Like it or not, we need Equifax

Though people may (rightly) think Equifax deserves a punishment that would put the company out of business, eliminating it would ultimately do more harm than good for consumers.

The U.S. financial system relies heavily on the consumer credit data collected and controlled by credit rating agencies. Equifax, one of the principal U.S. credit reporting agencies, experienced an unparalleled data breach affecting more than 145 million consumers this fall, and months later, the details of the breach continue to unfold.

Thus far, consumers have filed over 240 class-action lawsuits against Equifax. A federal court will consolidate most of these cases into one before hearing it. However, a massive class-action lawsuit or settlement may not necessarily lead to the best result for consumers. Equifax would not be able to withstand the magnitude of a cash award for the millions of consumers affected and their lawyers, so the case will probably settle.

Michael Nagle/Bloomberg

That might be for the best. Getting rid of the company would increase consolidation in an industry that already has few consumer options and significant barriers for new entrants. Experian and TransUnion, as the only other credit bureaus dealing with prime borrowers, would be in the best position to buy the liquidated company’s data assets. However, this would create even more consolidated risk for consumers, as a new business would be unlikely to fill the void left by Equifax’s elimination.

Furthermore, if Equifax were no longer operating, consumers could lose the credit monitoring and identity theft services the company is providing to affected parties. For its carelessness, Equifax has offered to provide affected parties with a credit-monitoring package for one year that includes up to $1 million in identity theft insurance as well as complimentary “credit locking.” While this is only the first step in a long process, these services at least serve as temporary mitigation for some of the damages caused in the breach’s wake. Because Equifax is unlikely to accept settlement terms that would put it out of business, the company may only agree to a modified version of what it has already offered, in lieu of a cash award to plaintiffs.

Consumers deserve recompense for the harm Equifax’s negligence has caused them. This compensation should be fair, but it should not take the form of a lawsuit that would bankrupt the company and force it out of business. Dismantling or eliminating Equifax would decrease competition in an already lean competitive landscape, which would not benefit consumers.

As the Equifax disaster unwinds via litigation, regulation and legislation, it is crucial that consumer welfare serves as the guiding framework of these efforts — not only by providing fair and reasonable restitution to the victims, but also by ensuring marketplace competition.

Until the fallout from this incident settles, credit bureaus remain the linchpin of the credit market. Consumer participation in the system is all but mandatory, which makes it all the more imperative that the system functions properly, even as Equifax is held accountable for the well-being of the consumers harmed by the credit bureau’s negligence.