The use of “buy now, pay later” or “BNPL” loans reached an all-time high this past holiday season, accounting for over $16 billion in consumer spending. These loans make it easy for consumers to pay for everything from concert tickets to daily essentials in installments over time. But unlike credit card usage, BNPL activity is not typically reported to the credit reporting agencies, making it difficult for regulators, banks, and other lenders to track.
A recent report by the Economics Group of Wells Fargo refers to BNPL as a form of “phantom debt” because it is not accounted for in traditional credit scores and reports.
This poses a very real challenge for banks and lenders. Without visibility into the actual debt that a consumer holds, lenders lack the ability to calculate an accurate debt-to-income ratio, or to determine whether a consumer has the ability to repay a new financial obligation. Worse, lenders may fail to detect fraudulent and abusive practices like loan stacking and first-party fraud.
At Prism Data, we’re using open banking to shine new light on this so-called “phantom debt.”
The Prism platform analyzes a consumer’s deposit account information for key insights, trends, and patterns. This includes many data points—like BNPL usage—that often don’t appear on a credit report.
We’ve developed specialty features that look specifically at a consumer’s use of BNPL loans, along with other obligations like rent and subscription services that are significant to a consumer’s budget but that fly under the radar of traditional credit reporting.
This increased visibility allows lenders to assess a consumer’s actual ability to afford a new obligation, as well as risk factors like missed payments on or abuse of BNPL loans. Lenders can use these features in their own scores and credit policies, or can leverage our CashScore® as a simple, automated risk assessment based on our large and diverse data consortium.
With the rapid growth of these types of financial obligations, lenders must look beyond traditional credit data or risk making decisions with increasingly incomplete information. Reach out to us at Prism Data to learn more.
