How BNPL's Credit Score Impact Reshapes Investment Strategies

The inclusion of Buy Now, Pay Later (BNPL) loans in credit scoring models marks a pivotal shift in the financial ecosystem. Starting in late 2025, FICO's new scores—FICO® Score 10 BNPL and FICO® Score 10 T BNPL—will integrate BNPL repayment data, altering how lenders assess risk, consumers manage credit, and investors evaluate opportunities in the BNPL sector. This transition presents both risks and rewards for investors, requiring a nuanced understanding of the evolving landscape.

The Integration of BNPL into Credit Scores: A New Paradigm

FICO's decision to incorporate BNPL data addresses a critical gap: roughly 30 million U.S. adults lack sufficient credit history to qualify for traditional loans. By including BNPL loans—typically short-term, interest-free installment plans—FICO aims to provide lenders with a clearer picture of borrowers' repayment behavior. For example, Equifax's analysis found timely BNPL payments could boost FICO scores by 13 points on average. However, missed payments could trigger significant drops, as BNPL defaults may now be reported to credit bureaus like any other loan.

Investment Implications for BNPL Firms

BNPL providers like Affirm (AFRM), Klarna, and Afterpay (APT) stand to benefit from this shift. Here's why:
1. Expanded Consumer Base: Younger, credit-invisible users may adopt BNPL to build credit histories, driving adoption and revenue.
2. Lender Partnerships: Traditional lenders, now able to assess BNPL borrowers more accurately, could partner with BNPL firms to offer hybrid products.
3. Risk Mitigation: FICO's scoring could reduce lender skepticism about BNPL's “phantom debt” risk (loans not reflected in credit reports), easing access to capital.

However, risks remain:
- Regulatory Uncertainty: While the U.S. Consumer Financial Protection Bureau (CFPB) has scaled back enforcement, the U.K. is imposing stricter rules requiring affordability checks and FCA authorization. BNPL firms must navigate these divergent frameworks.
- Credit Score Volatility: Missed payments could harm user credit scores, potentially reducing demand if consumers fear negative consequences.

FICO's Strategic Move: A Gold Mine or a Risk?

FICO's stock (FICO) has surged 22% year-to-date on expectations of growth from its BNPL initiative. The company's 80.8% gross margin and 90% lender adoption rate position it to dominate this space. Analysts at Jefferies upgraded FICO to “Buy” with a $2,500 price target, citing its ability to monetize data from BNPL's $130 billion U.S. market.

Yet challenges linger. FICO's new scores may face slow adoption by lenders accustomed to older models like FICO 8. Until BNPL-inclusive scores become standard, their impact on investment outcomes will be gradual.

Regulatory Crosscurrents: A Two-Speed World

• U.S. Liberalization: The CFPB's deprioritization of BNPL enforcement removes compliance hurdles, allowing firms to innovate freely.
• U.K. Tightening: New rules requiring FCA authorization and affordability assessments could raise BNPL firms' costs, favoring established players like Klarna over startups.

Investors must monitor regional trends: BNPL firms with strong U.K. footprints (e.g., Klarna) may need to invest in compliance, while U.S. firms can scale more aggressively.

Investment Recommendations

1. FICO (FICO): Buy for long-term exposure to BNPL's credit scoring integration.
2. Risk: Slow lender adoption of new scores.

3. Upside: Dominance in a $2 trillion credit scoring market.

4. BNPL Leaders: Consider Affirm (AFRM) for its early partnerships with Experian and its focus on credit-building users. Avoid purely U.K.-exposed firms until regulatory clarity emerges.

5. Risk: Overextension could hurt margins if defaults rise.

6. Credit Reporting Agencies: Equifax (EFX) and Experian (EXPN) may benefit from BNPL data processing fees.

7. Upside: New revenue streams from BNPL reporting.

Final Analysis

The integration of BNPL into credit scores is a double-edged sword. While it unlocks growth for BNPL firms and expands financial inclusion, it also introduces new risks tied to credit score volatility and regulatory divergence. Investors should prioritize firms with strong compliance frameworks (like Affirm) and bet on FICO's leadership in data monetization. For now, BNPL remains a high-reward, high-risk sector—ideal for portfolios with a tolerance for volatility.

Data as of June 19, 2025. Past performance is not indicative of future results.