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Fair, Isaac and Company
120 N. Redwood Drive
San Rafael, California 94903
At Fair, Isaac we blend the skills our our “techies”–mathematicians, engineers, analysts, software developers, computer experts and so on–with an intimate knowledge of credit markets and credit behavior gained through four decades of working in close quarters with some of the world’s smartest credit managers and financial services marketers. This combination of technical excellence and real-world experience gives the company a unique core competency and an enviable competitive advantage. The more we learn about credit, about our customers, and about worldwide financial services markets in general, the more opportunity we see for growth and diversification right in our own back yard.
If you have applied for a new credit card, small business loan, car financing, an insurance policy, or a home mortgage, chances are Fair, Isaac and Company helped decide whether you received it. Headquartered in San Rafael, California, Fair, Isaac is the world’s leading developer of computer-based credit scoring and predictive modeling tools, used by credit card companies, insurance firms, and banks and other lenders to measure an applicant’s credit risk. In fact, Fair, Isaac is directly responsible for the rise of the credit industry in the last quarter century. Lenders using Fair, Isaac’s INFORM, CrediTable, CreditDesk, or other scoring tools are able to make more rapid, and objective, decisions toward the granting or denial of a credit application, enabling millions of consumers to make purchases on hundreds of credit cards, while significantly reducing the lenders’ risk. The company’s PreScore tools allow lenders to screen out promising candidates for solicitation of the lenders’ products. Since the 1970s, Fair, Isaac software has also been used by the Internal Revenue Service for determining which taxpayers should be audited, resulting in fewer, yet higher yielding audits.
With the maturation of the credit scoring industry, Fair, Isaac has begun applying its expertise to new areas. It acquisition of DynaMark, Inc. in 1992 led Fair, Isaac into the direct marketing industry. Combining DynaMark’s database and data processing capability with Fair, Isaac predictive modeling tools, the company offers its customers enhanced capacity for targeting their direct mail and marketing campaigns. By identifying the customers most likely to be interested in and to purchase their products, direct mailing firms can significantly reduce the cost of mailing campaigns while increasing the numbers of orders they receive. At the same time, Fair, Isaac has extended its scoring tools to lenders seeking investments in the long-overlooked, and fast-growing, small business community. The company’s Small Business Scoring Service (SBSS) has brought similarly rapid credit identification and processing capacity to the making of loans and extension of lines of credit to the small business community. Fair, Isaac has also developed software tools for cross-selling lender services, enabling a bank, for example, to identify which of its borrowers might be interested in opening an account and which of its accountholders might be interested in applying for loans or other products and services offered by the bank. Another Fair, Isaac tool, Fraud Intercept, enables credit card companies to identify real-time purchases made with fraudulent or stolen credit cards.
Fair, Isaac generally receives royalties each time its products are used by lenders and credit reporting agencies. Major clients include 50 of the country’s top 100 banks, mortgage lenders like the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”), General Motors’ financing arm, credit card processor Total System Services, and major retailers such as Sears and J.C. Penney. International sales of CrediTable International and other products represent a growing segment of the company’s business. Fair, Isaac maintains offices in Germany, France, the United Kingdom, Japan, Canada, Mexico, and South Africa, and the company’s products have been used in more than 40 countries, with a focus particularly on Western Europe and the fast-developing Asian region. Although the company is expanding into insurance, small business, and other markets, approximately two-thirds of its revenues continue to come from the credit card industry. In its fiscal year ended in September 1995, Fair, Isaac achieved a net income of nearly $13 million on $114 million in sales. Fair, Isaac is led by President and CEO Larry E. Rosenberger.
Birth of an Industry in the 1950s
The first credit cards began to appear during the 1950s. Credit and loan making procedures were, at the time, almost entirely subjective. Credit analysts followed their own judgments when granting or denying loan or credit requests, a process that required days or weeks. Banks and other lending and financial institutions tended to be locally based, and decisions were likely to be made on a personal basis. This situation led, on the one hand, to retailers and other creditors lending credit to customers at risk for defaulting on their payments. On the other hand, lenders tended to be overly conservative, and discrimination based on age, sex, marital status, and ethnicity was rampant, making credit unavailable to many.
