Fair Isaac Roundup

Yesterday, shares of Fair Isaac (FIC) were knocked down on the news that three credit-reporting companies are creating a rival credit scoring system to Fair Isaac’s FICO. So far, I’m far from convinced that this new system is a serious threat to Fair Isaac.
The Wall Street Journal quotes Fair Isaac’s CEO, Thomas Grudnowski, who summed up the situation nicely:

The new VantageScore system developed by the three bureaus competes with the FICO score system developed by market leader Fair Isaac Corp. of Minneapolis, whose proprietary credit-scoring system is used by 80% of the 50 largest banks in the U.S., according to Thomas Grudnowski, chief executive officer of Fair Isaac. About 75% of mortgage-loan originators use Fair Isaac’s FICO scores in their underwriting process, according to Doug Duncan, chief economist of the Mortgage Bankers Association.
“Because of our low price and high quality, there has got to be a burning platform for customers who want to switch, because there is going to be financial risk,” Mr. Grudnowski said.
Financial institutions and mortgage companies use credit scores, which are derived from information reported to local and national credit-reporting agencies, to determine which loan applicants are good risks. Your payment history, amount of debt owed, and how long you’ve used credit are some of the factors included in a credit score. Each of the three national reporting agencies currently markets its own credit score to lenders and consumers, as does Fair Isaac, which sells them directly to consumers at myfico.com. The credit bureaus also sell the FICO scores to consumers.
Fair Isaac’s system uses a scale from 300 to 850, with 850 being the highest score representing a stellar borrowing record. The VantageScore system uses a scale from 500 to 990, which corresponds to an academic letter-grading system from F to A. Therefore, scores higher than 900 earn an A, scores from 800 to 900 a B and so on.

I like the way the company is responding. MarketWatch quotes Ron Totaro, a Fair Isaac veep:

But Fair Isaac’s Totaro says lenders face significant hurdles in switching to new score models.
Some credit-granting firms “have been using a FICO score for 20 years in many cases. It’s embedded in lenders’ computer systems, lending processes…you can constantly go back and compare apples to apples on how a portfolio is performing or how you need to adjust your lending criteria,” he said.
While the credit-reporting agencies’ announcement today was a surprise, he doesn’t see the new product as a significant threat.
“We’ve been dealing with folks trying to come up with another type of credit score and it really hasn’t impacted us. We don’t see this particular item impacting our business in any way,” Totaro said.

Yes, it’s not so easy to kill the king. Here’s Grudnowski again, this time in Business Week:

Fair Isaac Chief Executive Tom Grudnowski said in an interview that FICO scores are deeply embedded in the way lenders evaluate loan applications. The biggest challenge for the credit bureaus, he says, will be to prove that their score is so much better that it justifies ripping up the way they do things now. Says Grudnowski: “There’s got to be a really compelling reason to convince an institution to change.”

There are also anti-trust concerns. I’m not so sure three companies can get together so easily to take on a market leader.
The stock is below $37 this morning. I’ll gladly buy more if it goes any lower.

Posted by on March 15th, 2006 at 10:25 am


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