Credit has a huge inclusivity problem in the UK. It’s encouraging to see buy-now-pay-later (BNPL) firms make moves to share their data with credit referencing agencies (CRAs) ahead of regulatory deadlines. However, there’s much more to be done to help millennials improve their credit, and a real risk in advising consumers to increase BNPL usage before we have clarity on how credit bureaus will interpret this behaviour.
Over 17 million UK customers have made an online purchase using BNPL, but headline statistics around the sector’s growth could be misleading. While the sector has boomed, its application remains narrow. The majority of BNPL customers use it to fund occasional high-ticket purchases of clothing or tech. The data CRAs receive might not be enough to help lenders truly understand applicants’ risk profiles, and be able to offer appropriate credit products.
Klarna’s enthusiasm to collaborate with CRAs is admirable – but the bigger problem is about updating our understanding of risk in the age of big data. And that won’t be solved by a regulatory clampdown on BNPL.
The UK is home to 5 million ‘credit invisible’ people who have little to no financial footprint. Many are young professionals and expats. Unable to prove their creditworthiness, they’re excluded from mainstream financial services, or find that their options for credit products are severely limited.
BNPL is a great solution for breaking up occasional big payments – but it won’t necessarily smooth the path to buying your first car or house. Nor is it the best choice for someone who could get additional value from a typical credit card – like rewards or travel insurance- by using it for all their day-to-day spending.
A lack of financial education compounds the problem of accessing and better credit. Outside the industry, few realise that credit scores are little more than a number. It’s the information within your report that matters. Consider payday loans, for example – even if you take one out and repay it on time, the fact that you took out a payday loan can still impact your score.
It’s too early to know how credit bureaus will measure risk using BNPL data, so customers must avoid the trap of thinking that more BNPL spending could be a ’silver bullet’ for accessing cheaper mortgages or higher credit card limits. We need to find alternatives to take a more holistic view of people’s financial behaviour, and use that to help them access safe credit.
A modern solution for assessing credit suitability should draw on other sources of data to build a complete picture of a person’s financial health, and assess their ability to pay on time. An option would be to use open banking to look at an applicant’s transaction data. It’s more inclusive, as payment cards and mobile apps are popular with young people, and easy for immigrants to access soon after moving to the UK.
A fairer future for credit will reward good habits, not just the habit of borrowing. BNPL shouldn’t be the only option for those with a thin credit file to build their footprint. It’s time for financial institutions of all kinds to follow Klarna’s lead, volunteering their data and unique insights to help CRAs modernise reporting. We need to take collective responsibility for customers’ wellbeing – lenders have everything to gain from helping applicants access the right type of credit for their financial goals.