Klarna and Afterpay have chosen not to participate in a new credit scoring model that integrates consumers’ buy now, pay later (BNPL) loan information. In contrast, competitor Affirm has been collaborating with FICO to develop two credit score models that incorporate BNPL data. These models aim to provide lenders with a clearer view of how leveraged a consumer is with installment loans.

Concerns Raised by Klarna and Afterpay

Klarna and Afterpay have expressed concerns about the reliability of real-time, accurate data on BNPL loans provided by credit bureaus. They believe that this data could negatively impact consumers’ creditworthiness. According to Ben Danner, a Senior Credit and Commercial Analyst at Javelin Strategy & Research, Klarna and Afterpay see BNPL products as an alternative form of credit with looser underwriting compared to credit cards, which forms part of their marketing strategy.

Danner pointed out two main issues: First, Klarna and Afterpay view current scoring models as based on legacy credit card practices that do not account for the novelty of BNPL. Second, they want FICO to ensure that reported BNPL data will not penalize customers’ scores.

Data Impact Analysis

Despite these concerns, data from FICO suggests that including BNPL loan data in credit scores had minimal overall impact on consumer credit scores. Of the loans taken out through Affirm, FICO found that they affected credit scores by around 10 points for over 85% of those surveyed.

Affirm has also denied the notion that the rise in BNPL lending creates significant “phantom debt” that traditional scoring models might miss. It noted that BNPL loans make up a small fraction of overall credit card debt, and delinquencies are uncommon.

Klarna’s Expansion Plans

Despite data showing minimal negative impacts from integrating BNPL data, Klarna’s decision not to share their data with credit bureaus remains puzzling. As Klarna expands its partnerships ahead of a potential IPO this year, it faces the challenge of balancing customer concerns about credit impacts.

Klarna argues that treating each BNPL loan as opening a new credit line could quickly affect customers’ creditworthiness negatively. Afterpay has stated it will only share data with credit bureaus once concrete evidence shows it won’t harm its customers, indicating a cautious approach to data sharing.

Conclusion on Credit Score Impact

Danner believes that if Klarna’s BNPL delinquency rate is below 1%, as reported, this actually performs better than credit cards. Thus, the impact of reporting such data does not seem significant as initially feared.