Up to 100 million American adults have used buy now pay later (BNPL) loans at least once in the past 12 months, but financial institutions currently do not have access to the information generated when consumers open and redeem these new debt securities, according to a new report. Now, TransUnion says it’s launching a suite of solutions to “help people using BNPL loans get credit for their payments today and establish long-term credit.
Putting point-of-sale loans, of which BNPL loans are a part, on a consumer credit file is likely to benefit populations who most need new tools to build and improve their credit, according to TransUnion.
Liz Pagel, senior vice president and head of consumer loans at TransUnion, told GOBankingRates that point-of-sale loans include flexible installment loans that allow shoppers to make payments over time.
“Point-of-sale loans are transactional, like a credit card swipe, but they’re taken out as individual, unsecured installment loans,” Pagel said. “BNPL loans are a type of point-of-sale loan, although traditionally they are used for small purchases and repaid in shorter time periods.”
According to a TransUnion report, these point-of-sale loans — which give borrowers the ability to instantly get an unsecured personal loan when they leave — will likely change the way people pay for big-ticket items.
TransUnion said younger generations — Gen Z and young millennials — will benefit because people using this credit product tend to be younger. One out of three point-of-sale financing applicants (33%) is between 18 and 30 years old, compared to 17% for the entire credit workforce. And 43% of point-of-sale applicants fall into the subprime credit risk category, compared to 13% overall, according to the TransUnion report.
“While Gen Z and young millennials may use BNPL loans at a higher rate than the general population, TransUnion’s suite of solutions benefits all borrowers because our approach helps lenders ensure that lending activity is captured in a way that maximizes the benefits to consumers and the credit ecosystem,” says Pagel.
TransUnion said including point-of-sale loans in the consumer credit file is likely to benefit populations who most need new tools to build and improve their credit. “Including point-of-sale loans, including BNPL, in credit reports and other risk management tools can help tens of millions of BNPL users access more credit and potentially get better loan terms from lenders,” Pagel said.
In turn, she explained that this will help promote opportunities for financial inclusion.
“If BNPL borrowers make timely payments, this positive payment behavior will be made available to lenders to use in their lending decisions. This may open up opportunities for these consumers to obtain other loans at better interest rates,” she said.
When asked why they described this as a “unique new BNPL solution,” Pagel explained that TransUnion has taken “a measured approach to our suite of solutions that benefits consumers and lenders in the short and long term.”
“A consumer with normal buying habits could be the source of several [BNPL] loans per year, which most existing credit models consider risky behavior.
Pagel added that this could have an undue impact on the credit scores of millions of consumers, making ratings less predictive.
“The goal is to have a single standard for lenders to report data on and to accelerate adoption by lenders and rating providers in the future,” she said. “Information will be tagged and filtered in a new partitioned portion of TransUnion’s main credit file. In the long term, TransUnion plans to include point-of-sale data in the master credit file where it can maximize the number of credit decisions it impacts. »
BNPL plans may be easier to obtain than credit cards, which is attractive to people with lower credit scores or those new to credit and may not have a credit score at all, such as GOBankingRates previously reported this. However, to be clear, BNPL is a loan. “Yes, it’s a short-term loan and it’s interest-free if you follow all the rules, but if you’re late on a payment, the consequences are costly and potentially credit-damaging,” said analyst Shannon Vissers. retail at Merchant Maverick, at GOBankingRates. in October 2021.
The practice has also come under scrutiny. In December, the Consumer Financial Protection Bureau (CFPB) issued a series of orders to five companies, Affirm, Afterpay, Klarna, PayPal and Zip, offering to buy now, pay later for credit.
The CFPB said at the time that it was concerned about debt accumulation, regulatory arbitrage and data collection in a consumer credit market that is already changing rapidly due to advances in technology.
“Buy Now, Pay Later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but also gets the debt immediately,” said the CFPB manager. , Rohit Chopra, in a statement. “We ordered Affirm, Afterpay, Klarna, PayPaland Zip to submit information so that we can report industry practices and risks to the public.
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This article originally appeared on GOBankingRates.com: TransUnion to Maximize Financial Inclusion Opportunities for Nearly 100 Million Consumers Using BNPL Loans