VantageScore...Beyond the Hype

Do you realize how rare it is for the three national credit-reporting agencies to get together and collaborate on anything?  These guys hate each other with a passion.  Right now one of the only things they cooperate on is to sponsor www.annualcreditreport.com.  And let's face it, the only reason they do that is because Federal Law says they have to.  They are also nice enough to share fraud alerts with each other if a consumer feels that he or she has been a victim of fraud.  And that's about it for the cooperation my friend. 

That was until this past week when all of a sudden they announce VantageScore.  VantageScore is a credit risk score built by VantageScore Solutions, LLC.  And who is behind VantageScore Solutions?  Well it takes about 10 seconds of research and you'll find out that VantageScore Solutions isn't really company at all.  It's a paper company formalizing a collaborative effort by the three credit bureaus to build a new credit risk score available for sale to lenders.

A couple of observations if I may…

• This is clearly an assault on Fair Isaac’s FICO credit scores.
• This is clearly a great example of sizzle versus steak, hype versus substance or perception versus real value.  Chose your favorite of the three.  And last but not least…
• This is clearly a huge waste of time and a missed opportunity for some really good work to have been done for consumers

First things first…this is an assault on their largest strategic partner, Fair Isaac.  Let me explain.  All three of the U.S credit bureaus and the two Canadian bureaus collectively make several hundred million dollars each year selling the various scores that Fair Isaac (FICO) builds.  A portion of that revenue goes back to Fair Isaac in the form of a royalty.  Fair enough, right?  If you build a product that I can sell almost a trillion of each year then you deserve your cut.   

It looks like the credit bureaus are not happy with that arrangement any longer despite the fact that it's a dependable and predictable revenue stream that has been in place for over 15 years.  I guess it's smart business.  Publicly spit in the face of your cash cow partner who basically does all of the work for you while you collect the cash. 

What exactly do you think Equifax, TransUnion and Experian do for their portion of the hundreds of millions of dollars in FICO score revenue?  Would it surprise you to learn that they do NOTHING other than process the credit report like they would have done anyway and deliver it to the lender along with the FICO score?  They do nothing more.  Trust me, I lived that process for seven fun filled years at Equifax and seven more at Fair Isaac.  It's easy money for them.    

Fair Isaac, on the other hand, practically invented credit scoring, they built the models, they re-develop them periodically and they are the ones who have to answer the zillion questions that pop up from consumers when they don't agree with their scores.  The credit bureaus ARE LUCKY to be able to sell the FICO scores.  Without them they couldn't charge lenders the 50 or 60 cents that they're charging them now for credit reports.  They'd be giving them away for a little more than a dime because that's about as much as they'd be worth.  Analogy time…would you pay $1,000 for tickets to a football game?  Doubtful.  Would you pay $1,000 for a pair of tickets to the Super Bowl?  I bet you would.  FICO scores add that kind of value to a credit report. 

Second…this is a great example of mega-hype.  If you read the press release or any of the FAQ's from VantageScore Solutions and you really understand credit score modeling then you will quickly conclude that these new scores are about as valuable as snow tires in Miami.  Here are just a few of the good juicy ones…these might be a little confusing so excuse me in advance please.

• The new score promises to "decrease bad rates and charge offs by identifying delinquencies and accounts likely to default."  Wow, sounds great.  The problem is that it's about 25 years too late to toot that horn.  All credit-scoring models do this…it's the only reason they exist.
• The new score was built using "advanced segmentation techniques used to create a stronger model."  Okay, now we're getting somewhere, right?  Oh wait, Fair Isaac practically invented credit bureau scorecard segmentation about 3 decades ago.  Sorry credit bureaus…what else does your model do that you didn't try and steal from Fair Isaac?
• The reason this new score was created is because it's a "direct response to market demand for a more consistent method of credit decisioning."  That quote came right out of Equifax's customer announcement letter from a guy named Dann Adams who is one of their most senior executives.  Surely he's in touch with his customers well enough to know that NOBODY IS ASKING FOR ANYTHING OF THE SORT.  It's pretty obvious that his public relations folks wrote that letter.  Good idea though…fabricate a problem and then solve it with a new product.

I'll stop with my examples here but safe to say I can go on for several more pages of the "sizzle versus steak" examples.

Third…what an unbelievable opportunity was missed to help consumers.  The three credit bureaus, which fight like Democrats and Republicans, actually sat down at a table and agreed to work together on something.  For those of you not familiar with how these types of deals are formalized you can safely assume that it took between 6-12 months to fully negotiate terms between the three of them.  Then, it took at least another 18 months to two years to fully develop the new score.  If they got it done in any amount of time less than that then you can rest assured it's being held together MacGyver style…with chewing gum and a Q-Tip.  Scoring models are like contact lenses, heart surgery and a good steak…they're worth waiting for it to be built, performed or cooked right.  "Fast" in this case is not good…it's sloppy. 

Here are a couple of things that I really wish the bureaus had agreed to do rather than spit in the face of their largest partner…

• Figure out a more efficient way to deliver credit reports to consumers via the web.  It took me almost half an hour to answer all of their silly security questions that last time I claimed my annual free reports.  Who the heck can remember what the monthly payment was on an account that they had back in 1996?
• Figure out a way to ensure more data accuracy.  Studies continue to show that credit reports are riddled with errors and that a significant percentage of those errors are serious enough to cause you to be declined for a loan.
• Since identity theft is such a problem maybe they can get together to build a more robust data security protocol that would prevent unauthorized access into their credit databases.  When you want to get a copy of your own credit report you have to go through tighter security than at an airport.  When a lender wants to get a copy of your report they can pull it in without anyone asking why.  That's scary.

The bottom line is that I'm not angry at the bureaus for trying to muscle out FICO.  It's a smart business decision to keep more "score" margin rather than pay FICO a royalty.  But, my question is could they have spent their collaborative time together more constructively for consumers?

And, I'm not going to let them and their marketing people try and confuse consumers into thinking that all of the features and benefits they are touting are somehow bleeding edge technological breakthroughs when they simply are nothing more than tried and true practices that have been around since the 1960's.  The press release last week was simply nothing more than an effort to confuse consumers and unsophisticated lenders. 

I'm certainly not worried about most lenders being confused by what's going on here.  Lenders almost always employ a staff of people who are nothing less than statistic's gurus.  And in the short week that I've had to talk to a few of them it's very clear that they can see right through the PR fog.  It's going to take a whole lot more than "hey, we've created a new model and it's really really really good" to fool those guys.

Good luck bureaus.  We'll check back in a few months to see how well VantageScore is selling.  :)

Comments

[juan malaka]

You forgot to mention how much FICO is ripping off its Financial Serivces customers

[John Ulzheimer]

Interesting point you've made Juan. Can you expand?

How is FICO ripping off it's financial services customers?

[David Snider]

How about the credit reporting agencies come up with a model that applies credits to a persons score for years of good credit. As the system stands you can have excellent credit for 25 years and a major life event happens and in site of 3 months your credit score is in the toilet. No one bothers to ask the question "What is going on with you, this is not indictative of your past credit record" or "what can we do to help you get things back on track. I know this because I am living it. Another huge education better than any college.

[Gung Ho]

FNMA and FHLMC will have to adopt Vantagescore and they didn't even adopt the Nextgen FICO!