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  • Frank Tian

BNPL - Underwrite Your Loan

Updated: Sep 26, 2022

As Professor G gave his quick take on BNPL,

He mentioned credit card guardrails.

What guardrails? Many wonders.


There are 2 things that credit card or consumer credit runs on, even before the CARD act.


🚩 Credit Underwriting

A lender needs to assess a consumer’s ability to repay the loan. This is necessary to safeguard the usage of funds and avoid consumer over-indebtedness.


🚩 Credit Reporting

A lender can only make an informed underwriting decision when seeing all the debt holdings of the consumer. Credit bureaus play the role to collect and distribute such info, but lenders need to do their parts to report it.


The original BNPL gained its popularity by exactly avoiding these 2 steps.


Can we exchange the credit fundamentals with the convenience of technology?


Something without 2 wings can ride with a strong wind. What happens when the wind stops?


Consumer credit is a long-cycle business. As time passes by, the lagged risk effect begins to emerge.


👉 Last month, the chairwoman of Zip Co acknowledged the need for proper risk management:


“The industry as a whole, which has seen bad debts spike, really missed that moment. And we are now going to have to dig our way out of that”.


👉 Last Friday, Affirm published a blog by Max Levchin. The title is:


“Underwrite or Lose (Money)!”


“It may be worth stressing that we do in fact underwrite every transaction. I highlight this because a few other BNPL providers (who mostly specialize in the 6-week loan variety) have been famously on the record about not underwriting their transactions at all.”


👉 This year, all 3 major credit bureaus begin to take in BNPL reporting. Klarna, who has pivoted away from the biggest BNPL player to a digital bank, begins credit reporting in the UK.


The fundamental steps now become the differentiators among BNPL players, as they continue to strive for growth in a challenging macro environment.


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