Continued: Fair Isaac: Opportunity or risk?

"Growth is the word that's stamped on everybody's forehead around here."

"Here" would be Minneapolis-based Fair Isaac, the analytics and software company best known for its FICO credit score. And wielding the stamp? Mark Greene, who's been running Fair Isaac since February and aims to stop the company from "treading water."

For Fair Isaac, the U.S. financial services world isn't much of a growth market. It already has more than 90 of the top 100 U.S. banks as customers, often for its ubiquitous credit scoring device that allows lenders to decide who should get a loan and who shouldn't.

Greene, who recently sat down with the Star Tribune in his Minneapolis office, said the company's size, with $822 million in annual revenue, is a challenge: "We're large enough to do many things, but clearly not large enough to do all things. Placing bets in countries that matter" is the essence of his growth strategy. Top on his list: China.

Of course, international growth has become the mantra at most big companies, and China, with 1.3 billion people and an economy growing at about 11 percent this year, has become the nation du jour.

But China's banking system is a work in progress. A handful of state-owned Chinese banks lend the bulk of their money to businesses with state ties. Many experts believe those loans are made regardless of credit quality; many are never repaid because the business fails or the money is abused.

"The central government can pass all the laws it wants to create good lending practices, but local authorities will still pressure local branches to lend for pet projects," wrote Douglas Jaffe, research director of Financial Insights Asia/Pacific, in a report titled "Building a Credit Culture in China."

On top of that, consumers in China largely don't borrow money. Only 10 percent of bank loans have gone to consumers, compared with 60 percent in the United States, according to a research report released last year by McKinsey Global Institute. Just 2 percent of households have a credit card, compared with more than 75 percent in the United States, and most Chinese card holders pay their balances in full.

And the data available to gauge consumers' credit-worthiness -- payments on consumer loans, taxes, and utility bills on which Fair Isaac's formulas are based -- are only now emerging in China.

"You could take a very sophisticated software, but you don't have the raw data to go into it," said Nicholas Lardy, a China expert at the Washington-based Peterson Institute for International Economics.

China's central bank has also expressed concern about the economy overheating and has asked financial institutions to restrict lending through the end of the year. "Making the right lending decisions is all the more important" in such a climate, said Greene, pointing out that volatile periods in South Korea and Mexico proved good for business.

Relaxed Chinese regulations have opened the country to foreign banks such as Citigroup and HSBC, although Lardy, who just returned from a trip there, said foreign banks control just 2 percent of the assets in the country. Another potential drawback for Fair Isaac is that loan rates are fixed in China, meaning banks can't choose what rate to offer borrowers. "If you can't price risk, how much should you spend on coming up with metrics?" Lardy said.

Still, experts see many cultural traits starting to shift. Consumer demand is growing. Tracy Yue Wang, an assistant finance professor at the Carlson School of Management, expects there will be "a big opportunity for credit-related businesses."

That's Greene's hope. Fair Isaac is working with the People's Bank of China -- that nation's equivalent of the Federal Reserve -- to "legitimize" itself in the eyes of Chinese bankers and "help shape China's banking industry."

Wing Thye Woo, an expert on East Asian economics at the Brookings Institution, thinks Fair Isaac's sophisticated risk management software would provide the data banks need to pressure delinquent borrowers to pay up. Investing in technology is a way for banks to show the world that they're "turning over a new leaf," he said.

Fair Isaac opened offices in Beijing and Shanghai earlier this year and already employs 50 people there, mostly China natives who once worked in technical positions for Fair Isaac in California. The company is selling its sophisticated mathematical formulas that help organizations make smarter decisions about account management, fraud, who to market to and who to lend to.

It expects to increase its China workforce to 75 within the next few months.

Greene, who spent years as a vice president for IBM working in financial services, would like Fair Isaac's revenue to more closely resemble IBM's -- with equal thirds in the Americas, Europe and Asia. Today, two-thirds of its revenue originates in North America.

A full conference

Last month, Fair Isaac's first industry conference held in China was full, with more than 250 people crammed into an event expected to attract half that number.

Banks seem willing to spend the money. Information-technology spending by Asia/Pacific banks is expected to grow from $25 billion in 2008 to $35 billion by 2011, according to a technology research report by analysts at Massachusetts-based Financial Insights.

"It's pretty easy to get in the door," Greene said. "We've been doing this for 50 years around the world so we know what best practices look like. ... The Chinese crave that."

But it's also easy for its competitors. Companies such as Texas-based Austin Logistics, SAS, and Oracle have offices in China, and the big U.S. credit bureaus are also entering the market.

To date, international expansion, despite its promise, has been relatively slow for Fair Isaac. During its fiscal 2006, revenues from international customers amounted to 28 percent of total revenue. In fiscal 2007, which ended in September, that increased only slightly, to 29 percent. The company doesn't break out projects by region, but it estimates 3 percent overall revenue growth for the company in fiscal year 2008 and 7 to 10 percent in fiscal year 2009.

Greene acknowledges that Fair Isaac's China strategy isn't a magic bullet: "This is a sustained investment over many quarters," he said. And he's hedging his bets in other parts of the globe, such as India and Brazil.

Said Greene: "You look for markets that are high-growth themselves and a need for what we do really well: Balancing growth with risk management."

Kara McGuire • 612-673-7293