It Could Be Years Before BNPL Data Have Any Real Impact on Lending Decisions

The credit-scoring company FICO may be poised to unveil this fall new models that include buy now, pay later data, but some payment experts contend it could take years before there is widespread adoption by BNPL lenders. That, in turn, could significantly limit the effectiveness of the new models in the near-term, they argue.

The Fair Isaac Corp., known as FICO, in late June announced plans to debut its new models, FICO Score 10 BNPL and FICO Score 10 T BNPL. One of the reasons FICO developed the models was to help BNPL lenders evaluate creditworthiness for first time borrowers, but adoption is expected to be “gradual,” which means their impact on the credit decisions won’t be felt by consumers for years, says Kevin King, vice president of credit risk for LexisNexis Risk Solutions.

The reason: most lenders tend to relay on older versions of FICO models due to the cost of the resources required to implement newer versions, according to King.

“Think of this as owning a car: Most people don’t buy the newest model of their preferred vehicle every year, they invest in a make/model planning to rely on it for many years,” King says by email. “The same holds for credit scoring, and the reason lenders don’t migrate to a new version annually, or whenever a new version becomes available, has to do with the costs, people, and resources required to make the change to a new credit model.”

As a result, it will “be years (if ever) before BNPL activity will be fully and consistently reflected in the scores that determine credit eligibility,” King adds.

Another hurdle, King argues, is that BNPL lenders are not obliged to furnish BNPL data to the credit bureaus. FICO uses data from the credit bureaus to formulate credit scores. Some BNPL lenders have actively refused to report such data “for over half a decade,” King adds.

Still, King points out that BNPL lenders using older versions of the FICO models won’t necessarily be handicapped when it comes to measuring a consumer’s credit worthiness. 

“BNPL providers can underwrite quite accurately. There’s no question that BNPL providers would like to see what consumers are doing at other BNPL lenders, and this FICO development offers one path to achieving that,” King says. “But BNPL providers have access to a wealth of credit data, including the traditional credit data reflected in FICO scores, alternative credit insights which provide visibility to credit behaviors not considered in FICO today, and the very predictive history of how a consumer has repaid past BNPL loans with their own organizations.”

In response, a FICO spokesperson counters by email that “the pace of adoption can vary across the industry.” The company has worked closely with many of the largest lenders in the United States, the spokesperson says.

Those lenders “told us loud and clear they think there’s a need for a credit-scoring model that includes BNPL data,” the FICO spokesperson says. “Our clients see this as a smart, forward-looking move. It helps them make better lending decisions and opens the door for more consumers to build credit.”

While FICO acknowledges that the lack of uniform data reporting by BNPL poses a potential speed bump to adoption of its new scoring models, the company is quick to add that, since June, it has “been inundated with responses from lenders eager to learn how/when they will be able to test these scores.”

FICO adds that its new scoring models will be offered with existing versions of the FICO score at no additional cost. “This approach will allow lenders to evaluate the new BNPL-enhanced credit scores while continuing to use FICO’s industry-leading models they use today, ensuring a seamless transition and added value,” the FICO spokesperson says

Several BNPL lenders have stated they have no plans to report data for Pay in 4 BNPL loans, arguably the most popular BNPL product. But King suspects the majority of lenders will contribute payment data on their most widely used products and will continue doing so indefinitely, even if it’s shown to ultimately hurt their customers’ credit scores.  

“It’s critical to understand that, without BNPL providers contributing data in this manner, it won’t matter if lenders adopt the new score, as consumers won’t see their BNPL behavior reflected in their scores,” King says.