Buy Now, Pay Later services, which are gaining popularity with merchants and consumers alike, may soon be reporting payment history to the major credit bureaus, says The New York Times. Services like Affirm, Afterpay and Klarna allow consumers to break their online and in-store purchases down into payments – usually four payments – with no interest. Such services are now branching into subscriptions, making quarterly and annual subscriptions more attractive.
There are two sides to merchants reporting BNPL “loans” to the major credit bureaus – Equifax, Transunion and Experian – however. Consumers who make their BNPL payments on time can benefit from a positive payment history. On the other hand, late and missed payments may cost consumers more than just late fees. Such payments could impact their credit history and overall credit score. Too many late payments can lower their score, potentially causing credit rejections and higher interest rates on approvals.
Creating reporting standards
Last month, Equifax wrote about their plans to create a standard process for reporting BNPL payments, so they can be used for credit reporting purposes.
“Equifax will be the first credit reporting agency to formalize a standard process for reporting BNPL tradelines for inclusion on traditional consumer credit reports,” said Mark Luber, chief product officer for U.S. Information Solutions (USIS) at Equifax. “We are committed to helping people live their financial best and recognize the role that BNPL services can play in helping people build stronger financial profiles.”
Equifax believes that on-time BNPL payments have the potential to increase credit scores. This is particularly true for consumers with little to no credit history, such as younger consumers such as millennials and Gen Z. Equifax also says that on-time BNPL payments can help consumers to rebuild their credit.
“This BNPL trend is only going to grow as online shopping experiences get more innovative,” said Luber. “Equifax sees tremendous value in enhancing access to credit and incorporating this data into traditional credit reports to help consumers qualify for more mainstream financial services products with more favorable terms, such as mortgages and auto loans.”
Impact on subscriptions
In recent months, BNPL firms have branched into subscriptions. In November 2021, for example, Klarna announced that it would expand to help consumers in the U.S. pay and manage quarterly and annual subscriptions and memberships. Klarna is already offering BNPL options for subscription products in Sweden, Norway, Finland, Germany, Austria, the Netherlands and the U.K.
“The subscriptions market has seen massive innovation in the last decade to meet increased demand and popularity amongst consumers,” said David Sykes, Head of North America, Klarna, in a November 10, 2021 news release. “That’s why we’re thrilled to announce Klarna’s subscription offering in the US and a first for the market. As competition intensifies, the brands that provide the best services across value, flexibility, and a customer-obsessed experience will thrive.”
Two weeks later, Afterpay jumped on the subscription bandwagon, allowing BNPL payments for subscription merchants including IPSY, BoxyCharm, Savage X Fenty and Fabletics. The BNPL option will be available in the U.S. and Australia in early 2022.
In a November 24 news release, Zahir Khoja, General Manager of North America for Afterpay, said, “By offering customers the option to pay for subscriptions with Afterpay, we’re not only giving consumers flexibility to pay for more expensive monthly costs, but we’re also helping our merchant partners capture a wider consumer base through this convenient experience. As more retailers expand into the world of subscriptions, Afterpay is more than ready to answer the call for both customers and merchants.”
What does it all mean? The Buy Now, Pay Later market is growing quickly, and merchants and consumers seem to love it. Merchants get paid up front, reducing their risk, and consumers get to spread out their payments while getting immediate access to their purchase. But, like with credit card purchases, shoppers have to keep their payment promises.
Under the guise of helping consumers build credit, credit bureaus are also holding shoppers accountable for the purchases. Whether they are paying by credit card or BNPL, paying late could cost consumers far more than they realize. It will be interesting to see how Equifax’s standard evolves over time, and if the other credit bureaus will acknowledge and follow the standard. We think this is all in the early stages, and there is no clear path forward.