Credit cards are better than cash. You can spend more than you have and set all your repayment terms, as long as they are more than 3% per month. They can also be used virtually anywhere. Their ubiquity comes from the technologies behind them and their widespread acceptance. Since the late 1950s, companies operating behind the scenes have made the credit card industry run predictably, reliably, and securely.
Companies like Mastercard and Visa are at the center of bank cards, but vendors and suppliers, such as IBM, with their 1401 mainframe introduced in 1959, stand out as technology that changed banking from a ledger account system to a dynamic I/O design. And don’t forget the magnetic stripe, an IBM creation. ACI Worldwide, with its Base24 platform launched in the 1970s, stands out, as does the combination of Fiserv and First Data, which democratized technology for smaller banks. And then, there is FICO.
FICO’s foundation is a classic tech success story. It starts with: “From 1956 with two smart guys and a borrowed computer…” And in 1958, they launched their first credit score. Now, nearly every lender with over 90% of credit booked in the U.S. market uses the FICO Score.
What’s A FICO Score Anyway
The purpose of the score is to risk rank credit. Lenders use it universally at the entry point when applications get scored for underwriting and reconnaissance. Sophisticated firms utilize it throughout the credit cycle, monitoring factors such as balance buildup, and then continue to assess credit line usage, collection vulnerability, and risk management. Then, when accounts get securitized in capital markets, the score provides a clear line of sight on credit quality. The score is not a black box and conforms to all requirements of the Fair Credit Reporting Act.
There are variations of the FICO Score. Some specialize in auto, card, or mortgage lending. Others, like FICO Score 10 and 10-T, bring in trended data to enhance reporting.
What Happened
There are three major credit reporting agencies (CRA) in the U.S.: Equifax, Experian, and TransUnion. These companies compile lender data and are highly regulated for accuracy by the Consumer Financial Protection Bureau and the Federal Trade Commission. These agencies are responsible for enforcing the Fair Credit Reporting Act.
FICO owns the intellectual property on the FICO Score. CRAs license the score and calculate for each consumer. For about 20 years, the three bureaus have been developing their own score, known as VantageScore. The FICO Score is by far the dominant provider. In short, the CRAs sell the FICO Score, but they are also trying to build a business with their proprietary product.
According to the Financial Times, FICO is creating a novel distribution strategy that will allow lenders to deal directly, rather than through CRAs. This has the potential to improve pricing transparency and trim costs.
FICO Cuts Out Middleman
- FICO announced the launch of the FICO Mortgage Direct License Program late Wednesday. The platform is for tri-merge resellers, which combine data from the three nationwide credit bureaus and provide it to mortgage industry participants. Instead of depending on the credit bureaus, the tri-merge resellers will have the option of calculating FICO scores through the platform and distributing them directly to their customers.
Investing.Com noted: “Citigroup analysts said selling scores directly to lenders would cut out the margin that companies such as Experian and Equifax make on the FICO credit score.”
This move will likely increase competition in the scoring space, trim and clarify consumer pricing, and result in a stronger business model for lending.
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