FICO and the Consumer Credit Bureaus: Part 1

This circuitous 2-parter is going to open with the consumer credit bureaus (Equifax, Experian, and TransUnion – EET), switch to FICO, and loop back to the bureaus…apologies in advance for the disorienting structure.

Let’s start with Experian, which like many companies formed through motley acquisitions, wasn’t so much created as it was allowed to emerge.

During the ‘60s, the mail order and home furnishing divisions of UK retail conglomerate Great Universal Stores (GUS) developed a computerized system for keeping track of the millions of consumers to whom it extended credit.  The in-house database, which absorbed county court judgments and other public data over the years, was commercialized as Commercial Credit Nottingham (CCN) in 1980 and merged with Manchester Guardian Society (a credit association formed in 1820s¹) 4 years later to become the largest bureau in the country².

In the US, a defense focused electronics company founded in the 1950s called TRW applied its engineering talent to automating credit reporting, acquiring Credit Data in 1968 to become one of the 5 largest agencies in an industry whose ranks had swelled from 50 in 1900 to 1,000 in 1920, to 2,000 by 1960 as more automobiles, appliances, houses and other comforts of the American Dream were financed with credit, but were now dwindling as a handful of tech forward players began rolling up smaller, sleepier bureaus.  Eight years following the somewhat botched 1988 merger between TRW Information Systems & Services (the credit reporting division of TRW) and Chilton Corp. (one of the other 5 national agencies, founded in 1897), TRW sold IS&S to Bain Capital and Thomas H. Lee in 1996, who rebranded the company Experian and less than 2 months later, merged Experian into GUS for $1.7bn. 

The combined company’s footprint in the US and UK was augmented by acquisitions in less developed markets.  Most notably, in 2006 Experian took a 65% interest in Serasa, the leading credit agency in Brazil³, spending $2.8bn in total (~8.5x EBITDA) to claw its way to full ownership by 2012 in its largest “acquisition” to date.  Experian complemented Serasa with bureau acquisitions in Colombia⁴, Peru, and Venezuela, and then launched a credit agency JV in Australia with the country’s leading banks. 

Experian expanded not just across geographies but verticals.  In the early 2000s, with the advent of the consumer internet, the agencies started offering a direct-to-consumer product, where consumers could pay a subscription fee to monitor their credit.  But from fy04 to fy06 (fy ending March) Experian stretched its interest in the consumer market to the max, blowing ~$2bn on misguided diversions into online comparison shopping search engines and lead gen businesses (think shopping.com and LendingTree)⁵ that were moved into “strategic review” during the downturn and later divested⁶. 

Transunion has a similarly rich history with nonobvious origins.  The company was founded in 1968 as a subsidiary of railway equipment leasing company Union Tank Car.  It got into credit reporting services by rolling up or partnering regional credit reporting services, many with origins dating back to 1800s⁷, until it achieved nationwide coverage in 1988.  In the 90s, TRU acquired its way into analytics and marketing services, and began its foray into emerging markets, acquiring the largest credit database in South Africa (an acquisition that would be followed by scattered minority/majority ownership stakes of leading credit agencies in Brazil, Mexico, Chile, Colombia, and India over the next 25 years). 

Transunion has traded hands multiple times: it was sold to Marmon Holdings in 1981, spun-off to the Pritzker family in 2005, who then sold 51% of the company to Madison Dearborn partners in 2010.  In 2012, the company was sold for $3bn to Advent International and Goldman Sachs, who took the company public in 2015.

And then finally, there’s Equifax, who was founded in 1899 to evaluate applications for insurers and then went on to acquire a bunch of regional credit agencies over decades until by 1978, the company had become so dominant that it was ordered by the FTC to divest several.  Like TransUnion and Experian, Equifax started expanding into analytics and overseas markets⁸, planting flags in Latin America through a series of acquisitions in Brazil and Argentina in 1998 and landing in Australia/APAC through its 2016 acquisition of Veda (at $1.9bn, the company’s largest acquisition to date).  Equifax also forayed into credit card processing and healthcare claim reviews, businesses that it divested in the late 90s/early 2000s⁹.  Other domains like loan origination software, talent management, mortgage settlement services, and direct marketing were sold between 2010 and 2015¹⁰.

From the late 90s through the early 2000s, organic product development took a back seat to Equifax’s strategy of rolling up US credit bureau affiliates (affiliates = franchisees who used Equifax’s credit databases and sold Equifax products to banks in their territories).  Then in 2005, Rick Smith took over as CEO and did a fine job invigorating the company’s product development cadence until one day, whoopsie, data breach. 

Here are charts to give you a rough sense of how the 3 largest credit bureaus stack up against one another:

[Experian: LTM through September 2019]

The largest source of revenue for all 3 bureaus comes from North American lenders, who purchase data and software to help them make underwriting decisions.

All three companies are the product of a tech-forward commercial entity stitching regional agencies together into a nationwide database.  Both elements – the databases and the technology that makes them accessible and predictive – are essential, but they play somewhat different roles.  Technology was what allowed these bureaus to effectively scale the disparate collection of regional datasets during the ‘60s through the ‘80s and today, it is what underlies the new product development that fuels 40%-50% of organic growth (more on this in Part 2). 

If technology drives growth, data underpins durability.  The CRAs’ entrenched positions stem from historical dependencies and reflexive scale advantages that have accrued over many decades of owning the most comprehensive datasets.  What I mean by the latter is that the CRAs effectively function managers of data coops.  Just as 100 friends, each with a separate piece to the same puzzle, will have a more comprehensive understanding of the puzzle by joining their pieces together, lenders mutually benefit from combining the payment histories of their customers.  Each “puzzle piece” is separately of little worth but collectively valuable.  Lender B in Cleveland wants to know if Customer 1 is has already taken out a big loan from Lender A in Portland.  And just as you would rather see a puzzle that is 3/4 of the way complete than one that has just started, a lender will find it more valuable to access and contribute to a national bureau database that captures payment data from every lender in the country than one that only gathers repayment data from, say, 10 banks in Chicago.  Centralizing data also acts as a stick, since if a consumer knows that his payment behavior is going to be captured no matter what – that a bank in New Jersey will be privy to his delinquent loan in Montana – he will be more likely to stay current on his obligations.