What is Experian?

The credit information industry traces back to 1803 when a group of London tailors began swapping information on customers who failed to pay their debts. Experian originated out of the operations of Great Universal Stores (GUS), a retail conglomerate in the UK. GUS had millions of small customers who purchased goods on credit through its mail order business and home furnishing stores. In the 1960s, approximately a quarter of British families were customers of GUS. Therefore, GUS was probably the largest lender in the UK at the time. The company built its own credit databases, which were originally only for in-house use until IBM persuaded them to sell the information externally. The commercial conduit for GUS’ credit information services was formalized in 1980 as CCN Group. The business grew in part through acquisitions, including the 1996 purchase of US-based Experian, formerly known as TRW Information Systems and Services. Experian, as it was renamed, was spun off from GUS in 2006. The IPO was in October 2006 at £5.60 per share. In 2007 it added another geographical leg beyond its key US and UK franchises by acquiring Serasa, Brazil’s leading credit bureau.

The company reports its financial results according to three segments: Data, Decisioning and Consumer Services. Data and Decisioning includes its credit bureaux and provides businesses with a suite of data driven tools and services, enabling better decisions about credit risk, fraud prevention, and marketing. Consumer Services provides credit reports and scores to consumers, empowering then to make informed financial decisions. While the competitive advantages for Experian’s other businesses are not quite as deep as the core credit bureau business, they are natural add-ons that have significantly expanded its growth opportunities.

Why is a credit bureau an attractive business model?

A credit bureau (or “consumer reporting agency” in the US) searches and collects individual credit information. The information includes credit applied for, whether or not their applications were successful, bill-paying habits and how they repaid loans. Experian acquires data from thousands of sources, including from creditors, debtors, debt collection agencies or offices with public records (e.g. court records) as well as incorporating demographic information on consumer purchasing activity. The data it collects are the foundation for credit scores used by lenders to assess the creditworthiness of a consumer.

This data is sold for a fee that is typically tiered (i.e. $0.80 per credit report for the first 10,000, then $0.75 and ultimately $0.60 for a very large number of reports). Customers include large multinationals, financial institutions (i.e. banks, mortgage lenders, credit card companies and other financing companies) and governments as well as small mom-and-pop businesses. About 39% of Experian’s revenue still comes from the financial-services industry. That proportion might sound high but is down from about 70% in 2000.

The US credit reporting agency (CRA) industry is concentrated given it is dominated by a top tier of three players. There are other much smaller CRAs, but they do not pose much of a competitive threat. The other two major players are Equifax and TransUnion, which are less global and more US-centred compared to Experian. Another significant competitor is Dun & Bradstreet, which is just focused on business lending, where it is the market leader in the US (Experian is #2). Experian is split 80% consumer credit information and 20% business credit information. Outside the US, the industry structure and competitive landscape varies. For example, credit bureaux tend to be state owned in Germany. In Brazil there is only one significant credit bureau, which is Serasa (owned by Experian). Experian is also the dominant player in the UK.

There are three main reasons:

/ First, there is the difficulty and expense of replicating a database of similar depth and quality. Experian has a powerful network effect, whereby businesses want to use its information, and are happy to supply it with their own, as it has the best data. This has fuelled multi-decade growth of an unrivalled database of millions of records that have been tirelessly matched and enhanced.

/ Second, there is no incentive for most banks to go to the expense of setting up data distribution to new entrants, unless there is a major pricing issue, which there isn’t. As credit bureaux data is based on the voluntary reporting of thousands of financial institutions, it is unlikely a startup, particularly amid heightened data security concerns, would be able to convince banks to share consumer information.

/ Third and finally, regulators have imposed high barriers to new entrants to ensure consumer protection. For example, the US regulator requires credit bureaux to have the infrastructure and processes in place to deal with any consumer disputes over the accuracy of their credit score within 30 days.

These new growth avenues and the mission-critical nature of the credit data business (i.e. lenders cannotoperate without Experian’s data) all add up to a robust business model.

The business has proven to be resilient through the ups and downs of business cycles. Although credit application volumes slow in a recession, the core bureaux in the US, the UK and Brazil only account for around a third of group revenue. Experian has counter-cyclical protection through its risk management and asset protection offerings as well as products in healthcare and other segments.

The proof is in the pudding. As shown in the chart, Experian saw positive organic revenue growth during the Global Financial Crisis, despite many of its financial sector clients running into difficulties, because there was a pick-up in demand for its credit monitoring, risk management and collections offerings.