The BNPL explosion
Since the pandemic started, BNPL has been used by five million people in the UK, with consumers deferring online payments for everything from snack foods to holidays.
And this is probably just the start. In Germany, BNPL is the payment channel of choice for the majority of consumers. Use of BNPL lending nearly quadrupled to £2.7bn in the UK in 2020 – an explosion that was bound to attract the scrutiny of regulators.
“This is one of the biggest changes in the credit market for 20 years. It is revolutionising the way people pay for goods and services,” says Experian’s Chief Data Officer in the UK, Jonathan Westley.
Regulation on the way
With the numbers of BNPL arrangements rocketing – and covering more and more big-ticket items – the Woolard report in February 2021 proposed some form of regulation should be considered.
And with the feedback from the Treasury consultation in October 2021 now published, the questions have become What, When and How.
How can credit bureaux help get lenders ready?
One key concern has been a lack of affordability checks. With BNPL, consumers can potentially take on more credit than they can afford in a matter of seconds.
“If you are a vulnerable individual”, says Westley, “you could find yourself very easily in a very difficult position.”
Can credit bureaux help here? Some in the sector have been sceptical, arguing that credit-bureau data is too slow to report on changes to a customer’s behaviour, or not granular enough to help.
“This is why we’re developing a new approach”, says Westley
Transaction data, in real-time
That new approach involves sharing data on BNPL transactions across the industry. It will reflect a consumer’s BNPL activity in real-time, not just the past month.
“It’s clear that BNPL credit needs to be reported to bureaux,” says Clint Hook, Experian Director of Data Governance. “The question now is how do we ensure that it meets the needs of the industry in terms of protecting vulnerable consumers and informing lending strategies.”
Traditional monthly credit reporting is not fast enough to keep up with consumers who may have got themselves into serious difficulty by the time their credit history is updated.
“We’ve got to be able to have a function and a capability that reports the BNPL credit a consumer holds in real time,” says Hook.
“We can’t sit and wait weeks for lenders to update their records because somebody could have purchased several items with different lenders in minutes.”
When considering a borrower, lenders need to be able to access real-time information about the burden of BNPL credit they are shouldering.
Experian is working with multiple BNPL lenders, who have shared data to test and refine the system. We’re working collaboratively with other UK bureaux to refine that process and agree standards for sharing BNPL data.
“The industry needs to try and get ahead of any potential regulation,” says Hook. “It’s crucial that the whole sector shows commitment to responsible lending, and we’re already supporting our clients, getting them organised to meet the challenges ahead.”
How is Experian helping lenders get ready for data sharing?
- Learning from other markets: As a global organisation, we’re working with Experian colleagues in areas where the BNPL market is more mature – especially in the United States, Germany and Australia – to use their expertise to develop a data-sharing solution.
- Working together: The major UK credit bureaux are consulting to ensure a consistent approach for BNPL data sharing.
- Using our expertise – Establishing and operating 23 consumer credit bureaux across the world has given Experian a wealth of knowledge and experience in data sharing. We’ve already established protocols and processes for sharing BNPL data in other global markets including the US and Germany.
- Starting with a ring-fenced approach: Experian will initially ring-fence BNPL data. We will share details of how many BNPL transactions a consumer has and their value, but we will not use BNPL information in credit scores at this stage. Further work has to be done to understand how best to integrate this data into the rest of the bureau, so we can protect consumers and lenders. “From an affordability perspective, it’s important for all lenders to understand any debt the consumer has,” says Hook. “But until we’ve established the system and made sure we understand the credit predictiveness of this data, we won’t feed it into credit scores.”
- Continuing to provide a friction-free customer journey: One of the great benefits of BNPL has been that it created a frictionless route to credit. We are committed to keeping it that way.
What lenders should be doing now?
- Contact us: Lenders should start to begin working with credit bureaus now so they can prepare early.
- Work with us: Get engaged in the discussion about how data sharing will work in BNPL. That way, lenders will be able to get the outcome they’re looking for.
- Check your data. The quality and compatibility of data held by lenders will be vital for affordability checking. There are several tools out there to support this, including Experian ones. These help lenders check and validate data quality ahead of time and make the transition to data sharing much smoother.
With these steps in place, we are confident that if regulation comes, the industry will be ready to move.