Equifax (EFX)

TOP CONTRIBUTORS

Kryssia Uraguchi

Equifax Inc. (NYSE: EFX) is the leading credit report provider in the U.S. and is considered one of the "Big 3" in the credit reporting market. It generated $1.54 billion in revenue (2006) and operates in 14 countries across three continents. Equifax also provides credit scoring, marketing consulting and other credit related services. Equifax also recently acquired TALX, the leading employment verification company in the U.S.

Since the US credit reporting market is now considered mature, Equifax has had to expand its database services to include other services such as marketing and credit scoring, in addition to developing its international divisions. Efforts toward the latter have been quite successful to date with Equifax non-domestic operations growing at double digit rates over the last few years. Among the adverse factors affecting Equifax are the potential for more stringent government privacy policies and the stagnancy of the US housing market in the wake of higher interest rates and subprime lending troubles.

Company Breakdown

Equifax operates in three segments broken down by region and are further brown down by three divisions of service.

Services

• Information Services includes credit reports, credit scores and other related information. Banks, retailers and other lenders buy credit reports to help determine an applicant's(individual or business) eligibility for a loan, offer credit and other business-to-business and business-to-consumer decisions. Credit scores are mathematically based on Equifax credit reports and represent the likelihood that a person will pay his or her debt. Credit scores are important because lenders use credit scores to determine the risk of lending to a particular person or entity, what loans he qualifies for, and at which interest rates.

• Marketing Services uses Equifax's enormous database to prescreen, segment and target consumers. Equifax uses mail and e-mail to directly reach its client's target consumer base and also offers consulting advice and marketing strategy. Equifax's database system has the capability to customize information for its customers and generate mailing lists based on different criteria, such demographic information.

• Personal Solutions is connected directly with consumers who want to buy their credit report in order to monitor their credit status and watch for identity theft. This segment was a large contributor to the over 8 million reports sold in 2004. Equifax's Personal Solutions has set itself apart providing consumers with access to the home sales in their neighborhood as comparable sales to measure the growth of their neighborhood value.

Segments

• North America - Equifax's North American segment generates 80% of its revenue and consists of Information Services (68%), Marketing Services (22%) and Personal Solutions (10%). It has credit information on approximately 220 million customers and 25 million businesses.

• Europe - Its European Segment accounts for 10% of revenue, with a majority of revenue contributed by Information Services (88%). Equifax Europe has a database of over 45 million customers throughout the UK, Ireland, Portugal and Spain. It also provides its Credit Marketing Services (12%) in the UK.

• Latin America - Equifax's Latin American operations contribute the remaining 10% of revenue, with Brazil generating 50% through its Information Solutions. Equifax has credit information on 72 million customers throughout Brazil, Argentina, Chile, El Salvador, Honduras, Peru and Uruguay.

Customers

Equifax's main clientele consists of banks and credit card companies, but its customers have become more diverse largely due to the rise of identity theft, fraud and more thorough background checks. For example, small businesses, insurance providers, a number of government groups and retailers use Equifax's services to conduct background checks on potential employees, check payment histories and validate the credit of a business. Equifax also caters to individual clients who wish to have access to their credit reports or scores. In recent years, individual clients have been generating more business for EFX.

Attempt to Expand in a Mature Market

Equifax is one of the largest players in a mature credit market. As a result, the growth prospects of its credit reporting business is somewhat limited. Faced with increasing pricing pressure the company is focusing on offering more complimentary services.

• TALX Acquisition: TALX, the leading employment verification company (with 9,000 customers, including 75% of the Fortune 500), complements Equifax's existing services with its Work Number database. The database contains information on 140 million employment records which can be used by lenders to verify income. The Work Number database sets Equifax apart by allowing it to offer TALX's services even in cases where the credit applicant has little or no credit history. TALX reported revenues of $237 million in 2006, up 33% from 2005.

• International Markets: In an effort to further expand, Equifax has begun to establish itself in international markets such as the UK and Brazil. Along with its information services, it started providing other services such as fraud detection and business credit throughout Europe and Latin/South America. Equifax's international branches have experienced a 30% growth over the past year, but will not have a substantial impact the company's earnings in the near future.

How Much Will Additional Government Legislation Affect EFX?

Since the digital database boom is relatively new, there is not a lot of government regulation around database management. The FCRA and its FACTA amendment are the only laws protecting consumer credit privacy at this point. The FCRA (Fair Credit Reporting Act) regulates how credit reporting companies receive, transmit and use consumer credit information and the FACTA (Fair and Accurate Credit Transactions Act) allows consumers to obtain free credit reports from Equifax and its two rivals, Experian and TransUnion annually. Free credit reports available to any of the 220 million consumers in the Equifax database could potentially hurt sales and growth in the Personal Solutions division. The FCRA and FACTA amendment have not severely affected Equifax so far since its revenues have only been rising, but there are a number of advocates that believe stricter laws need to be enacted. At this point it is unclear how new legislation would affect Equifax. On on hand stricter privacy laws could restrict the information that credit bureaus are allowed to collect and/or disseminate with regards to individuals. On the other hand the Patriot Act could help broaden the spectrum of information credit report companies can receive and report on due to the risk of identity theft or fraud.

Sales Down Due To A Slow Housing Market

Equifax provides bundled credit reports to mortgage lenders (mortgage lenders usually require around three reports from credit bureaus). The decreased number in mortgage applications directly affects Equifax's credit reporting services revenue. Since 2006 higher interest rates and other factors have led to drastically lower housing prices and housing demand. In 2006, mortgage related credit reporting accounted for 13% of Information Services revenues and has since diminished to 4.3%. Mortgage related credit report revenue has been decreasing since early 2005, as illustrated by the graph. Overall revenue hasn't been badly hurt since its other divisions, especially international have made up for the loss.

Equifax versus the Competition

Although Equifax is one of the "Big 3", Experian has a significant lead over the company in terms of revenue. Despite this, Equifax is the leading credit report provider in the U.S.

In addition to their credit report competitors, Equifax competes with a number of different companies across the additional services it provides. For business information services (i.e. regarding business credit), EFX competes with Dun & Bradstreet (DNB) (D&B) and Moody's (MCO). Both companies publish financial ratings and credit reports on commercial and government businesses, as well as provide marketing services for its clients. Similarly to individual credit reports, those reports help lenders determine a business's credit risk. EFX competes mainly with Fair, Isaac and Company (FIC), the leading credit scoring developer. Lastly, Equifax competes with NOVA in its marketing segment. NOVA, a subsidiary of U.S. Bancorp (USB), provides point of service data. Point of service data tells companies exactly what its customers are buying, when, and how often. This data is extremely important for marketing because companies can get a good view of what products are most popular and who their products appeal to.

Internationally, Equifax and Experian are the two main information providers. Equifax is currently the #2 credit bureau in Brazil, but Experian has expressed interest in acquiring the #1 credit bureau, Serasa, which is almost three times larger than Equifax's Brazilian division. The Brazilian credit market has a lot of potential for growth and Experian's presence will not bode well for Equifax, especially since Experian has more experience internationally.

Equifax and the rest of the "Big 3" don't have to worry about fierce competition for credit reporting from brand new players because of the immense amount of information they have collected amassed over the years. Equifax has information on 300 million consumers in its databases worldwide, including its recent acquisition of TALX Corporation. Its enormous collection of consumer and small business information makes it nearly impossible for new consumer information companies to enter the industry.

• *: Denotes estimates for 2007
• Source: Company reports and data

References