Buy Now Report to the Credit Bureau Now, with Simon Forster
It's no secret that I am a fan of the BNPL concept while still being a little nervous about how it has been implemented. Some of the valuations have been built on sand, but that's not what I'm concerned about here, instead, I'm referring to independent lenders all chasing growth with no thought to see the combined impact of their independent activities. Luckily, there's a relatively easy fixe for that: the good old-fashioned credit bureau. There's still work to be done to make the infrastructure fit the data, as you'll hear from Simon Forster, but the good news is that we're already a few months into this journey in the UK.
Picking up from what we covered with ZIlch on episode 102, today we're talking about what we're learning now that BNPL's are sharing their data with Experian, and the credit bureaus.
There's a huge amount of information over at https://www.experian.co.uk/business/ (or at https://www.experian.com/business/ for American listeners) However, if it's the given the topics discussed today that have you intrigued, you can go straight to https://www.experian.co.uk/business/industries/buy-now-pay-later for insights from their BNPL work.
As Simon said, his team create more than just BNPL insights, so also poke around at https://www.experian.co.uk/blogs/latest-thinking
Simon is on LinkedIn at https://www.linkedin.com/in/simon-forster-78b8897/ (the company as a whole is at https://www.linkedin.com/company/experian/)
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Regards,
Brendan
The full written transcript, with timestamps, is below:
Simon Forster 0:00
Consumer habits are changing. The personal loan as you and I understand it, in the UK, may not exist in five years.
It will be instalment finance driven through point of sale offerings. It'll be a little different from BNPL because it could be larger values, longer terms, it might be interest bearing, but you know, we need to react and think about different ways of taking product to market: what are consumers wanting? And how do we best support their needs.
Brendan Le Grange 0:26
Buy now pay later was around before the pandemic - establishing a foundation, finding a user base, and growing. But the nature of exponential growth is such that, initially, it can be hard to see: one becomes two becomes four becomes eight becomes sixteen... until suddenly it isn't, and 1,000s and 1,000s of customers are signing up every day in countries around the world. That natural upswing then coincided with - and was amplified by - the pandemic push to more online commerce, more online everything, really, to create the BNPL explosion that we saw.
Then came the equally quick reversal.
As usual, the truth lies somewhere in-between. Consumers love cheap and transparent credit. Investors love creditors that can attract consumers. So check and check. But investors also love growth, and that's where the valuations went awry, I think. In the pursuit of growth, we saw too many lenders making too many unsustainable loans, too risky or too unaffordable, because they were each in an independent race, invisible from each other.
It's a gap that can only be closed by broad-scale data sharing, which is now beginning to happen. Welcome to How to Lend Money to Strangers with Brendan le Grange.
Simon Forster, Senior Market Consulting Partner at Experian, welcome to the show.
I think your route to your current role is interesting, not just because it closes a loop, but because you've worked with several of the UK challenger banks, which back in the day, were the original digital banks. And I don't know if we can call it FinTech version one.
So before we start talking about the details of buy now pay later on the credit bureau, would you mind starting us off by talking me through that early career and what it was like within those early years of FinTech innovation in the UK?
Simon Forster 2:29
Yeah, for sure, actually, really quite interesting reflecting back because while all the banks I helped transform were labelled as challengers, they were effectively a partitioned entity within existing high street banks. But what made it really quite interesting, they weret keen to do and to offer something different.
And I guess there's some synergy around what we're going to talk about later today with BNPL, they were wanting to utilise their retail base wanting to offer very simple, very functional products to their customers. They saw the supermarket as a route to market distribution partner.
And you're very much right when he described it as as kind of FinTech 1.0: we had a blank canvas, the brief was deliver like for like, so while a lot of the underlying tech was consistent, we were able to start fresh, we weren't hamstrung by technical debt and that offered us a real advantage in terms of getting products and capabilities to market. And you're absolutely right, in that digital and online space, we could do something and we could be much more customer centric.
Brendan Le Grange 3:34
Then you moved, though, to Experian - what is your role within Experian, I guess more broadly, and I see on LinkedIn, you take yourself as passionate about the enablement of innovative data driven solutions which promote credit inclusivity, how does that thread of credit inclusivity brand through that work?
