Credit ratings could chill hot market ‘Buy now, pay later’

A move by Equifax allowing Buy Now, Pay Later (BNPL) sellers to report their customers’ ‘overnight’ loans to the credit rating agency could dampen consumer enthusiasm for the method popular payment.

“Any additional friction at checkout will impact a payment option’s popularity with consumers, and that one is quite significant,” observed Donny Ouyang, CEO of Blackcart, a pre-trial solution provider. buy in Toronto.

“Even if the credit angle is presented as an advantage, it will be difficult to recover from it,” he told the E-Commerce Times. “Retailers selling products, especially mid-priced products, will see a drop in conversion rates and sales.”

Rob Enderle, president and principal analyst of the Enderle Group, an advisory services firm in Bend, Oregon, agreed that retailers could be harmed by Equifax’s decision. “It can make buy now, pay later less appealing because its inclusion will degrade credit scores,” he told the E-Commerce Times. “So there may be a negative impact on sales.

However, the impact of Equifax’s decision was downplayed by Rajiv Bhatia, equity research analyst at Morningstar Research Services in Chicago.

For BNPL suppliers, it will be as before. “The reporting of this by the credit bureaus does not change whether BNPL providers decide to do a soft or hard credit inquiry,” he told the E-Commerce Times, “and for consumers, reporting this could help their credit ratings if they make payments on time.

A stepping stone to better credit

Equifax also argued that saying buy now, pay later on loans could benefit consumers.

As the first consumer reporting agency to formalize a process for including BNPL in traditional credit reports, Equifax sees this as an important step in expanding access to credit, it said. in a post on its website.

An Equifax study of anonymized consumer data from a BNPL provider shows that people who repay their BNPL loans on time could potentially boost their credit score, helping consumers build and rebuild their credit, it said. he adds.

“Consumers should get credit for paying their bills on time and should be able to use their responsible BNPL behaviors as a stepping stone to other types of credit, like car loans or mortgages,” said Mark Luber, chief Equifax US Information Solutions products, in a statement. .

“Generally,” he continued, “consumers can take advantage of BNPL products early in their credit lifecycle, even if they don’t qualify for other traditional types of credit. For consumers with young credit records – or those looking to rebuild their credit – using BNPL products from reporting companies presents an opportunity to demonstrate responsible behavior and build or rebuild their credit.

Ouyang pointed out, however, that one of BNPL’s main selling points during this period of rapid growth has been its place outside the credit reporting system. “If having buy now, pay later factored into credit scores was a benefit to merchants, they wouldn’t have spent the last five or six years explaining to consumers that it wouldn’t have not affect their credit ratings as one of the market’s key value propositions. product,” he said.

Retail Success Story

Buy now, pay later has been a success story for retailers. According to Forrester Research, buy now, pay later jumped from 2020 to 2021, with online merchants offering the service growing from 26% in 2020 to 52% in 2021.

The expansion of e-commerce is one reason for this growth, Bhatia noted, while another is that younger consumers are shunning credit cards.

In its survey, Forrester found that among respondents under the age of 35, 29% made a purchase at BNPL because they did not want to use a credit card, 20% did not want to pay card interest credit on the purchase and 18% did not have a credit card.

A very basic instinct can also contribute to buy now, pay for growth later. “Instant gratification is part of our nature and buy now, pay later calls to those who want it,” Enderle said, “and those who are bad with strategic decisions and tend to go into excessive debt.”

Forrester also found that the number of consumers using buy-it-now, pay-later services such as Affirm, Afterpay and Klarma more than doubled over the period, from 4% in 2020 to 9% in 2021. The highest users of the payment method were millennials. (17%), followed by Gen Z (10%) and Gen X (8%).

Graphic credit: Forrester Research, Inc. | Reproduced with permission.

“Buy now, pay later tends to be popular with lower-income groups, including children,” Enderle explained. “It could damage a child’s credit rating initially. On the other hand, if the child pays off the debt in a timely manner, it could also be a way to create a more positive balance sheet earlier, so it depends borrower behavior.

However, Ouyang said, “if millennials see their credit score impacted when they place an order with buy now, pay later, its value proposition becomes significantly less attractive.”

Try before you buy

Ouyang believes that saying buy now, pay later on loans will make consumers turn to his business of “try before you buy.”

“Our research shows that when buying low- or mid-priced products, the reason for choosing buy now, pay later shifts from affordability to product uncertainty,” he explained.

“Try before you buy solves the uncertainty of product quality, fit and size,” he said.

After a rocky start, he maintained he had a good working pattern. “When we started it was very painful,” he admitted. “At this point, however, we have become quite sophisticated with our AI. Losses are less than one percent.

Blackcart determines a consumer’s willingness to pay before sending them goods. “When you checkout, we’ll take the phone number you entered and cross-check it against the telecom and government datasets to see if the billing and shipping addresses you entered match,” he said. Explain. “We review several hundred of these signals to determine if you can try before you buy.”

“It all happens so fast that a person doesn’t notice it,” he continued.

“Now that the pandemic is less of a concern, e-commerce has slowed down,” he said. “That’s because the main benefit of offline shopping hasn’t been captured by e-commerce: being able to try things out and then make a buying decision.”

“Try before you buy has always been part of the basic formula for retail success in everything from Apple stores to Nike stores,” he said.

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