulated as BNPL products typically fall outside of regulations for more traditional longer-term credit products that are regulated by the Truth in Lending Act.
How come terms are 4 months if this study is based on Pay-in-4 which is around 1.5 months?
Bob Hofmann: The actual BNPL trades included in the analysis are reported as Line of Credit (LOC) which means that the term of the LOC can be longer than the term of the underlying pay-in-4 transactions against that LOC. e.g. the consumer may be given a $1,000 LOC that they can use over the next four months. Over that four months they can do multiple pay-in-4 transactions against that $1,000 line.
Any impact on Beacon 5.0 score?
Suna Hafizogullari: To the extent that BNPL accounts are reported in the main consumer credit bureau file, they will be factored into all versions of the FICO® Score, including FICO® Score 5 (fka Beacon 5.0).
What does Low Utilization in BNPL mean?
Bob Hofmann: It means that the percent of the overall credit line being used is very low. For example, if I have a $100 credit line and I have only used $25 of that $100 to make a purchase, my utilization is 25%. As I pay down that $25, the credit line remains at $100, but my balance decreases which means my utilization gets even lower over time.
Does the analysis include the impact of the inquiries related to BNPL applications?
Bob Hofmann: The majority of inquiries for the short-term and small-dollar BNPL transactions are treated as soft inquiries so they do not impact the consumer's score.
Is it fair to assume that for FICO® > 720, inclusion of BNPL trades probably will have minimal impact if the customers pay on time? And, is it that right now there is a selection bias in terms of customer profile using BNPL?
Suna Hafizogullari: Yes, this study found that segments in the higher score ranges experienced more muted impact from the inclusion of these positive (low utilization, on-time payments, longer history) BNPL accounts in the credit profile.
Could the positive effect of including BNPL on FICO® score be due to the unusual good performance of loans during covid? Do you not think the picture could change as consumer loans performance deteriorates?
Suna Hafizogullari: Inclusion of BNPL tradelines with on-time payment data and/or low utilization likely to have a positive impact. If the BNPL tradelines reported in the credit file were to reflect missed payments and/or higher utilization and debt levels, that would certainly alter the resulting impact on FICO® score.
Any views on what has impacted construction delinquencies?
Sarah Briscoe: There have been reports that cash flow and payment reliability are issues for Construction businesses, as well as simple supply chain issues, lumber shortages, and price increases. Lending has increased, indicating growth but also that loans might be needed to cover costs/cash flow problems. Increased lending typically also corresponds to increases in delinquency, and Construction has seen the highest lending growth of any industry. Levels still remain historically low for the industry, however.
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* The opinions, estimates and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.