TransUnion to Maximize Financial Inclusion Opportunities for Nearly 100 Million Consumers Using BNPL Loans

Photo illustrations in Ukraine - 31 May 2021
Pavlo Gonchar / SOPA Images /

Up to 100 million U.S. adults have used buy now pay later (BNPL) loans at least once over the past 12 months, but financial institutions currently do not have access to the insights generated when consumers open and repay these new debt obligations, according to a new report. Now, TransUnion says that it is launching a solution suite to “help people using BNPL loans get credit for their payments today and establish credit long-term.”

The inclusion of point-of-sale loans, which BNPL loans are a part of, on a consumer credit file is likely to benefit the populations most in need of new tools to build and improve their credit, according to TransUnion.

Liz Pagel, senior vice president and consumer lending business leader at TransUnion, told GOBankingRates that point-of-sale loans include flexible installment-like loans that allow shoppers to make payments over time.

“Point-of-sale loans are transactional, like a credit card swipe, but they are underwritten as individual unsecured installment loans,” Pagel said. “BNPL loans are a type of point-of-sale loan, though they are traditionally used for smaller purchases and repaid in shorter timeframes.”

Those point-of-sale loans — which give borrowers the option to instantly get an unsecured personal loan when they check out — will likely change how people pay for big-ticket items, according to a TransUnion report.

TransUnion said that the youngest generations – Gen Z and younger millennials – will benefit as people using this credit product tend to skew younger. One in three point-of-sale financing applicants (33%) are between the ages of 18 and 30, compared to 17% for the overall credit-active population. And 43% of point-of-sale applicants fall into the subprime credit risk category, compared to 13% overall, according to the TransUnion report.

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“While Gen Z and younger millennials may use BNPL loans at a higher rate than the overall population, TransUnion’s solution suite benefits all borrowers as our approach helps lenders ensure credit activity is captured in a fashion that maximizes benefits for consumers and the credit ecosystem,” Pagel said.

TransUnion expressed that the 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 inclusion of point-of-sale loans including BNPL into credit reports and other risk management tools can help tens of millions of BNPL users gain access to more credit opportunities and potentially secure better loan terms from lenders,” Pagel said.

In turn, she explained that this will help promote financial inclusion opportunities.

“If BNPL borrowers make on-time payments then that positive payment behavior will be available to lenders to use in their lending decisions. This can open up opportunities for those consumers to secure other loans at better interest rates,” she said.

Asked why they describe this as a “unique new BNPL solution,” Pagel explained that TransUnion has taken “a measured approach to our solution suite that benefits consumers and lenders in both the short- and long-term.”

“A consumer with normal shopping habits could originate several [BNPL] loans per year, which most existing credit models view as risky behavior.”

Pagel added that this could cause undue impact to millions of consumers’ credit scores, making scores less predictive.

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“The goal is to have a single standard for lenders to report data and accelerate adoption by lenders and scoring providers in the future,” she said. “The information will be tagged and filtered into a new partitioned part of TransUnion’s core credit file. Long term, TransUnion plans on including point-of-sale data on the core credit file where it can maximize the number of credit decisions that it impacts.”

BNPL plans can be easier to obtain than credit cards, which is appealing for people with lower credit scores or those who are new to credit and may not have a credit score at all, as GOBankingRates previously reported. However, to be clear, BNPL is a loan. “Yes it is a short-term loan and it’s interest free if you follow all the rules, but if you are late on a payment the consequences are expensive and potentially credit-damaging,” Shannon Vissers, retail analyst at Merchant Maverick, told GOBankingRates in Oct. 2021.

The practice has also come under scrutiny. In December, the Consumer Financial Protection Bureau (CFPB) issued a series of orders to five companies, Affirm, Afterpay, Klarna, PayPal, and Zip, offering buy now, pay later credit.

The CFPB said at the time it was concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing due to technological advancement.

“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” CFPB director Rohit Chopra said in a statement. “We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks.”

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