How Equifax Became A Private IRS
Authored by Matt Stoller via BIG (emphasis ours),
The movie The Big Short is about the housing crisis and its collapse, along with all the fraudulent activity up and down the financial system that abetted it. It is as much a cultural story as it is one about finance, a film about what banking corruption does to human beings and the law itself. In it, there’s a famous scene where fund investors betting on a housing collapse are trying to learn about the Florida housing market, and are interviewing some frat-boy type Florida real estate agents. The agents keep discussing their self-serving and illegal behavior, like falsifying paperwork or selling to people who knowingly can’t pay back loans. At a certain point, the main character asks his colleagues, ‘why are they confessing?’ to which the others respond, “they’re not confessing, they’re bragging.”
The point of this scene is to show that people in the industry during the housing bubble weren’t just breaking the law, but saw the law itself as irrelevant. Enforcement was so weak that those in finance and real estate would just openly brag about all the crime they were doing.
It was a true story. And it continues to be a true story in most white collar areas.
Late last year, the CEO of Equifax Mark Begor presented at a Goldman Sachs conference for investors, and openly told the investors how much market power his firm has in the business of selling income verification services to creditors. “We have meaningful pricing power,” he said, because “only Equifax has that income and employment data.” Equifax aggressively raises prices on the Work Number product line annually, and has, according to Begor, “already got our January 1, 2023 price increases in the market.” Long term, he says, “we have an ability to grow price well in excess of GDP.” This is fairly shocking stuff from a CEO, who should know better than to confess to monopolization. Only, it seems as if Begor wasn’t confessing, he was bragging.
Here's the audio.
Still, why wouldn’t Begor brag to investors? Equifax’s controversial behavior is near-legendary. The firm is an important credit bureau, and credit data is exactly what we wouldn’t want to fall into the hands of hackers, who could then easily use it to engage in identity theft, en masse. But in 2017, Equifax had a massive scandal, one of the biggest data breaches in history, when it accidentally exposed the personal data of 147 million people. The Federal Trade Commission fined the company more than $575 million, and the CEO, CIO, and chief security officer were all forced out.
Yet the firm didn’t suffer any long-term reputation damage. And in all the hoopla around the scandal, there really wasn’t a lot of discussion about why that is, and how Equifax actually makes money. So looking at Begor’s braggadocio around the firm’s market power is useful. The product Begor told investors about at the Goldman Sachs confab is called The Work Number, which is a business line that bundles data about the incomes of hundreds of millions of people and sells it to interested parties, like lenders, landlords, employers, and government agencies. Payroll and data is by some estimates a $10 billion market, and now brings in a majority of the firm’s domestic revenue.
Equifax used to be a firm, which, along with Experian and TransUnion, focused on keeps tabs on all of us and whether we pay our debts. But over the last four years, it has transformed itself into a sort of tax information agency, which sells information about our salary and income to third parties. It’s a better business than just credit data, because while three firms have information about whether you pay back your credit card company, only Equifax has complete information about where you work. And a monopoly, as Begor bragged, is better than an oligopoly.
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The Work Number
First let’s start with why this business exists. Sharing information about where you work and what you make is something we all need to do on occasion. If a bank or auto dealer wants to lend someone money to buy a home or car, they need a verification that the person works where he says he works and makes the income he says he makes. Sometimes a potential employer or landlord needs to check work history, or a public agency needs to ensure someone qualifies for government assistance, or they have to update immigration status.
How do third parties verify this information? Employers don’t like it when their HR departments are getting constant requests from lenders about their employees and what they make. And getting this information from the IRS is illegal (or least has been since progressives in the 1920s temporarily had tax returns made public.) So for decades, employers have been sending data on this to brokers, who sell the records to interested parties. Today, the biggest and in some ways only meaningful broker in this space is Equifax. If you are trying to find out someone’s work history and income, it’s pretty likely Equifax has it, and it’s unlikely anyone else does. (Experian is the second player in the market, but they just started their product line in 2021, and as I’ll explain, they are far behind.) And we’re not just talking about the data the IRS has, we’re talking about data on pay for every payroll cycle, your overtime amount, the start and end date for your job, your title, your health care provider, whether you have dental insurance, and if you’ve ever filed an unemployment claim.
There are network effects in this business; the more data Equifax gets from employers, the more likely it is to be the place lenders and government agencies seek to do income verification. In addition, having lots of data about workers also allows Equifax to build services for firms, such as managing unemployment compensation. When a firm lays off a worker, that worker is supposed to have rights to unemployment compensation, which the firm has to pay for. But if that employee was fired for cause, or quit, then that worker isn’t entitled to unemployment payments, and the firm is off the hook. There are lots of grey areas here, it’s a quasi-legal setup between the state, the business, and the employee. Managing this process, along with appeals, is also something Equifax does, as it’s a natural extension of its data business.
