 | robinhood acquired x1 in 2023 |
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credit. |
In March of this year, Senator Josh Hawley sent out a letter to the Department of Justice, calling for an investigation into anti-competitive practices at FICO |
Read the full letter here |
Hawley's argument can be summarized as follows: |
FICO operates under a sweetheart deal with the federal government; its credit scores are required for loans originated by government entities This means that homebuyers have to get their mortgage from lenders who use FICO services. As a result, FICO has 90% market share in the B2B credit scoring market FICO is using its market share to hike prices. Over the last two years, prices have gone up over 500% for "hard" and "soft" credit pulls. FICO's stock has more than doubled over the same time period Price increases are disproportionately being passed on to the consumers, adding further friction to a weak housing market
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A Jefferies analyst called the letter "political theater" and suggested that the DOJ will not act on this. |
It should be noted that FICO faced a DOJ anti-trust investigated in March 2020 and the case was closed in December 2020 without any penalties enforced. |
Before FICO became a money-printing monopoly, it was just an idea at the Stanford Research Institute |
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risky business |
Earl Isaac grew up in Buffalo, New York, and attended Muskingum University. After graduating, he enrolled in the Navy where he served for a year during World War II |
Afterwards he was discharged and went on to work at the Stanford Research Institute |
At SRI, he met Bill Fair, a curious engineer with degrees from CalTech, Stanford, and UC Berkeley. |
In 1956, Fair, Isaac, and Company was incorporated and the duo sold its first credit score system two years later. |
It took an additional 29 years for the company to go public on the New York Stock Exchange. It was around this time that the first general use FICO score was launched, ranging from 300 - 850. |
 | fair x isaac |
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Taking a step back into the present, FICO credit scores are the standard for lenders underwriting loans. |
The company generated $770M from selling credit scores to lenders in 2023, which accounted for 51% of total revenue ($1.5B). Profit margins have consistently hovered around 27-30% of revenue Lenders purchase more than 10 billion FICO scores each year
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old money, new loan |
X1 was an income based credit card startup with rewards and no fees. |
The company underwrites consumers based on their income rather than a credit score, which reportedly allowed some customers to reach limits up to 5x higher than they would on a normal credit card. |
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In their last round of fundraising towards the end of 2022, X1 saw a 50% valuation boost, raising $15M from investors like Soma Capital, Spark Capital, Craft Ventures, and more. |
X1 simultaneously launched a trading platform that allowed users to buy stock with their credit card points. X1 co-founder Deepak Rao made an interesting statement to TechCrunch: |
| ❝ | | | By using credit card points to buy stock instead of cash or their savings, we feel this is a safe way for many consumers to start investing. There is no real downside as their investing is technically free. | | | | Deepak Rao to TechCrunch |
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Rao admitted that X1 was trying to compete with Robinhood. |
Word must have traveled, because just 6 months later, Robinhood paid $95M in cash to acquire X1. |
Co-founders Deepak Rao and Siddharth Batra stepped on as general managers for the credit card business at Robinhood. |
The concept of income based underwriting has gained momentum in the past decade, but loosening FICO's chokehold on lending will not take place overnight. |
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In other news, Robinhood just rolled out contracts to bet on the Presidential election next week. |
We discussed the rise of prediction markets using Polymarket as a case study in a past memo. |
More recently, Kalshi has been the platform of choice in the U.S. after a landmark ruling in late September |
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Robinhood stock was up 4% yesterday on the news. |
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Are you betting on the election? |
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Did you change your stock portfolio in anticipation of the election? |
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Headlines |
Waymo closes $5.6B round to expand autonomous ride hailing service. Reuters article here General Catalyst raises $8B in fresh funds to back startups globally. TC article here Good piece from 99% Derisible newsletter on founders taking more money than they need. Check it out here
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