FICO has found that BNPL loans have little impact on most credit scores and may actually improve some, amid heated regulatory conversations around the topic.
During a 12-month study with payment network Affirm, FICO analysed over 500,000 consumers who took out an Affirm BNPL loan, comparing their scores to those without one. FICO then evaluated the potential impact of these loans on credit scores by simulating their inclusion in credit reports.
As BNPL loans become increasingly popular for purchases, the main concern in various countries has been about consumer debt. However, there has been very little discourse about how these loans may affect credit scores, which may be useful to those deciding how to regulate the sector.
Ethan Dornhelm, VP of Scores and Predictive Analytics at FICO, said: “Given the growing popularity of BNPL loans, understanding how to effectively capture the benefit that BNPL data can have on FICO Scores is crucial to all stakeholders in the credit ecosystem.
“Our findings show that the inclusion of BNPL data via our innovative treatment can drive score increases for some consumers while improving model risk performance for lenders. We appreciate Affirm’s leadership and collaboration on this study.”
The results of the study show that BNPL loans generally impacted credit scores similarly to opening a new bank account, with changes of less than +/- 10 points for over 85% of consumers.
In contrast, consumers with five or more Affirm BNPL loans typically experienced higher scores or no change. Based on this research, FICO plans to incorporate BNPL data into the credit-scoring market.
Don Lemire, VP of Credit Analytics at Affirm, commented: “We appreciate the collaboration and partnership with FICO as we sought to conduct a thorough analysis examining the impact of furnishing BNPL loans on credit scores.
“Through studies like this, we aim to drive greater transparency and promote industry best practices for responsible reporting of BNPL data to credit bureaus. We invite other providers of pay-over-time products to join us in conducting studies with FICO and committing to furnish data on all BNPL loans in a manner that is beneficial for consumers and the broader financial system.”
Effects on regulation
As noted above, several countries are actively working on regulating the BNPL sector. The US has grouped BNPL firms into the same category of credit card issuers while providers in Australia must obtain a credit licence before 10 June to continue operations.
Currently, the UK has not fully outlined specific regulations on the sector, though an announcement is likely later this year. However, in other sectors such as AI and Open Banking, the country is actively encouraging the use of technology and financial innovations to try and boost growth and investment.
Regulators’ main concern thus far has been rising consumer debt, as shoppers take out numerous loans and struggle to pay them off. Responding to this allegation, BNPL firm Klarna cited that in the Netherlands 99.4% of Klarna loans are repaid in full.
FICO’s findings on how BNPL credit scores may support the BNPL sector’s case for less restrictive regulations. At the same time, they provide regulators with more data to make informed decisions, which has also been a key argument from BNPL firms.