Because of this extensive warehouse of data and set of services, firms and agencies then integrate themselves into the Work Number. So one could argue this business has natural barriers to entry. But the story here isn’t just one of scale efficiencies. The Work Number is a legacy business, started decades ago. With the internet, however, there’s no technical reason for a centralized repository of employment and verification data, or at least not the way it’s set up today. It’s quite possible to set up a system allowing any verifier to ask the individual for his or her records. But that would cut against Equifax’s business model, which involves not only taking your data without you knowing about it and selling it, but also, crucially, preventing any other third party from innovating to build a more privacy-safe version of the same service.
Indeed, the story here is monopolization. Fifteen years ago, Equifax had already run into the Federal Trade commission, not for privacy violations, but for antitrust violations. Only, because its income verification business was a sideshow to its main credit reporting revenue line, people didn’t really notice. Today, however, Equifax is now a monopoly income verifier with a side credit information business.
The original Work Number product came from a company called TALX Corporation, which was founded in the 1970s and that Equifax bought in 2007. From 2002-2005, TALX had bought up seven rivals, consolidating the verification of income and employment business. Immediately after this acquisition spree, TALX raised prices and forced customers to move from buying annually to signing long-term multi-year contracts. Additionally, TALX had non-competes and non-solicitation agreements with its employees, which further locked up the market.
In 2008, the Bush administration FTC sued Equifax over acquisitions and unfair methods of competition. It was a creative complaint, with the Chair of the commission - Bill Kovacic - looking skeptically at a series of small acquisitions, instead of one big one. But the FTC didn’t seek to undo any of the mergers. Instead, it signed a consent decree forcing TALX, now Equifax, to let customers out of long-term contracts and employees out of non-compete agreements. These consent decree obligations ended in 2017. Ultimately, this FTC action, because it didn’t require a break-up, didn’t restore competition in the market, allowing Equifax to fortify its monopoly. Equifax’s TALX subsidiary was even caught for violating of the Fair Credit Reporting Act just two years later. And the company is still a merger machine, purchasing small and large firms nearly every year. For instance, just in 2021, it made $3 billion in acquisitions, buying HIREtech and i2Verify.
After the consent decree ended, the exclusive arrangements came back. ADP, Intuit, Paycor, PrismHR, Rippling, and many other providers of outsourced payroll services have deals with Equifax to turn over or sell records. So do large companies. In 2017, Joel Winston at Fast Company reported that “75% of the Fortune 500 companies, 85% of the federal government workforce, entire state governments and agencies, courts, colleges, and thousands of small businesses nationwide” handed over data. Facebook, Amazon, Oracle, Google, Wal-Mart, Twitter, AT&T, Harvard Law School, and the Commonwealth of Pennsylvania do too. The number of entities handing over this data has only gone up since then.
And Equifax pays many of these entities for their employee data, turning human resources into a revenue generator. Of course, the employees don’t know their own data is being sold by their employer, and even small businesses who use payroll services like ADP don’t realize their data is being sold. (Small businesses can opt-out, but they have to tell their payroll provider.)
The net effect of these arrangements is that smaller players in the market, such as ExperianVerify, Truework, Thomas & Company, and Certree, simply cannot get the data that Equifax has. They are boxed out. If you are doing income verification, and you put someone’s Social Security number into Equifax, you have a 50-70% chance of getting a successful conversion. For other brokers, it’s much lower. There isn’t so much a market for employer/income verification information, there’s a market for information about each specific person. To a lender, it doesn’t matter if a rival to Equifax has information on 30% of the country, it matters if that rival has information on the individual to whom they are considering loaning money. If they don’t, you have to use Equifax.
On the other side, Equifax has also erected barriers to entry. If you are a frequent buyer of income and employment data, Equifax sometimes offers a loyalty discount if you move all your business to the Work Number. One background check provider, SwiftCheck, explained Equifax offered that “if our organization performs The Work Number Verification on every employment verification, a discount is offered.” This is a classic loyalty discount, what looks like an unlawful mechanism to exclude competitors.
So that’s how Equifax establishes its market power, by blocking rivals from getting data and by locking in customers of that data. And we can see this market power at work in the pricing, as their CEO noted in December. Equifax has been raising prices substantially for years. How much? Well like an airline or any firm with market power, Equifax doesn’t just have one price. It can engage in price discrimination depending on the willingness to pay. But the price hikes that are public, are extreme. In 2017, the price for a record was $20, in 2020 it was $41.95. Today, it lists its price as $54.95 for a record of where you currently work, and potentially up to $200 for records with more historical information. And it’ll keep going up.
