Thread by @investing_city, FICO is an interesting business. You know that credit score you get?Yeah, [...]

Ryan Reeves

investing_city

FICO is an interesting business.

You know that credit score you get?

Yeah, FICO makes more than 100% of its profit from those. Think about how asset-light they are.

Quick [THREAD]

1/ The key is the industry dynamics.

Here is a simplified version of the value chain:

- someone applies for a loan
- the bank needs a credit report and FICO score to assess risk
- credit bureaus supply data to FICO and distribute FICO scores

2/ FICO services 98 of the top 100 financial institutions globally. These lenders have FICO scores embedded in their processes for determining risk.

FICO& #39;s brand has power.

This is why the credit bureaus can& #39;t cut FICO out. They tried with VantageScore but not successful.

3/ It& #39;s a very rare dynamic for a company to be a supplier and a distributor and not have ultimate leverage.

This is the case with credit bureaus and FICO.

Bureaus can& #39;t raise prices too much on their data either because FICO would raise its royalty rates.

4/ Hence the crazy margins for FICO scores.

86% EBIT margins!!

That& #39;s EBIT, not gross.

5/ FICO has 3 revenue segments and "Scores" made up 36% of sales last year.

6/ However, at the segment level, "Scores" accounted for more than 100% of total EBIT.

End/ Clearly FICO& #39;s business is driven by its Scores.

Anyone seen a business with higher than 86% operating margins?

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