Simon Forster 3:52
To describe it at its most simplistic level: my role, I sit within the Financial Services vertical. So within financial services, we have some monoline credit card issuers, retail finance houses, some of the smaller mortgage lenders, but we also have the larger BNPL providers. And my role is to work with a number of those clients and effectively provide a view of the market, what the data is telling us who's doing what what those trends look like to effectively help them stay ahead of the game.
And equally as part of that is, you know, it's to ensure they get the very most of the products and services that may take some experience.
Now outside of the high street bank, a number support what we describe as the underserved credit market. And there's been some real change in that space over the last three to five years.
We talk an awful lot about using data for the power of good. So it's about identifying and locking new data sources, and how that can be used by lenders to create opportunities for themselves and the customers they serve, right. You know, you would like to think everybody has a current account. Almost everybody has a mobile phone.
The reality is they don't.
So even the most basic bureau footprint doesn't doesn't exist. And therefore, there was a quite an active population. There's the underserved, there's the invisible, and there's the how can we target solution service portfolios to better serve those datasets.
Brendan Le Grange 5:04
One of the things that came out of the the COVID lockdown years was a rapid acceleration of e-commerce here in the UK, but also obviously around the world. And at the same time, and partly because of that, we saw the big explosion of buy now pay later as this new model that grabbed a lot of headlines.
In the UK, because some fingers had been burned by bad payday lending in the past, and people could still remember that - and in big part, because, you know, there were questions about how much lending is happening outside of the walls of the credit bureau, unseen by the formal lending system, and is there a risk of runaway borrowing and some consumers and problems with affordability?
So I guess we're here today because the very good news is that, actually now that's not the case anymore. The Buy now pay later sector is being brought within the walls of the credit bureau, from what you've seen, if you were just going to set the scene, what does that BNPL sector look like, how big is it, and in terms of the consumers you're seeing, are they the young and high risk consumers, we expect?
Simon Forster 6:05
I think we saw a number of shifts during that pandemic, one of which are the most obvious was because you couldn't transact in a physical store, it was a direct correlation to increased volumes, better credit quality in terms of you know, retail finance/ mail order where you could buy online, and then obviously, you have BNPL.
The pandemic was very much an accelerator to buy now pay later. It existed pre pandemic, but I think it helped move it forward, I can just about recall my mum paying on ticket in the local shop for buy now pay later, you know, you've been able to get in store credit, either one a revolving basis or fixed term for a number of years, you could buy sofas with DFS on 12 months interest free. So it's such a concept as has been around for forever in a day, what's changed is the vehicle driven by digital acceleration, and also product innovation.
Over time, we've seen the consumer who interact with Buy now pay later change and evolve. And that's very much correlated to the fact it's become more more mainstream BNPL was available now in almost all checkout journeys. And it's very simplistic. Maybe that's part of the problem. People don't necessarily see it as a form of credit. And there's perhaps a stigma associated with it. And combined with the fact you know, you've got a growing sector emerging sector, nobody quite knows what's happening, who's using it, there were questions being asked.
What we do see is, working with larger providers, a real growth in adoption. If I think about the three months worth of data, live data, that we've got in the bureau - so December into January and Feb - interest free, predominantly online, for a term of no more than three months. There we see 3.8 million unique customers.
A big number, right? And they've made 50 million transactions, spending almost 20 million pounds. And it's not just your Gen Z. It's not just your Millennials, it's across all demographics.
And actually the fastest growing demographic is the 35 to 44 age band. Suddenly, I'm now just outside of that, but it's reflecting the point of becoming more mainstream, right? This is established, right? It's here to stay.
Brendan Le Grange 8:09
If we think about it with a lender's lens, you know, it wasn't so long ago that when you're talking about credit bureaus, they're dealing primarily with established banks and non bank lenders that have been around for 10s of years and very structured data, kind of everybody knew what everyone was doing. But the arrival of BNPL has been so quick, that's obviously not the case.
These are lots of newer companies, smaller companies doing things differently. And in particular, the terms as you said, less than three months, which presents I imagine some sort of unique challenges in how we read this.
And myself, when I think through some of the numbers I see, I'm not sure how to interpret a default on a single transaction versus that same person using a credit card where it might have been rolled up and watered down.
Simon Forster 8:53
The credit reporting framework was developed probably 25 years ago. And it was developed for traditional products as we understand them today. And the world has changed, right? So has credit reporting kept up with technology and product inovation? Probably not.
