Many investors think that $FICO is going to be disrupted by Vantage Score, $UPST and $AFRM, but I believe that is extremely unlikely. These competitors claim they have better predictive analytics for credit ratings than FICO but that is irrelevant to FICO’s competitive advantage.

Similar to $SPGI and $MCO, Fico has become a standard and common language. In order to communicate across organizations, you need to use a Fico score. This is shown by 98.8% of dollars securitized in the US solely citing Fico scores as a risk measurement. FICO scores cost an average of 6.5 cents per score. These scores are used for car and home loans which are large investments. There is little incentive to scape out of paying 6.5 cents for a score and not be able to securitize them. Fico mortgage scores are protected by the law. Their 10k stated “Requirement of The Federal National Mortgage Association (“Fannie Mae”) and The Federal Home Loan Mortgage Corporation (“Freddie Mac”) that U.S. lenders provide FICO® Scores for each mortgage delivered to them.” Banks have also come under scrutiny for who they reject giving loans too. Banks don’t have to explain to customers they got rejected because of a low Fico score. Fico has a 90% brand awareness while Vantage Score has 10%.

Fico has a software segment that is ingrained into banks. 95/100 of the largest US financial institutions are Fico clients. There are high switching costs in changing software systems, especially ones that are so integral to loan securitization.

Fico has great capital allocation. Management stated, “We view FICO shares as the best use of our excess cash at this time and expect to continue to aggressively buy back shares in the coming year.” They spend over 100% of their FCF buying back shares.

My full Fico write-up will be released on Monday. I hope you enjoy it.