But in the 1950s, William R. Fair, a mathematician with degrees from the California Institution of Technology, Stanford University, and the University of California at Berkeley, began investigating mathematical techniques for use in building models of predictive behavior. Fair was attracted to the relatively unrecognized complexity involved in the credit decision process, finding that the variables typically used in determining credit could produce trillions of possible combinations. Fair determined, however, that by using statistical techniques, such as multivariate analysis to produce scoring algorithms, this complexity could be greatly reduced. Furthermore, recent advances in computer technology, especially the introduction of transistors, allowed calculations to be automated and processed quickly. Joined by Earl Isaac, an electrical engineer, Fair started up a management consultant company as a 50-50 joint venture in 1956. As Rosenberger told Investor’s Business Daily, “Some firms are founded to create wealth, but this firm was born in 1956 from a desire to do things the partners liked to do.”
In 1958, Fair, Isaac introduced their first scoring system, called Credit Application Scoring Algorithms, proving that their system could accurately predict the payment behavior of credit holders, including whether they would pay on time, pay late, or not pay at all. Two years later, Fair, Isaac launched the first version of the company’s INFORM product, a process for building scoring algorithms based on a customer’s database of past borrowing behavior. In that year, the pair incorporated the company as Fair, Isaac and Company.
Credit lenders were slow to adopt credit scoring, in part because of the slow penetration of computer technology into mainstream commercial use, clinging to traditional judgment-based decision-making methods and relying on credit bureaus, which reported on an individual’s past credit behavior. Fair, Isaac received a boost, however, when the Internal Revenue Service (IRS) contracted the company to develop a scoring algorithm that would enable the IRS to locate tax evaders more accurately. That system, put into place in 1972, quickly produced results: The number of audits dropped by a third, and the IRS posted a higher level of uncovered underpayments. During the 1960s, Fair, Isaac attempted to extend their scoring system to employee hiring practices; although this attempt forecasted the flexibility of scoring, the company found little enthusiasm among businesses for such a system. At the end of the decade, however, Fair, Isaac moved to extend credit scoring, beginning research on a behavior scoring system for monitoring credit purchases and payments.
The 1970s proved to be the breakthrough period for credit scoring. The introduction of faster minicomputers led more credit companies to add credit scoring to their application process. In 1972, Fair, Isaac adapted its products for use with minicomputers, allowing credit applications to become fully automated. Credit scoring was also proving flexible enough to meet the variety of lenders’ needs. Using data gathered from a lender’s own database, credit scoring allowed the lender to build predictive models, and acceptance levels, based on criteria specific to the lender, its customers, and their region. Credit scoring had another advantage in that it was completely objective, and factors such as a person’s age, sex, or race held no place in a credit score. Indeed, Fair, Isaac worked hard to prove that these factors held no predictive value in determining an individual’s creditworthiness. Lenders were reluctant to set aside their prejudices, however. In 1974, however, they were forced to do so with the passage of the Equal Credit Opportunity Act, which barred such discriminatory factors from the credit equation.
The numbers of credit card holders rose rapidly through the 1970s. Fair, Isaac, now grown to a company with 30 employees, saw its customer base grow as well. Its clients were at first limited to the largest lenders, as smaller lenders balked at the high price of credit scoring products. But credit scoring quickly proved its worth, producing dramatic cuts in companies’ bad debt rates. As credit scoring became the industry norm, Fair, Isaac moved to evolve into a new phase of the company’s development, that of becoming a risk management company. In 1978, Fair, Isaac launched its first behavior scoring tools, intended to aid credit card companies in managing their existing card holders.
Rising inflation rates and increasing numbers of bad debt rates, coupled with the beginning of a recession, led President Carter to impose temporary credit controls at the end of the 1970s. Fair, Isaac, with more than $6 million in revenues, struggled through the recession, posting a loss of $135,000 in 1981. But its losses proved temporary. The following year, the company was back in the black, and by 1984 the company posted more than $600,000 profit on revenues of nearly $9 million. Earl Isaac died in 1983; William Fair continued to lead the company as chairman, president, and CEO. The company remained equally divided between Fair and Isaac’s widow.
Aiding the company’s growth was the next in its line of risk management products, its PreScore process, introduced in 1984, for screening direct mail credit solicitations. Companies using PreScore could abandon earlier practices of blanketing entire regions with solicitations for credit cards, only to reject large percentages of those responding. Using PreScore, a credit card company could more accurately target individuals likely to be approved for the credit card. In that year, Fair, Isaac was contracted by an insurance company to extend its scoring algorithms to developing application and risk control processes for that industry. Within the next two years, the company launched two more products, an adaptive control system and its ServiceScore method for screening applicants for public utility services. To keep up the pace of new product development and servicing its clients, the company began to expand, reaching 250 employees by the mid-1980s. Growth was also necessary as the company began to shift from its traditional fixed-price product sales to royalty-producing usage-based sales.