I think the credit information market service will begin to address some of those challenges. And it will enable the inclusion of new products and we will be able to reflect them in a much more accurate light. But we've we've taken the view - and absolutely in my mind, it's the right one - that we need to get the data in.
So there wasn't a full adherence to what we call reciprocity. So you know, many of the providers were using our data to make informed, transparent safe lending decisions, but they weren't contributing back. That was a scenario that just couldn't persist.
It is short term, the bureau cycle is monthly reporting. So again, no, no direct fit, but it's important we get that information in. And actually we get a lot of data in, I think 20% of all records we see are what we what we term in the trade as 'closed settled'. So we see them on the bureau after they've been paid down. Yeah. which, which again, you could argue is a good thing. But it's important we have that visibility.
Over time, I'm convinced we will go to a real time model, whereby you get that trade, that transaction is made, it's reported, it's visible and can be consumed by all.
The flip side is, you know, the vast majority of lending organisations in the UK have links into the Experian bureau. And the same way that we're not quite set, up neither than the lenders. So we're quite some way away from getting to that view.
So we adopted the view of 'let's get the data in, and let's work with what we've got'.
We put a framework in place that said, each transaction each basket, each purchase, will be considered a unique credit record. So you can be running multiple BNPL, but they will all have its unique payment schedule, which then comes back on to your next point. How do you weigh this data? What does it represent?
So, you know, on a credit card, it's a rolled-up aggregated view. So a default balance on a cart of, say, £5,000 is going to be very different to a default on a pair of trainers, as you suggest, you know, for which you've probably already made at least one payment, because it's required a plan. The dynamics are very different.
Because they're so very different and because we don't have a huge amount of performance or outcome data, we've decided to hold this information out of our core bureau. And I'll try and simplify that. It means it won't impact credit scores or core characteristics that the lenders use when building their own scorecards, because we can't quite reflect it in its most accurate way.
So therefore, we will serve this information, we will show individual's behaviour, their performance, a number of transactions and the balance of payment ratios against credit card, but it will be entirely standalone, it won't impact score, because the reality is if we inject this data directly into the score, as it stands today, the model would one penalise a customer, it will protect detriment, which is which is not something anybody wants. And it would introduce real volatility to our lenders models. So we're holding it out.
We're looking at the data, we're looking at outcomes, we're testing against score, so we can make some informed decisions to say, Well, okay, how does it best reflect, how does it best fit?
Brendan Le Grange 12:02
I like this approach, of 'let's get it on there, let's look at it, we're not going to push it into our models yet, but at least it's here'. And that gives us something to work with.
And you know how these things go blink your eye, and it's going to be six months, 12 months down the line. And suddenly, you will have enough data to build strong models on I also want to pick up on on something there in terms of the the reciprocity, I've rolled out a few credit bureaus in, in new markets. And it tends to be that the biggest established players can be a little bit reluctant to let the smaller players on. And they feel like well, I've got 20 billion customers, this person's only got half a million customers, you know, they're getting the better end of the deal.
But actually, from my experience, it's these unique models that are bringing different customers and different types of data in that are punching above their weight. Because if you're one big bank, and another big bank adds their data, there's a lot of overlap. Whereas this is very much in a different niche. Obviously, there are a lot of consumers that had traditional credit products that have had Credit Bureau reports. But also, I think, what gets a lot of consumers that this is some of their first credit data or detailed credit data coming on board.
Simon Forster 13:08
So there's a number of different definitions. But if you think about invisible, and then you have thin file to thick file, so we're seeing a limited shift from invisible to thin, a big shift from thin to thick. And then degrees of thickening as you work your way through the through the score bands in the depth and breadth of data. But there's a number of reasons for that. One, as I said earlier, not all but the majority of providers are using credit reference data to either identify the customer at point of sale, or to make an informed decision about how much they're willing to lend to them. But a lot of that information also comes into well, okay, where are the shopping and what are they buy. So that is equally as important as that as their credit score and waiting. But to get through that initial test, you must have at least a pulse on the bureau more often than not. So that's having a current account having a mobile phone, having a mobile phone may mean you've got another two keys records. So you know, we see a lot of thickening of fire with this data.
But we don't see a big shift in the movement visible to thin to thick.
