DEFINITION of FICO (Fair Isaac)
FICO (Fair Isaac) is a major analytics software company that provides products and services to both businesses and consumers. Previously known as the Fair Isaac Corporation, the company changed its name to FICO in 2009 and is best known for producing the most widely used consumer credit scores that financial institutions use in deciding whether to lend money or issue credit.
Fair Isaac has offices in 25 locations worldwide, mainly in the United States, Europe and Asia, and its clients include hundreds of banks, insurance companies and retailers. Fair Isaac also provides collections and recovery consulting, customer strategy consulting, operational readiness reviews and other services to businesses.
BREAKING DOWN FICO (Fair Isaac)
Fair Isaac was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac. Today, the company holds more than 130 patents for its technologies. Thus far the company has sold more than 100 billion credit scores since its inception. The company also asserts that three-quarters of all home loan originations make use of the information provided by its scores and reports. FICO also maintains a fraud protection service used to safeguard more than 2.5 billion credit cards.
Because FICO gives businesses a convenient way to assess consumers’ credit risk through FICO scoring, consumers have greater access to credit. Consumers can access their credit scores directly through myFICO, Fair Isaac’s consumer division. The sale of credit scores to both businesses and individuals is an important part of the company’s business model.
How FICO's Services Are Used to Assess Credit Risk
Fair Isaac’s scoring algorithms are designed to predict consumer behavior. For example, when FICO gives a consumer a credit score of 620, which is considered subprime, it is predicting that the customer is likely to have trouble repaying a loan based on the data it has on that consumer’s past repayment activity. Many companies rely on FICO’s products and services to reduce risk.
Because the FICO score is so widely used and there is little competition in the credit scoring industry, if the company becomes unable to provide credit scores or if its scoring method were found to be significantly flawed, there could be negative effects throughout the economy. Most mortgage lenders, for example, use the FICO score, so any problem with the Fair Isaac Corporation or its scoring model would have a major impact on the mortgage industry.
As consumer behavior and usage of credit changes, there has been some debate on how new and future lenders might use FICO’s services. For instance, there has been some perception that recent generations are aiming to make less use of credit cards. Furthermore, there may be other types of fiscal indicators that lenders may might make use of to assess potential borrowers.