What’s next for risk models and scores

With the number of online purchases using BNPL services increasing at a rate of 39% annually, more and more lenders are starting to take an interest in using high BNPL, and how this data will be included in risk models and scores.

Against this backdrop, and with the Treasury preparing to close its consultations on FCA regulation of the buy now and pay later (BNPL) market, we’re exploring what’s next for credit providers, and how to prepare.

What has happened since the Treasury announcement? Four major updates

1.) Credit Bureau Updates

Since the Treasury published its update in the BNPL Market Review, one credit bureau recently announced its intention to include BNPL data on its credit scoring forms. This is important because including data has the potential to provide a much larger picture of consumer spending habits, which can influence risk scores (and possibly even) compliance with IFRS 9.

Interestingly, Equifax says, its research, based on a study of anonymized data from a BNPL provider, has shown that including the on-time payment history of a BNPL plan can actually be beneficial for those without a long-term credit history.

2.) International regulation

The BNPL product has also seen growth internationally and many other countries are also closely scrutinizing their providers. For example, in the United States, the Consumer Financial Protection Bureau (CFPB) issued orders in late 2021, to several BNPL companies, requiring them to collect data on customers for use in risk scoring. Orders to collect information about the risks and benefits of these fast-growing loans went to Affirm, Afterpay, Klarna, PayPal and Zip. The CFPB is concerned with debt accumulation, regulatory arbitrage, and data collection in a consumer credit market that is already changing rapidly with technology.

3.) Consumer protection concerns

In addition, the consumer body who? He called for upfront safeguards from the Financial Conduct Authority (FCA) regulation. Rocio Concha, Director of Policy and Advocacy at Which?: “BNPL schemes can provide speed and convenience at checkout, but our research shows that many users do not realize they are incurring debt or consider the possibility of missed payments.”

The consumer authority also said that “due to the immediate risks” BNPL companies should make their terms and conditions easier to access now. It added that affordability assessments of all transactions should be conducted before the regulations were introduced.

4.) Amazon UK launches BNPL product with Barclays

Finally, in December 2021, Amazon UK announced that it had entered into a deal with Barclays to enter the BNPL market.

The premiums will cover millions of products on Amazon but will only apply to purchases over £100. Once users have applied and been approved, they will be able to reuse a credit account without having to reapply, much like a credit card.

I look ahead

While Equifax has announced that it will be the first of the “big three” offices to include BNPL information, TransUnion and Experian are expected to roll out similar initiatives later this year. However, this does not necessarily mean that the data you receive from them will all be the same.

Additionally, as different offices have their own unique assessments of affordability, it may be unclear exactly how BNPL services will be viewed and included. BNPL providers also have different reporting processes, reporting credit usage in different ways, further complicating the impact of BNPL.

Affordability models are usually built based on the known income and expenses of the customer. This can be complemented by additional household spending modeling, usually based on data provided by the National Statistics Office, to give an overall view of clients’ affordability. But, given the typical BNPL client profile, the traditional approach to modeling household expenses may not be the right one.

With roughly a third of 20-30 year olds now using a BNPL, the debtor is more likely to be a member of a home unit and may bear less liability for overall expenses. This is why alternative approaches to affordability modeling will likely be needed, such as using transaction data available via open banking, to give a true understanding of BNPL client affordability.

Access to the best BNPL data and scores

Once the credit bureaus start including BNPL data in their risk scores, you’ll need to make sure you get the right quality data at the best price.

But there is a lack of objective, evidence-based insight into how each office measures one another, and the differences paid by different lenders. Data measurement addresses this significant gap in the credit community, by providing evidence-based standards, assessing data quality and accuracy – with complete pricing transparency.


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