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The go-to credit rating system

Fico is the most recognizable name in credit scores and the most widely used credit scoring system in the US. When using a credit scoring algorithm, 90 percent of top US lenders in 90 percent of lending decisions use Fico’s systems. And 98.8 percent of dollars securitized in the US solely cite Fico scores as risk measurement, 300 million consumer accounts have access to Fico scores, and one billion consumers could get credit through the scores. Fico is the industry standard for consumer credit lending decisions, and there are high barriers to entry for new companies that seek to replicate similar services. Some of the company’s competitors include Fiserv, Western Union, and Experian.

The first low-cost producer of high accuracy scores

Fico’s sticky offering could be compared with getting Americans to start using the metric system or quoting temperature in Celsius. Fico is the low-cost producer of high accuracy scores; for example, it took Synchrony Financial three years to move away from using Fico. The company's fast-growing software business also has substantial switching costs. It becomes increasingly embedded in customer workflows, a software with over 90 percent retention rate and, thus, substantial amounts of recurring revenue.

Checks many of the wide moat criteria

The Fico score was introduced in 1989, and through the information found in the individual consumer's credit reports, the algorithm calculates credit scores for them. Lenders use these scores to evaluate the creditworthiness of their customers and thus determine whether to approve applications for loans, credit cards, and other borrowings.

As the creator and owner of the FICO credit-rating score with a world-class credit database, Fico checks many of the criteria when looking for a wide moat business:

  • High free cash flow

  • High return on capital employed

  • High return on equity

  • High operating margins