Experian logo is seen on a smartphone in front of displayed stock graph in this illustration taken, December 1, 2021. REUTERS/Dado Ruvic/Illustration
The logo and trading information for Credit reporting company Equifax Inc. are displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 26, 2017. REUTERS/Lucas Jackson

By Manya Saini and Arasu Kannagi Basil

(Reuters) -Fair Isaac Corp's shares jumped in premarket trading on Thursday after the U.S. data analytics company said it would license its credit scores directly to mortgage resellers, raising concerns of margin pressure for major credit bureaus.

Shares of Experian, Equifax and TransUnion tumbled as the move could curtail the intermediary role of the credit reporting companies.

FICO score, created by Fair Isaac, is a U.S. credit scoring system used by nearly 90% of lenders to evaluate a borrower's creditworthiness. The higher the number, the lower the risk of default.

Fair Isaac said direct access to FICO scores for lenders and mortgage resellers would increase competition and bring price transparency.

"This new distribution model will allow lenders to avoid paying the current about 100% markup the credit bureaus currently charge for the FICO score," analysts at brokerage Raymond James said.

Experian shares were down 8% in London. U.S.-listed Equifax fell 12% in premarket trading, while TransUnion was down 11%.

"It implies that this would cut out the margin that the likes of Experian and Equifax make on the FICO credit score," Citigroup analysts wrote in a note. "Our initial reaction is this is negative for Experian and Equifax."

Shares of Fair Isaac were up 10.7% before the bell. They have lost 24% of their value so far this year.

INDUSTRY SHIFT

The stock had earlier this year taken a hit after Federal Housing Finance Agency Director Bill Pulte criticized FICO pricing and allowed lenders to use VantageScore for Fannie Mae and Freddie Mac mortgages.

VantageScore, founded in 2006, is a joint venture between credit bureaus Equifax, Experian and TransUnion.

The agency's decision introduced direct competition for FICO in the mortgage market, sparking doubts about its ability to continue increasing its prices.

Fair Isaac said its direct mortgage score licensing plan would bring immediate cost savings to lenders, brokers and other industry participants, while noting that firms opting to work through the credit bureaus can continue to do so.

"This change eliminates unnecessary mark-ups on the FICO Score and puts pricing model choice in the hands of those who use FICO scores to drive mortgage decisions," CEO Will Lansing said.

The change could intensify competition in the credit scoring business as it gives lenders more direct access to FICO scores.

"By introducing a licensing program for tri-merge resellers, FICO is effectively taking away the ability of the credit bureaus to mark up the FICO score," Jefferies analysts said in a note.

The new model could hit credit bureau earnings by an average of 10% to 15%, it warned. "For the bureaus to take price, they will now have to directly negotiate with the lenders, as well as compete with each other."

(Reporting by Manya Saini and Arasu Kannagi Basil in Bengaluru and Samuel Indyk in London; Editing by Arun Koyyur)