Klarna and Afterpay have chosen not to participate in the new credit scoring model that integrates consumers’ buy now, pay later (BNPL) loan information. In contrast, Affirm has been collaborating with FICO to develop two credit score models incorporating BNPL data. These aim to provide lenders a clearer view of how leveraged a consumer is through installment loans. Additionally, Affirm began reporting its loan data to Experian and other credit bureaus earlier this year.
According to reports from the Wall Street Journal, Klarna and Afterpay are opposing FICO’s approach, citing concerns for their customers’ creditworthiness. They argue that real-time, accurate data on BNPL loans is not currently available, which could negatively impact consumers’ credit scores. “A key differentiator for BNPL products is to offer a form of credit without relying on the strict underwriting of credit cards,” noted Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research.
Danner highlighted two main issues: first, Klarna and Afterpay believe current scoring models are based on legacy credit card practices that do not reflect the novelty of BNPL. Second, they want FICO to ensure their data does not penalize customer scores.
Phantom Debt Analysis
Data from FICO indicated that incorporating BNPL loan data had a minimal impact on most consumers’ credit scores. Around 85% of those surveyed saw an effect of about 10 points, with the majority experiencing only slight changes.
Affirm contested the notion of substantial “phantom debt” in the surge of BNPL lending, stating that these loans account for a small fraction of total credit card debt and are rarely delinquent. It argued that the inclusion of BNPL data would not significantly impact consumers’ creditworthiness as reported delinquency rates were below 1%.
Strategic Considerations
The decision by Klarna and Afterpay to withhold their data is surprising, especially for Klarna, which is expanding its partnerships and services ahead of a potential IPO this year. They argue that treating each BNPL loan as an additional credit line could rapidly affect customers’ creditworthiness.
Affirm suggested that FICO scoring could be adjusted to only consider positive behaviors, making it less likely to negatively impact scores. Danner pointed out that Klarna’s reported delinquency rate is lower than credit cards, implying the potential for minimal negative impacts from data reporting.
