The king is dead, long live the king.
Inevitably, Equifax’s CEO Richard Smith has left his post, joining the firm’s CIO and CSO in the ranks of the unemployed. In his place, Paulino do Rego Barros Jr., a seven-year Equifax veteran, will take over as interim CEO. For the credit bureau's sake, let's hope it has a long-term plan that's better than promoting from within.
If Equifax is going to survive, the company needs to entirely rip out and replace systems, procedures, business models and management. For years, the credit bureaus have built a system around a very specific consumer demographic that excludes or alienates those who can't or don't want to build their credit files the traditional way. It's increasingly clear that those "alternative" credit models are perhaps the only path forward.
A steam powered company in a digital age
Equifax is a 118-year-old company that came into being at the time of steamships and predating aviation. It's an analog company that simply hasn’t adapted to digital changes. Finding its calling in the age of credit risk assessment in the 1950s as one of the three legs of the FICO scoring stool, Equifax hasn’t needed to innovate — why should it, when it was in the incredibly lucrative business of both capturing and selling sensitive consumer data? Equifax was having its proverbial cake and eating it until a couple of weeks ago.
However, as the digital economy has grown, Equifax's once-scarce commodity — sensitive personal and financial information — has spread far and wide across the digital corners of the globe. Even before the bureau's data breach, Social Security numbers and bank account credentials were stolen and shared en masse online, forcing financial institutions to adopt new ways to identify their customers through the use of tokenization, biometrics, device identification and other innovations.
But what hadn't changed — at least, from within the system — was the use of static Social Security numbers as the keys to a consumer's credit. The legacy credit scoring system simply has not kept up with shifts in U.S. demographics. The FICO scoring system has been the backbone for lending in the U.S since its inception in 1958 and is primarily based on ratings from credit bureaus on historic lending activity. It assumes some degree of credit history on which the score can be calculated. For immigrants coming to the U.S. with no local credit history, this places them in a Catch-22 situation. No credit history means no access to credit, but because of no access to credit there is no credit history.
This may have been less of an issue in the 1950s, but as demographic shifts continue in the U.S., the cracks in FICO scoring become more apparent. This will only get worse — according to the U.S. Census Bureau, between 2014 and 2060, the native population is expected to increase by 62 million (or 22%), reaching 339 million in 2060. At the same time, the foreign-born population is projected to grow from 42 million to 78 million, an increase of 36 million (85%).
The new world is already here
Equifax hasn't solved this problem, but companies like Square and PayPal have.
Square Capital and PayPal Working Capital are merchant cash advance alternatives that could only work in the modern age. These programs don't put all of their faith in the aging credit scoring system, and instead look at the tangible data they have on hand for each customer to determine whether to extend credit. A customer's transaction history determines its cash flow and ability to repay, and those payments are deducted from future sales.
This isn't a consumer lending model, but in the gig economy it easily could be. Could an Uber driver apply for a car loan and then make payments out of future fares? Could Airbnb host fund renovations the same way? Already there is a niche credit rating industry for thin-file consumers who have steadily made utility and rent payments but never bothered with credit cards; why couldn't this extend to the mainstream population?
This world has already changed around Equifax. It's too late to right the ship; it's time to abandon it and build a new one. It's not a problem that Equifax’s interim CEO is a longtime company man; it is a problem if the company thinks that's the only skill he needs to bring to the table.
The best person for the job is, frankly, someone who doesn’t want to work at Equifax.