Buy Now, Pay Later (BNPL) services continue to surge in popularity, providing consumers with a convenient way to split payments into multiple instalments, often with no interest or fees. As BNPL grows, those BNPL lenders face a new challenge: how to ensure that consumers can see the benefit of responsible usage by accurately reporting these short-term loans within an existing credit reporting framework that are primarily long-term credit reporting frameworks like the Metro 2 format (the predominant format in the US).

Why BNPL Doesn't Fit into Traditional Credit Reporting Systems

Developed in 1997, Metro 2 was designed to handle traditional credit products like credit cards, mortgages, and auto loans - long-term products with regular monthly payments. However, BNPL loans work differently and forcing them into an unsuitable reporting system could unfairly distort a responsible consumer's financial profile. Typically, BNPL involves a few payments over a short period (often four payments within six to eight weeks), creating several challenges:

1. Lack of real-time data: Traditional reporting systems, designed for monthly payments, struggle with BNPL’s more frequent repayment cycles, leading to delayed or incomplete data capture.

2. Recency of Debt: Frequent BNPL usage can make a consumer appear to be constantly taking on new debt, which could negatively impact creditworthiness, even if the amounts are small.

3. Frequent Account Openings: BNPL accounts open and close quickly. If reported directly through Metro 2, these short-lived accounts could overwhelm a consumer’s credit file, distorting their credit profile and making it look more volatile than it truly is.

4. Average Age of Credit: Repeated use of short-term loans like BNPL reduces the average age of accounts on a consumer’s credit file. Since credit age is a key factor in scoring models, this can negatively affect credit scores.

5. Credit Utilisation: BNPL loans are issued for specific purchase amounts and don’t involve revolving credit or a fixed credit limit, making them difficult to incorporate into standard credit utilisation ratios, which rely on a clear limit-balance relationship.

6. Delinquency Reporting: BNPL loans have tight repayment schedules, and missing one payment can result in immediate delinquency. Metro 2 reports delinquencies in 30, 60, or 90 day increments, which does not accurately reflect the shorter time frames of BNPL loans.

BNPL loans, while providing convenient short-term credit, do not align well with traditional credit reporting systems designed for long-term financial products. Without proper reporting mechanisms, consumers could see discrepancies across their credit files and have their credit profiles negatively impacted, even if they are responsibly managing their BNPL payments.

How BNPL Differs from Traditional Instalment Loans

At first glance, BNPL might seem like a type of “instalment loan” as prescribed by the Metro 2 format - fixed payments over a specific time. However, BNPL loans are often for much smaller amounts, for shorter durations and often lack interest. Unlike car or personal loans, which are larger and paid monthly over long periods, BNPL's rapid cycles and smaller sums make it more challenging to report accurately in systems like Metro 2, which were designed for longer-term products. The rapid usage and repayment of BNPL loans creates complications in accurately reflecting a consumer's overall credit health.

Lack of Standardisation Across Credit Bureaus

Currently, the NCRAs each have their own approach to handling BNPL data within the longer term reporting formats such as Metro 2, leading to a lack of standardisation. This discrepancy means that BNPL loans may be reported and treated differently depending on which bureau is handling the data. For consumers, this lack of uniformity can lead to significant variations in credit profiles, credit scores, and the overall perception of creditworthiness.

For example, a consumer's credit score could vary dramatically between bureaus depending on how BNPL loans are reported - potentially causing confusion when applying for credit. Further, the different treatments of BNPL data could inflate risk (by mixing BNPL loans with revolving credit) or even lead to vastly different lending decision outcomes for similar consumers.

Most notably, without a standardised approach to how to report the data, consumers will struggle to understand how their BNPL activity is affecting their creditworthiness, especially if they see such a discrepancy of scores and reports across bureaus.

Ultimately, the lack of uniformity to reporting BNPL data increases the complexity for consumers and lenders alike, emphasising the need for consistent methodology.

A Bespoke Solution Is Needed

While longer term reporting formats have served the credit industry well for decades, it quickly became clear that BNPL required a bespoke solution. The traditional system was built for long-term credit, and BNPL’s short-term, high frequency, no interest nature is simply too different. 

At Qlarifi, we have built a custom solution specifically to ingest, standardise and report BNPL data in the way that works for the BNPL industry. BNPL providers can furnish data in an industry specific format, and receive relevant data in a BNPL tailored reporting structure. By taking a bespoke approach to the industry, Qlarifi enables the BNPL industry to collectively define the expectations and standards for BNPL reporting across the broader financial ecosystem, removing inconsistencies and ensuring the most responsible outcomes for consumers.