Brendan Le Grange 14:04
Just for clarity for the rest of the world: the UK is certainly fairly unique, I think may be unique, in that it has access to current account data on the credit bureau. So for us that starting point is far more broad than it is for markets where it's credit products only. For them, the thickening, that we see is actually going to be new to credit.
And I think there's two two lessons there (1) yes, it's a way to provide thicker credit files for consumers who aren't yet transacting on all the formal products, but (2) it's that actually yeah, this is a product that's been used by your customers that's data you should be seeing on that if lenders are wanting to see what these consumers look like what the situation of these products looks like.
How are you sharing that with a market waking lenders go to get their heads around what's what's happening in this space?
Simon Forster 14:55
It can be consumed directly from existing links, albeit through an extension.
So we can now able to data, you know what we call law tradelines, that transactional level clients, we take that and can be switched on immediately. Or we can surface the content of the summarised block. And you know, one of the Levers we're looking to pull when talking to our clients, yes, everybody focused upon risk and best in class risk management standards.
But for me, it's more opportunities, sorts of pockets of risk actually do exist in this data set. And you'll be able to see customers that are running hot on your credit card and have multiple BNPL trades, and therefore I need to do something about it, or equally, some defaults, which are few and far between on BNPL, but up to date elsewhere. So how do I react to it?
But it's about additional positive payment performance data. So a good slice of these customers don't have a credit card, for example. So you know, the Gen Z, you know, they have a very different attitude toward credit, as I say, you and I would, and therefore, we're surfacing a huge amount of positive performance data that could be used by lenders to offer product and service. Whereas historically, they wouldn't have sat within their risk appetite, or there'll be insufficient information.
You know, while it's not impacting score, day one, there is that positive performance data or trends and behaviours that can be used over time. So walk, you know what, these are a customer who's showing a high propensity to repay, therefore, I can engage with them and offer them a product I ordinarily wouldn't have.
Brendan Le Grange 16:16
Yeah, you will you spoke there about risk management, are you able to share any statistics in terms of the the risk that people fear is in this population versus what you're actually seeing?
Simon Forster 16:27
What I what I can say. So look at a lot of commentary in the BNPL space comes from a particular angle. So for example, I can't recall whom but one high street bank put together a survey with support stepchange. So stepchange, work close was sitting to revise and their customer base are financially stressed individuals. So therefore, any population though engaging with or life to have accounts in arrears likely to be in financial difficulty likely to be on forbearance.
And therefore, it's not a surprise when they say they've struggled to make their BNPL commitments because they struggle to make others lots of verses written through a lens.
But what we see holistically is that arrears emergence bad rate on this short term transactional BNPL is lower than that was on a credit card book. Clearly, one is bigger than the other. But in terms of how they sit in the distribution of your score, but and you're not a million miles away, that they stack up. So you know, absolutely risk exists. There are undoubtedly people who use BNPL as a prop. But there are many more who kind of see it as a more of a payment vehicle of convenience, a better way of managing their finance.
But in terms of arrears emergence, it looks and feels no different to some of the other revolving products that exist in the viewer today.
Brendan Le Grange 17:37
Yeah, and I think that's important in the sort of the hype cycle that we've seen with the NPL, where, three years ago, it was almost mandatory, and every headline written about lending, it was about how great BNPL is, and then a couple of years ago, that flipped and went about how dangerous it is, that actually, once that's what through the system, there's a significant amount of consumers using BNPL pretty well, they're your customers are ready for in many cases, and if they're not your customers at the same sort of customer.
So this, from a lending point of view, is where we sort of leave the headlines behind.
This is a product whose data you need to look at. And you need to think about because it's very much applicable to everybody out there. And I think that's a core message, we need to put aside some of those fears from headlines and try and speak to the likes of us Experian about what does this data mean? How do I interpret it into my models?
Simon Forster 18:29
And you know, we actually say and, you know, I kind of get wheeled out speak to a number of the high street banks, and, you know, it's creating that 360 view, it's using that data to complement what you already know about the individual. And you're gonna have to let it build over a period of time because you weren't going to take and understand usage over 6/ 9/ 12 months.
But the data will tell its own story, it will help you identify value, it will help you identify risk.
Brendan Le Grange 18:51
Yeah. And you said there that sort of three months of data on the bureau now, in terms of the project of getting all the data on board, where are we on that? Is everybody contributing? Now, there's still people adding data, and what's the timeline there?
