DA plc (DA) is an information solutions company, listed on the London Stock Exchange.

Company background

DA began trading a number of years ago, providing credit reference services for business customers. Although this remains its primary activity, it has grown organically and now provides financial and statistical information to a variety of UK businesses to help them manage the risk of commercial and financial decisions.

The company is split into three divisions:

• Credit reference services provides factual information to clients, via credit searches of an individual's financial history, to assist them to lend profitably or offer trade credit.

• Decision software assists clients in improving the consistency and quality of business decisions in areas such as credit risk, fraud prevention and customer account management.

• Vehicle history provides financial and statistical information to the automotive industry to help clients understand the risks associated with the purchase or sale of a particular second-hand vehicle.

A breakdown of key data, by division, for 20X7 is as follows:

	Credit Reference services	Decision software	Vehicle history	Total
Sales (m)	166	115	64	345
Operating profit (m)	41	34	13	88
Growth in sales from 20X6	3%	15%	0%	6%
Number of employees	686	490	300	1,476

Credit reference services

Clients for credit reference services can be split into two groups:

(1) Banks, credit card companies and other financial services organisations which need help assessing

the risk associated with lending decisions; and

(2) Commercial companies seeking credit references before supplying goods on credit to other

businesses and private customers.

When an individual or business makes an application for credit, the lender or supplier usually asks a credit reference agency (CRA) for a credit search to check the applicant's identity and credit worthiness. The database system operated by a CRA enables different lenders, such as banks, to share information about their customers' credit accounts and repayment histories. Applicants have to give permission for their credit report information to be shared when they apply for credit.

Although a number of companies are currently licensed as CRAs in the UK, DA is the largest, with a 58% market share. DA has built its market position by compiling and managing the most comprehensive credit database in the UK. Communication and information technology are a core part of DA's business. Online systems allow lenders to update data directly, resulting in more accurate information and efficiency gains for DA.

DA's main competitor, CC Inc (CC) is an American-based business with an acknowledged expertise in credit scoring (a statistical technique that combines several financial characteristics to form a single score to represent a customer's creditworthiness). CC has recently announced that, as part of its global expansion strategy, it plans to increase its share of the UK credit market, which is currently 32%. CC intends to use low cost web-based systems to deliver online consumer credit scores directly to lenders and companies extending trade credit. In this way, it hopes to reduce DA's market dominance in the UK.

DA's strategic development

Decision software:

Having created a reputation for holding the most comprehensive credit database in the UK, DA has embraced the increasing use of data analytics software and has developed its own in-house analytical software to enable clients to process credit applications and manage customer credit accounts more efficiently.

The software takes data from DA's own credit management database and a range of other sources, such as the client's own customer account information, and uses analytical tools and scoring systems to provide decision support. Typical users of this product are banks, credit card companies, mortgage providers and other organisations that grant personal or trade credit. DA's software has helped to revolutionise the service offered to clients by enabling them to quickly and accurately assess in 'real time' whether to accept a new customer or extend credit arrangements for existing customers. The software can also define the processes the businesses should adopt in managing an account that has fallen into arrears. In recent months a number of large financial institutions have contacted DA with a view to making a use of the service.

Vehicle history:

Recognising that it had a core skill in the management of large databases for the financial services industry, DA also decided to provide similar services to the automotive industry. It compiles and manages data on the histories of 30 million vehicles and 25 million car insurance policies in the UK. This data is used to provide vehicle history information to car dealers, finance providers and insurers.

Fraudulent representation of used vehicles is a significant risk for private consumers and a potential financial liability for the businesses involved in the sale or purchase. The vehicle history can assist in establishing the market value of a vehicle; and whether a vehicle is registered as stolen or has outstanding finance.

Proposed diversification:

Recently, DA has decided to target a new market, the individual consumer market, with a new online service: 'Checksta'.

Under current UK legislation, individuals have a legal right to see the information about them held by a CRA. In return for a statutory fee of 2, the CRA is legally obliged to provide a written copy of the information held on the individual's credit report. Instead of making a written application for a statutory credit report, individual consumers will be able to pay to subscribe to Checksta.

The Checksta service will allow individuals to check online that their credit report is accurate and up-to-date, as many times as they want. Checksta will send a text or email alert every time there is a significant change to the information held on an individual's credit report. This alert service assists in identifying identity fraud (where somebody applies for credit in another person's name). Individuals will also be able to order a credit score, based on their DA credit report, which will give them an idea of how a lender would view the information, if they were to apply for credit.

The introduction of Checksta is partly in response to the aggressive marketing stance currently being adopted by CC and also as a reaction to the following changes in the external environment:

Changing attitudes to money and credit

An increase in spending has led to an increase in demand for credit and it is very easy to apply now, both by telephone and online. This means that individuals are more likely to shop around for credit and lenders have to carry out more credit checks.

Changes in legislation

DA has to conform to the UK laws that govern the way it does business. Government concerns that debt levels are too high have caused a tightening of the legislation to give consumers better access to information held on them, more rights regarding disputes with lenders and more protection from rogue lenders. As a result, CRAs have had to implement a consumer education programme, working closely with consumer organisations to help consumers understand how credit referencing works.

The growth of e-commerce (products bought online)

This has necessitated more frequent and rapid credit checks and a subsequent upgrading of DA's information technology systems.

An increase in identity fraud

Identity criminals steal people's personal information and use these details to commit crimes, usually obtaining credit illegally.

Marketing

To date, DA has worked mainly with business clients, attracting business customers through personal selling and retaining them by developing strong client relationships. The sales director is aware that to succeed in the consumer market, DA will need to use a different marketing strategy for Checksta. DA intends to use its knowledge of consumers who have applied for their statutory credit reports in the past, to build up a profile of the consumers it wants to target with its online service. Preliminary market research suggests that those most likely to be interested are people who are internet users, credit users and those keen to manage their financial affairs effectively. Such people are likely to read the financial pages in newspapers or visit personal finance websites.

**Requirements:

Discuss two ethical issues relevant to credit rating agencies and the ways in which each issue can be addressed. (20 marks)