The Real Cost: Equifax as Private Government
Consumers pay for this cost in ways they don’t see. When you get a loan or rent an apartment, the lender or landlord has to pay Equifax’s toll, and will include that extra cost in the price of your loan or rent. But more than just higher prices, Equifax’s database is powerful. The Work Number can, according to the government, help determine “an applicant’s social service eligibility” or “inform child support collections and enforcement.”
There are often errors, and getting your own data from Equifax can be difficult if not maddening. Just read this thread of frustrated consumers trying to do so, and often encountering mistakes in the process. And as we know, Equifax is prone to hacking. People don’t know that their employment data is being sold to Equifax, and they tend to be upset when they find out. Google workers were outraged about it, which is ironic. It’s also prone to abuse; Apple told the Work Number that every worker who left was automatically given the title “associate,” regardless of whether they were a top engineer. According to one former Apple worker, this error “delayed the hiring process at a prospective employer by nearly a week, during which time the company rescinded the offer.” I don’t tend to focus on privacy, but though Equifax claims there are controls on who can buy this information, security researcher Brian Krebs noted in 2017, that it’s easy for pretty much anyone to learn your salary. These flaws are all quality harms, standard for any monopolist who isn’t subject to competition.
The Work Number is so important that Equifax is engaged in the work that should be reserved to a government. Generally speaking, people would get really upset if the IRS shared our tax information for a fee. Effectively, Equifax is doing that, because for most people, employment and income is our tax information. But since it’s a private monopoly, the anti-government types don’t notice or care. At the height of the Great Recession in 2010, Equifax’s TALX division was processing 30% of the unemployment claims in the country. Though originally intended to automate the process, what Equifax ended up doing was automating the refusal to pay out unemployment claims. It systemically denied applications regardless of merit so its clients - employers - would have to pay less in unemployment taxes. And this goal is on the firm’s investment documents, which uses the anodyne wording of “reduce the cost of unemployment claims through effective claims representation” to describe the service it provides to employers who give it data.
It’s perhaps no exaggeration to note that Equifax is a quasi-governmental agency, a monopoly provider of evidence that you work, where you work, and what you make. If there’s an error, or if someone lies about you, too bad. If Equifax itself is paid to harm you, too bad. If a government agency gets the wrong data and denies you assistance or screws up your immigration status, that’s on you, well, you have limited to no rights in this situation. In some ways, you might have more to fear from Equifax than the IRS.
It Need Not Be This Way
As is always the case, most things created by people can be unmade by people. And so too with Equifax. I learned about the Work Number from a contact on Wall Street who pays attention to monopolies. He told me the Work Number is one of the purest examples of market power he’s seen, which of course, the CEO of Equifax helpfully confirmed in public. I’ve also talked to a number of people in the industry trying to compete in the payroll data space. Two firms - Certree and Argyle - recently sent letters to the Federal Trade Commission asking for an investigation into this market, pointing at the abuse of consumers by Equifax (and to a lesser extent Experian).
The strategies for each small rival are different, but both give the consumer control over who can access their data, instead of building a giant centralized repository controlled by a monopolist. Certree gives each employee a ‘personal vault’ where his or her data resides. While they verify that the data came from an employer, only the employee can give permission for a third party to look at what’s inside - even Certree can’t see it. Certree is paid when a lender or third party successfully verifies an employment or income record.
Argyle has a totally different model. It isn’t even a data broker, but a ‘data transfer agent.’ It lets third parties ask consumers about their income and employment information by sending them a link, and then gets consumers to give them their passwords for their employment information. Argyle doesn’t keep any data on hand, but is controversial because it engages in screen-scraping of your employer’s website, which can be a security risk. And yet it is weird to think it’s problematic for employees to take their own data from their employer, but fine for employers to sell that data to Equifax.
Both Certree and Argyle charge much less than Equifax for their service.
Regardless, the overall point is that having a centralized data broker that has a quasi-monopoly over income and verification data, and sits largely unregulated, is ridiculous. Breaking up Equifax’s monopoly wouldn’t be that hard, at least conceptually. Many of the practices that it engages in today are things the FTC banned in its old consent decree with the firm. And it’s obvious that Equifax is immune to competitive forces. Despite the price hikes and devastating and routine news stories about hacks, errors and problems, as well as public polling showing increasing concerns over privacy, Equifax marches on, unbothered and unchastened. That’s the classic monopoly position, a recognition that there is no alternative.
Beyond the monopoly problem, however, why not have a system where individuals control their own data? Prior to the internet this would have been impossible, but today it’s quite doable. Giving individual control over their data would probably require both antitrust law and an aggressive reading of the Consumer Financial Protection Bureau’s authority over Credit Reporting Agencies, or a new Congressional statute for ownership and control of employment data.
Regardless, I’d like to thank Equifax CEO Mark Begor for bragging last month about his firm’s market power. Without that, I never would have taken the time to learn why Equifax can act as a private IRS, put out a middle finger to each one of us, and collect our money regardless.
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