What's Happening?
Fair Isaac, the company behind the widely used FICO credit score, announced a significant change in its business model, leading to a substantial increase in its stock value. The company will now license its credit scores directly to mortgage resellers, allowing them to distribute FICO scores directly to borrowers. This move is designed to bypass traditional credit bureaus, which have historically been intermediaries in the credit scoring process. The FICO score is a critical tool used by nearly 90% of lenders in the United States to assess a borrower's credit risk, with scores ranging from 300 to 850. The announcement led to a more than 20% surge in Fair Isaac's stock, marking its largest percentage increase since November 22. However, the company's shares are still down about 9% for the year.
Why It's Important?
This development is significant as it could reshape the credit scoring landscape, potentially reducing the influence of major credit bureaus like Experian, TransUnion, and Equifax. These bureaus saw their shares fall between 4% and 10% following the announcement, indicating investor concerns about their future role in the credit scoring process. By offering a direct licensing model, Fair Isaac aims to eliminate unnecessary mark-ups and provide more pricing flexibility to mortgage lenders. This could lead to more competitive mortgage offerings and potentially lower costs for consumers seeking loans. The change underscores a shift towards more direct and transparent financial services, which could benefit both lenders and borrowers.
What's Next?
Fair Isaac plans to offer its new mortgage score pricing models to the three major credit bureaus on the same terms, which could lead to further adjustments in the credit scoring market. Lenders will have the option to choose between two pricing models, potentially leading to a more competitive environment. The response from credit bureaus and their strategies to adapt to this new model will be crucial in determining the future dynamics of the credit scoring industry. Additionally, consumer advocacy groups and financial regulators may weigh in on the implications of this shift for consumer credit access and fairness.
