FICO (NYSE: FICO), global analytics software provider, released key guidance and takeaways from a study that has recently analyzed the impact of including ‘Buy Now, Pay Later’ (BNPL) loans in a consumer’s FICO Score.
FICO conducted the 12-month study in partnership with Affirm (NASDAQ: AFRM), the payment network that empowers consumers and helps merchants drive growth.
As explained in the announcement, the research study has compared the FICO Scores of over 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 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 study with Affirm, FICO developed a 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.”
Ethan Dornhelm, vice president of Scores and Predictive Analytics at FICO said:
“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. 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.”
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 approach that includes “aggregating separate BNPL loans together when calculating certain in-model variables.”
This treatment has reportedly been “effective at capturing predictive signal from the inclusion of BNPL data while increasing FICO® Scores for some BNPL consumers.”
Key findings are:
- Utilizing FICO’s 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.
Given the various aspects of BNPL loans, FICO’s treatment of this data is necessary to “mitigate impacts to borrowers, and maintain credit risk assessment effectiveness.”
Don Lemire, vice president of Credit Analytics at Affirm said:
“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.”
Based on learnings from this analysis, FICO is developing a solution to introduce its “treatment of BNPL data to the credit-scoring marketplace.”
Julie May, vice president and general manager of Scores at FICO said:
“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.”