Until this year the tiny group of credit check companies that toil in consumer lending markets had largely avoided public scrutiny. Cyber security and big data in credit reports seemed less exciting compared to stories of Russian interference in elections and leaked Hollywood emails. The data breach at Equifax has changed that. So far, UK-listed rival Experian remains unscathed. It has a good shot at staying that way.
Experian’s share price has already recovered from the drop that accompanied the revelation hackers stole financial records for as many as 146m Equifax customers, mostly in the US. Shares are up 15 per cent over one year while Equifax shares are still off by 8 per cent. The market thinks the problem is not systemic. Unless there is another breach it is impossible to know for sure whether the hack indicates weak links in the industry or an unlucky one-off. Companies that collate information on millions of people are certainly an attractive target. Then again, their reputations depend on their defences. Equifax’s troubles will have sharpened the focus on security by its rivals.
The fallout from US regulators is clearer. Here Experian, with 43 per cent of revenues coming from outside the US, seems in good shape to weather any change. Within the US, lawmakers appear irritated that consumers can be charged to access information about themselves. But Experian is already focused on increasing free consumer checks and has reduced dependence on consumer credit subscriptions. Surely only masochists enjoy poring over their credit profile enough to pay for these services. Consumer Services contribute just 22 per cent to group revenue.
A dip in consumer subscriptions is manageable. Operating margins remain high at 25 per cent. Experian’s real business is in collating and analysing credit data then selling it to banks and other companies. Organic revenue growth at the credit services business, which accounts for over half of group sales, is 5 per cent. There is no reason this demand should dip.
Credit reporting requires a network effect to be successful. Once that is in place, it becomes a profitable, cash-generative business. The small cadre of companies at the top have the kind of scale that puts a high barrier to entry for competitors. If one suffers misfortune, the others benefit. Experian’s sales were helped by more interest in its new identity monitoring service following the Equifax breach. The industry’s collective record on data security has been dented — Experian’s individual appeal has not.
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