In recent years, shoppers have embraced “buy now, pay later” loans as a simple, interest-free way to buy everything from sweaters to concert tickets.
However, loans are generally not reported on consumers’ credit reports or reflected in their credit scores. This has fueled concerns that users could take on an outsized amount of debt, invisible to both lenders and financial regulators.
So in February, when Apple announced that it would begin reporting loans made through its Apple Pay Later program to Experian, one of the three major U.S. credit bureaus, it seemed like a watershed moment for the category in rapid growth “buy now, pay later”. .
But none of the other big pay later providers have followed Apple’s lead. And even though credit bureaus and lenders say they’re interested in finding a way to work together, the gap between the two sides remains wide — so much so that some pay-later companies are considering starting a credit bureau. alternative credit assessment to manage their loans.
“I haven’t seen really significant progress,” said David Sykes, chief commercial officer of Klarna, one of the largest deferred payment companies.
Buy now, pay later loans allow consumers to pay for purchases over time, often in four installments over six weeks, interest-free. They gained popularity during the pandemic, when they helped fuel a boom in online shopping. Rapid growth continued: the retail industry attributed its record holiday sales in part to the popularity of pay later products.
But Wells Fargo economists warned last year that the “phantom debt” resulting from forgivable loans “could create substantial problems for the consumer and the economy as a whole.”
Credit reporting agencies say integrating deferred payment loans into the reporting system would benefit consumers, who could build their credit by repaying loans on time, and lenders, who would have a more complete picture of borrowing consumers.
Late payment providers agree – in theory. But they fear that reporting the loans will end up hurting their customers. Existing scoring models penalize borrowers who take out numerous loans over a short period of time. This could pose a problem for the pay later industry because, unlike credit card purchases, every pay later transaction is treated as a loan.
Some consumer advocates share this concern.
“The credit reporting system is a system that assumes monthly payments, longer-term loans, and it’s just not really set up to handle ‘buy now, pay later,'” Chi Chi said Wu, senior attorney at the National Consumer Law Center. “It’s a square peg, round hole kind of thing.”
In the United States, the consumer information industry has evolved over decades into a complex network of independent and sometimes competing players. Financial institutions – banks, mortgage brokers, auto lenders and others – report loan information to three major credit reporting agencies: Equifax, Experian and TransUnion. These bureaus compile the data and provide it to lenders and consumers, as well as companies like FICO and VantageScore, which use it to establish credit scores.
The major credit bureaus say they addressed the pay-it-forward industry’s concerns more than two years ago by creating a category for loans. This should allow FICO and VantageScore to adjust their models to account for the unique characteristics of these loans – and ultimately incorporate them into credit scores without penalizing users. (For now, the loans would be included in consumers’ credit reports but would not be visible to lenders or incorporated into scoring models.)
“It’s been a long road, but I think we’re finally reaching a turning point in the momentum toward releasing the data,” said Liz Pagel, a senior vice president at TransUnion who oversees the company’s consumer lending business. business.
The pay later industry, however, says the credit reporting system is not yet ready. For one, credit bureaus primarily receive monthly data from lenders, whereas pay-later loans are typically paid every two weeks. (All three major credit reporting agencies have said that while monthly reporting is the default, lenders can report more frequently if they choose.)
“It’s just not fit for purpose yet,” said Klarna’s Mr. Sykes. “And we haven’t seen anything from the offices that suggests it’s about to be.”
Klarna reports loans to TransUnion and Experian in Britain, where the system works somewhat differently. A rival, Affirm, reports some longer-term loans to Experian in the United States and says it hopes to release shorter-term loans “eventually.”
Other major pay later providers, such as Afterpay, PayPal and Zip, have said their concerns over the credit reporting system’s handling of pay later loans have not been resolved.
“Our members continue to say this is still insufficient,” said Penny Lee, president of the Financial Technology Association, which represents many of the largest late-payment companies.
That argument took a hit in February, however, when Apple announced it would begin reporting loans made through its “Apple Pay Later” product — essentially a copy of the quarter-pay loans offered by Klarna, Afterpay and companies similar – to Expérien.
Apple declined to comment, but in a previous press release said that while the loans would not immediately be integrated into credit scores, it viewed the move as a step to “provide users with the ability to further strengthen their credit.”
Silvio Tavares, chief executive of VantageScore, said in an interview that Apple’s announcement showed the credit scoring system’s ability to handle pay-later loans.
“It’s hard to be more sophisticated than Apple,” he said.
However, far from joining Apple, late payment providers appear to be exploring a system outside of traditional credit reporting infrastructure. Last year, two former industry executives founded Qlarifi, a data aggregation platform specifically aimed at deferred payment loans. (Mr. Sykes of Klarna is an investor.)
Alex Naughton, who left Klarna last year to help found Qlarifi and is now its chief executive, describes the company as a more agile, tech-enabled approach to credit scoring. It will be able to collect and share data in real time rather than monthly, the standard for major credit bureaus.
“I don’t think the existing infrastructure is capable of adapting that quickly,” he said.
Lenders and credit agencies agree that forfeit loans are unlikely to remain outside the credit scoring system forever. But it is not clear what will break the deadlock. Ultimately, industry experts say, it will likely come down to one of two things: Either regulators will force later-paying companies to start reporting their expenses, or market forces will.
“Either it’s going to be a market change or a regulatory change,” said Shane Foster, an attorney at Greenberg Traurig who specializes in financial regulation.
Regulatory action seems unlikely in the near future, at least at the federal level. The Consumer Financial Protection Bureau has suggests that he would like to see pay later loans integrated into the credit reporting system. But even though the agency oversees the credit reporting industry — enforcing policies that ensure the data is accurate and consumers’ rights are protected — it has not tried to require private companies to provide data to offices.
Several states, including California, have taken steps to regulate the late payment industry, and others, including New York, are considering doing so. But those efforts would not immediately require loans to be reported to credit reporting agencies.
Banks and other traditional lenders report to credit bureaus because the data is useful in lending decisions and because it is a way to encourage borrowers to repay: if they don’t, their credit rating will suffer.
Late payment providers may not feel much pressure to start reporting because their business is growing and most consumers are making payments, said Ted Rossman, senior industry analyst at Bankrate. But if the economy slows and more consumers begin to fall behind on their payments, lenders may decide they need to adhere to the credit reporting system to judge the trustworthiness of borrowers.
“Delinquencies are pretty low, the job market has been strong, so maybe it hasn’t created the same urgency,” he said. “The “Buy now, pay later” strategy has not yet been the subject of a real calculation in terms of delinquency. People keep warning about it. Maybe that will ultimately be what prompts change here.”
