FICO, global analytics software leader, released key guidance and takeaways from a study that analyzed the impact of including ‘Buy Now, Pay Later’ (BNPL) loans in a consumer’s FICO® Score. Based on learnings from this industry-leading analysis, FICO is developing a solution to introduce its proprietary treatment of BNPL data to the credit-scoring marketplace. FICO will be releasing more information on this product development soon.
FICO conducted the 12-month study in partnership with Affirm, the payment network that empowers consumers and helps merchants drive growth. The research compared the FICO® Scores of more than 500,000 consumers who opened at least one new Affirm BNPL loan against a benchmark population of consumers without an Affirm BNPL loan. FICO simulated the inclusion of these Affirm loans into consumers’ credit reports, and then examined the potential impact to resulting credit scores of those consumers.
The goal of the research was focused on outlining the potential benefits or impacts that BNPL lending products could have on FICO® Scores. It was also intended to help inform both responsible furnishing of BNPL loans to the credit bureaus, as well as an appropriate and empirically supported treatment of this data within the FICO Score.
Through this first-of-its-kind study with Affirm, FICO developed a proprietary treatment to harness the benefits offered by incorporation of BNPL data into consumers’ FICO Score calculation. The research showed that this treatment can improve model performance and lead to increased FICO Scores for some BNPL borrowers.
“Given the growing popularity of BNPL loans, understanding how to effectively capture the benefit that BNPL data can have on FICO Scores is crucial to all stakeholders in the credit ecosystem,” said Ethan Dornhelm, vice president of Scores and Predictive Analytics at FICO. “Our findings show that the inclusion of BNPL data via our innovative treatment can drive score increases for some consumers, while improving model risk performance for lenders. We appreciate Affirm’s leadership and collaboration on this study.”
„A unique consumer behavior associated with BNPL loans is the potential for a large number of these loans to be opened within a short period of time. To address this, FICO developed an innovative approach that includes aggregating separate BNPL loans together when calculating certain in-model variables. This novel treatment has proven effective at capturing predictive signal from the inclusion of BNPL data while increasing FICO® Scores for some BNPL consumers.” – the company explained.
Key findings
1) Utilizing FICO’s novel treatment, the simulated inclusion of BNPL data into consumers’ credit files yielded:
. FICO Score impacts that were generally consistent with the opening of a new account – within less than +/- 10 points for over 85% of the consumers in the study.
. Higher scores or no score changes for the majority of the population of consumers in the study who had recently obtained five or more Affirm BNPL loans.
. Impacts on FICO Score predictiveness ranging from modest improvement to no adverse impact, across a range of different use cases.
2) Given the unique aspects of BNPL loans, FICO’s empirically supported treatment of this data is necessary to mitigate impacts to borrowers, and maintain credit risk assessment effectiveness.
“We appreciate the collaboration and partnership with FICO as we sought to conduct a thorough analysis examining the impact of furnishing BNPL loans on credit scores,” said Don Lemire, vice president of Credit Analytics at Affirm. “Through studies like this, we aim to drive greater transparency and promote industry best practices for responsible reporting of BNPL data to credit bureaus. We invite other providers of pay-over-time products to join us in conducting studies with FICO and committing to furnish data on all BNPL loans in a manner that is beneficial for consumers and the broader financial system.”
“As the provider of the credit score relied on by 90% of top U.S. lenders, we understand the need to continuously produce innovative insights and solutions that guide the industry’s responsible use of credit data,” said Julie May, vice president and general manager of Scores at FICO. “We are eager to arm lenders with a tool that allows them to incorporate BNPL data into their credit evaluation process, demonstrating FICO’s commitment to innovation, transparency and inclusivity in lending.”
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FICO powers decisions that help people and businesses around the world prosper. Founded in 1956, the company is a pioneer in the use of predictive analytics and data science to improve operational decisions. FICO holds more than 200 US and foreign patents on technologies that increase profitability, customer satisfaction and growth for businesses in financial services, insurance, telecommunications, health care, retail and many other industries. Using FICO solutions, businesses in more than 100 countries do everything from protecting 4 billion payment cards from fraud, to improving financial inclusion, to increasing supply chain resiliency. The FICO® Score, used by 90% of top US lenders, is the standard measure of consumer credit risk in the US and has been made available in over 40 other countries, improving risk management, credit access and transparency.
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