Equifax, other credit agencies will survive huge data breach
Black eye? Yes, but business is central to U.S. economic life
Despite a data breach that put as many as 143 million Americans at risk of identity theft, the chances of credit-reporting agency Equifax — or the broader industry — being forced out of business are extremely slim, according to Wall Street analysts.
A huge black eye? Certainly. Costly legal fees? Yes. Outrage from lawmakers and a likely regulatory crackdown? Yup. Fewer sales of credit-monitoring services to consumers and the potential for clients to defect to rivals? Check.
There’s no disputing Equifax faces challenges. But a demise of the business? Unlikely. It’s central to modern economic life. Both Equifax’s and rivals’ business of collecting financial and personal data from consumers and selling it to lenders is what keeps the credit spigot open.
“The (core credit-reporting) system as it stands in terms of fa-
cilitating lending works,” says Brett Horn, a Morningstar analyst. “At the end of the day that will be the deciding factor.”
That’s not to say regulators and lawmakers won’t make credit bureaus take additional steps to better safeguard personal data or limit the ways credit-reporting companies can use and profit from the valuable information they keep in their databases.
“The core function of credit reporting will still continue,” says James Thomas, a director at S&P Global Ratings, which this week kept Equifax’s BBB+ credit rating intact but downgraded its outlook to “negative” from “stable.”
The industry is dominated by the “Big Three” — Equifax, Experian, the largest player when measured by annual revenues of
$4.3 billion, and TransUnion. These companies collect financial information about consumers, such as payment history for credit cards and mortgages. This data is used to create reports and credit scores that are then sold to “customers,” the lenders and other financial institutions that extend loans and other credit.
“The reports sold by the three largest consumer reporting companies are used in determining everything from consumer eligibility for credit to the rates consumers pay for credit,” according to the Consumer Financial Protection Bureau (CFPB).
It’s a big business. Revenue for the three totaled more than $9 billion last year. Stifel, a Wall Street firm, estimates the breach at Equifax could cause a total financial hit of $300 million to
$325 million for the company. In a nutshell, Equifax and the other two credit bureaus won’t be irreparably harmed because:
Core business protected
by a “moat.” The “entrenched oligopolistic position” of the core credit bureau business creates “high barriers to entry” for upstarts or challengers, Horn says.
Lenders’ reliance on
credit reports. Banks, mortgage lenders and credit-card companies rely on credit reports from the three major credit bureaus to make financially sound lending decisions. And, in many cases, they prefer to get checks on potential creditors from all three services to make sure they are not missing anything negative.
“If a financial services company is underwriting a mortgage or another financial product today, next week or six months from now, they will still be using credit bureaus,” says Jeffrey Meuler, an analyst at Baird.
Breach aside, credit bu
reaus benefit consumers. The economy can’t really function without a working credit-reporting system. “These companies are extremely crucial to doing business and going about life in
“The core function of credit reporting will still continue.” James Thomas, a director at S&P Global Ratings
America,” says Amit Rahav, vice president of marketing and business development for Secret Double Octopus, an Israel-based tech firm specializing in authentication technology that wants to do away with passwords. “If you want to exist financially, you need to get credit. It is an essential part of the U.S. economy.”