Credit Bureaus' Wide Moats Can't Be Breached
Experian, Equifax, and TransUnion can profitably expand in multiple directions.
Equifax’s (EFX) massive data breach last year has drawn a fair amount of unfavorable attention to the credit bureau industry. While uncertainty around this issue persists, we think Equifax’s results since the breach, first reported in September 2017, have been about as good as can be expected, due in large part to the wide economic moat the company and its peers-- Experian (EXPGY) and TransUnion (TRU)--enjoy. We believe these companies have meaningful opportunities to expand without diluting the moats around their legacy operations. We view the growth of the middle class in emerging markets to be the most value-creative long-term growth opportunity for the industry as the companies tap this secular trend to replicate their business model internationally. Additionally, selling credit data and related services directly to consumers is a natural extension of the credit bureau business model, and while new entrants have appeared, we think the credit bureaus will retain control of this market, given that they control the credit data. Finally, we believe the credit bureaus have been relatively disciplined in entering new verticals that play to their strengths. We see Experian as the stalwart in the industry and expect it to rebound from recent headwinds. TransUnion is the smallest but most aggressive player and has the best growth prospects. While uncertainty persists, Equifax looks positioned to start to return to growth.
Simple Businesses With Wide Moats
Credit bureaus have a relatively simple and attractive business model: They take consumer credit information from lenders and other sources, aggregate this data to form a complete-as-possible picture of consumers’ credit history, then sell this data back to lenders and any other businesses that find the information useful. The data in the credit report is the input for a scoring system (with FICO being the dominant scoring system in the U.S.) that provides an overall quantitative rating on the consumer.
Brett Horn does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.