Nearly half of all Americans are affected by a cyber security breach at Equifax, one of the nation’s three major credit-reporting agencies. Here’s how to avoid being a victim.
Despite a data breach that put as many as 143 million Americans at risk of identity theft, the chances of the credit-reporting agency Equifax — or the broader industry — being forced out of business are extremely slim, according to Wall Street analysts.
A huge black eye? Certainly. Costly legal fees? Yes. Outrage from lawmakers and a likely regulatory crackdown? Yup. Fewer sales of credit-monitoring services to consumers and the potential for clients to defect to rivals? Check.
There’s no disputing Equifax faces challenges. But a demise of the business? Unlikely. It’s central to modern economic life. Both Equifax’s and rivals’ business of collecting financial and personal data from consumers and selling it to lenders is what keeps the credit spigot open.
“The (core credit-reporting) system as it stands in terms of facilitating lending works,” says Brett Horn, a Morningstar analyst. “At the end of the day that will be the deciding factor.”
That’s not to say regulators and lawmakers won’t make credit bureaus take additional steps to better safeguard Americans’ personal data, or limit the ways credit-reporting companies can use and profit from the valuable information they keep in their databases.
“The biggest X-factor is: Does this prompt any regulatory changes that will increase costs of doing business,” says Horn.
Investors have pounded Equifax shares. The stock is down more than 30% since the company divulged the data breach on Sept. 7.
“The core function of credit reporting will still continue,” says James Thomas, a director at S&P Global Ratings, which this week kept Equifax’s BBB+ credit rating intact but downgraded its outlook to “negative” from “stable.”
The reasons cited for the weaker outlook included revenue losses from Equifax offering consumers free credit monitoring services for a year, “meaningful costs” related to lawsuits and potential government investigations, as well as an expected drop in sales of credit-protection services to consumers.
There’s also a risk that current clients might not renew contracts and instead switch business to its competitors.
More: How to defend yourself against identity theft after the Equifax data breach
More: Equifax data breach could create lifelong identity theft threat
The industry is dominated by the “Big Three” — Equifax, Experian, the largest player when measured by annual revenues of $4.3 billion, and TransUnion.
These companies collect financial information about consumers, such as payment history for credit cards and mortgages. This data is used to create reports and credit scores that are then sold to “customers,” the lenders and other financial institutions that extend loans and other credit to consumers.
“The reports sold by the three largest consumer reporting companies are used in determining everything from consumer eligibility for credit to the rates consumers pay for credit,” according to the Consumer Financial Protection Bureau (CFPB). “They play a key role … in the financial lives of consumers.”
It’s a big business. Revenue for the three totaled more than $9 billion last year. Roughly 40% of Equifax’s business comes from its core credit bureau business, with the rest from international operations (25%) and new lines of business, such as selling credit-monitoring plans directly to consumers (13%) and generating revenues from its “workforce solutions” segment (20%-plus), which includes services like verifying employment status and other data requests from corporate clients.
Names, Social Security numbers and addresses of millions of people were exposed during the Equifax breach.
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Stifel, a Wall Street firm, estimates that the breach at Equifax could cause a total financial hit of $300 million to $325 million for the company.
Equifax could see business in its consumer- and workforce-focused businesses hurt due its damaged reputation for failing to protect key personal data, analysts say. Consumers may question why they should pay for monitoring services from a firm that has shown it can’t keep data from cyberthieves; corporations may fear their employment data could end up in the wrong hands.
In a nutshell, Equifax and the other two credit bureaus won’t be irreparably harmed because:
*Core business protected by a “moat.” The “entrenched oligopolistic position” of the core credit bureau business creates “high barriers to entry” for upstarts to break into the business, says Mornginstar’s Horn.
*Lenders major reliance on credit reports. Banks, mortgage lenders and credit card companies rely on credit reports from the three major credit bureaus to make financially sound lending decisions. And, in many cases, they prefer to get checks on potential creditors from all three services to make sure they are not missing anything negative.
“If a financial services company is underwriting a mortgage or another financial product today, next week or six months from now, they will still be using credit bureaus,” says Jeffrey Meuler, an analyst at Baird.
*Breach aside, credit bureaus benefit consumers. The economy can’t really function without a working credit-reporting system.
“These companies are extremely crucial to doing business and going about life in America,” says Amit Rahav, vice president of marketing and business development for Secret Double Octopus, an Isareli-based tech firm specializing in authentication technology that wants to do away with passwords. “If you want to exist financially, you need to get credit. It is essential part of the U.S. economy.”
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