By 1987, the company had doubled its annual sales, to $18 million, earning a profit of more than $2 million. In that year, to fuel research and development and expand employee training facilities, while improving scoring algorithms by acquiring information databases, Fair took the company public. Revenues and earnings rose in the following year. The company, which had been exporting its products to Western Europe since the 1970s, next moved to enter the Japanese market. In 1988, the company reached agreement with Sumitomo Corp. subsidiary Sumisho Electronics Co. Ltd. to develop and market credit scoring services for Japanese Visa card issuers; the company also won a contract to develop a prescoring tool for Sumitomo Credit Services, the credit card subsidiary of Sumitomo Bank Ltd. In the United States, however, the company faced a new national recession.
Evolving in the 1990s
Fair, Isaac saw a decline in its fixed price business in the last years of the 1980s. This decline was offset somewhat by strong growth in sales of the company’s usage-based products. But the company failed to match its growth rates of the years before its initial public offering, and income, hampered by increased research and development spending, dropped to a low of $1.6 million on 1990’s $25 million. William Fair retired the following year, replaced by Larry E. Rosenberger, who had joined the company in the early 1970s and had held the position of executive vice-president through much of the 1980s. By the time Rosenberger took over, the company had already regained its momentum. Revenues climbed to $31.8 million in 1991, bringing income of nearly $2.8 million.
The company’s fortunes were buoyed by changes in the credit card industry itself that led to increased demand for Fair, Isaac’s behavior scoring products. As the number of delinquent accounts began to rise during the recession, the percentage of credit card accounts, which numbered more than 200 million just among Visa, MasterCard, and Discover card accounts, being subjected to behavior scoring rose from 14 percent in 1989 to more than 50 percent by the first years of the 1990s. Fair, Isaac’s growth was further stimulated by rising demand for its prescoring products, as credit card companies began the massive mail solicitation campaigns of the mid-1990s. At the same time, more and more smaller banks and lenders were looking outside for scoring services. But Fair, Isaac was itself evolving into a new phase in the company’s development.
The company rolled out its USER products, extending its business to the insurance industry, and then moved into the small business loan market with its Small Business Scoring Service, introduced in 1995. Meanwhile, Fannie Mae and Freddie Mac stepped up the use of the company’s FICO scoring for home mortgages, despite criticism that credit scoring, which had helped overcome discrimination in the 1970s, now hampered implementation of federal affirmative action policies. International sales also picked up rapidly in the 1990s. In 1992, however, Fair, Isaac made a move that would extend the company’s reach into an entirely new market. In that year, Fair, Isaac acquired DynaMark, Inc., a fast-growing marketing services firm, for $5 million, marking the company’s first acquisition in its history.
Aided by DynaMark’s revenues, Fair, Isaac booked strong gains in annual sales, climbing past $42 million in 1992 and to nearly $67 million in 1993. Joining its scoring expertise with DynaMark’s direct marketing and database management strengths, Fair, Isaac began providing cross-selling services that proved attractive to banks and other lenders then undergoing consolidation throughout the industry. Beyond that, the company began to establish itself as a one-stop source for companies seeking greater targeting activities for marketing their products, increasing spending of their customers, and limiting growing attrition rates. Fair, Isaac also began spending heavily on its own sales and marketing activities, achieving gains to $90.3 million in sales in 1994, providing a net income of $10 million. The following year, Fair, Isaac struck agreements with two more database management companies, Acxiom Corp. and Metromail Corp. The company’s introduction of its Fraud Intercept product found a number of important early customers, including Total System Services, the world’s second largest credit card processor. In September 1996, Fair, Isaac formed a joint venture, called Fair, Isaac/INFORMA, with German firms Schober Direktmarketing and the Struebel Group to offer database management and risk analysis and consulting services. The following month, Fair, Isaac made a second acquisition, of Baltimore-based Credit & Risk Management Associates, Inc., adding consulting capabilities in the United States. William Fair, having founded not merely a company but an entire industry, died in January 1996. By then, Fair, Isaac, with $114 million in 1995 sales, was indeed poised to help the world make “better decisions through data.”
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