Simon Forster 19:05
So I'd say we we have coverage of and it's very difficult to get a view on whole market when you when you've never seen it, but I suggested experiment we have at age 5%. Now, there are some organisations who are working with to onboard, new our new entrants coming to the market who will support going forward.
And equally there were providers who are thinking about the use of bureau, who don't necessarily use it today, but but I wanted to do so going forward. So it's a it's an evolving picture. But I think we've got enough to say we've got that that market share that critical mass, enough to make it useful enough to make it meaningful.
Brendan Le Grange 19:42
Simon actually reached out to you via an article I saw published by the team at Experian on BNPL on the credit bureau. If people want to read some of these insights and sort of some of your interpretations of the data. Where can they go to do that? Or maybe they want to have a conversation directly and start understanding this data a bit more for themselves, where it's a good place for them to learn more about this experience.
Simon Forster 20:06
So there's a number of white papers on our publicly-facing website, you know, just search Experian BNPL - that'll be Experian.co.uk BNPL rather than the US or anywhere else around the globe - we have product sheets, we have testimonials, we have some insight, we have a bit of mythbusting.
But equally happy for individuals or organisations to reach out via LinkedIn or their their account management network. You know, we're more than happy to have that conversation. Because I think it's important in my world, at least we kind of educating we inform, and we ensure everybody understands what this data represents. And the way in which can be used to add value to all players.
Brendan Le Grange 20:42
In terms of the work you're doing, or your team's doing, what other topics are hot right now, whatever things are you keeping an eye on over the next couple of months?
Simon Forster 20:50
The more exciting ones are in and around score boost and finding different use cases, different stories within the data to add value and how we can promote lender adoption, and then the others what they're going to do in the gambling sector. And you know, the the introduction of a proportion affordability test, and how can we use our data - so we have a unique customer key in the UK for every financially active individual - could we use that alongside some of our models and metrics to help inform appropriate decisions in that space to?
And what can we bring to market and more help again, consumers, you know, I guess it would be a benefit to the organisations that will help them remain compliant. But it's about how can we use our data for the power and good and putting that consumer first?
Brendan Le Grange 21:34
Yeah, and I think a lot of leaving back that idea of the 360 degree view at as simplified as affordability, but this idea of if we can understand the consumers true exposure and true incomes, then we can we can provide services in a in a way that's safe for both parties.
And I think the UK is a great place to test that because we have such wide data in terms of affordability and incomes and gaming and all sorts of things. And they're they're not every Bureau has but that same principle holds true in other markets that are thinner in terms of their credit as well, that, particularly if we sort of wrap it up, I mentioned BNPL again, it's just this idea that that's where people are transacting, it would be silly not to, not to be considering it in our, in our lending decisions.
Simon Forster 22:17
You know, like everything we have, we have to move we have to evolve, we see the world of finance changing, you know, I think in my personal opinion of the personal owners, as you and I will understand it the UK may not exist in five years. It will be instalment finance, political point of sale offerings, you know, we will have a different webinar per ethics could be larger value, longer term, it might be interest bearing, yeah, but you know, consumer habits are changing a lot that's been driven by changes in tech. But you know, we need to react, we think about different ways of taking product to market, what are consumers wanting? And how do we best support their needs?
Brendan Le Grange 22:51
Yeah, I think you're right. I mean, there's that underlying flexibility and transparency that's in there, which is separate to the free, and that can be applied to almost every loan product. Can we provide some more customer friendly interaction? So yeah, something to look forward to.
And I guess lots of studies from the team for people listening to go look for I'll put links to the documents in the show notes as well.
But otherwise, they can reach out to you, as you said on LinkedIn and start those conversations. It's a space that obviously for the next year or two even will be really interesting to see how it develops. And ultimately, how that decision is made. How do we incorporate them into credit bureau scores and into in house models, but I think it's clear to me that they'll be coming in. It's such valuable data. I'm just glad that it's been done in a concerted way on that.
Simon, thank you so much for for making the time to take me through today.
Simon Forster 23:41
Thank you, Brendan.
Brendan Le Grange 23:42
And thank you all for listening.
Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is written and recorded by myself Brendan le Grange in Brighton, England and edited by Fina Charleson of FC Productions.
Show music is by Iam_wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show and I'll see you again next Thursday.