TransUnion to maximize Financial Inclusion Opportunities

By Edlyn Cardoza

Up to 100 million U.S. adults have used buy now pay later (BNPL) loans at least once in the past 12 months. Still, financial institutions currently do not have access to the valuable insights generated when consumers open and repay these new debt obligations. To help promote financial inclusion opportunities for this growing population and allow the financial community to accurately capture credit behaviours of consumers using such loans and other point-of-sale instalment products, TransUnion recently introduced its new Point-of-Sale suite of solutions.

The inclusion of point-of-sale loans on the consumer credit file is likely to benefit the populations most in need of new tools to build and improve their credit. Approximately 9% of point-of-sale applicants studied by TransUnion are thin files (have three or fewer trades reported). The youngest generations – Gen Z and younger Millennials – will benefit as people using this credit product tend to skew younger. One in three point-of-sale financing applicants (33%) are between the ages of 18 and 30, compared to 17% for the overall credit-active population. And 43% of point-of-sale applicants fall into the subprime credit risk category, compared to 13% overall.

“The inclusion of point-of-sale loans including BNPL into credit reports and other risk management tools can help tens of millions of consumers gain access to more credit opportunities and potentially secure better loan terms. TransUnion has taken a measured approach in developing our solution suite, working with the top BNPL lenders over the past three years to craft solutions that benefit consumers and do not penalize them for using these products frequently,” said Liz Pagel, senior vice president and consumer lending business leader at TransUnion. “TransUnion’s approach helps lenders and consumers ensure credit activity is captured in a manner that maximizes benefits for consumers and to the overall credit ecosystem.”

Point-of-sale loans are transactional, like a credit card swipe, but underwritten as individual unsecured instalment loans. Therefore, a consumer with regular shopping habits could originate several loans per year, which most existing credit models view as risky behaviour. This could cause a disproportionate impact on millions of consumers’ credit scores, making scores less predictive.

TransUnion is launching the capability to receive point-of-sale lender trades through the traditional credit reporting process, with specific Metro 2 reporting guidance that ensures FCRA compliance. The goal is to have a single standard for lenders to report data and accelerate future adoption by lenders and scoring providers. The information will be tagged and filtered into a new partitioned part of TransUnion’s core credit file.

Users of TransUnion credit data will be able to opt-in to receive these tradelines as part of their existing credit data delivery. Default credit report delivery, which feeds current scoring models, will remain unaffected. Over time, as the industry works to enhance models with these data, it is expected that many lenders will choose to use the information in addition to their existing models to help expand their buy boxes – accelerating the consumer impact.

In the long term, TransUnion plans on including point-of-sale data on the core credit file to maximize the number of credit decisions that it impacts. “The industry needs time to adjust, and each lender will adopt the point-of-sale tradelines and attributes at its own pace. Maximizing the financial inclusion impact requires broad usage of this valuable data in more credit decisions. Ultimately, given the prominence of FICO and VantageScore in the market, the biggest impact from the data will not be realized until the data migrates to the core file and these scores take into account consumers’ good behavior” added Pagel.

The initial capability will allow FICO and VantageScore, along with major financial institutions, FinTechs and other lenders, to have enough time to ensure that they build future versions of their underwriting models that give consumers credit for good performance on point-of-sale products.

“Buy Now Pay Later is helping many consumers access short-term credit for shopping at a time when prices are rising rapidly. BNPL can enable consumers that have not traditionally had credit records to build better credit scores. We think adding this data to credit scores may help drive broader financial inclusion and we are working rapidly to incorporate this into VantageScore models,” said Silvio Tavares, President & CEO of VantageScore.

“FICO is committed to financial inclusion and expanding credit access by leveraging more data, where available, and supported by empirical analysis,” said Sally Taylor, vice president and general manager of FICO Score. “These are top priorities at FICO and we look forward to working with TransUnion to determine the best approach for inclusion of BNPL data in the credit file considered by the FICO Score family of products.”