Credit Rating Agency - CRA Business Models

CRA Business Models

Most credit rating agencies follow one of two business models. Originally, all CRAs relied on a "subscriber-based" business model where the CRA would not distribute the ratings for free but would instead only provide the ratings to subscribers to the CRA's publications. Subscription fees would provide the bulk of the CRA's income. Today, most smaller CRAs still rely on this business model, which proponents believe allows the CRA to publish ratings that are less likely to be tinged by certain types of conflicts of interest. By contrast, most large and medium-sized CRAs (including Moody's, S&P, Fitch, Japan Credit Ratings, R&I, A.M. Best and others) today rely on an "issuer-pays" business model in which most of the CRA's revenue comes from fees paid by the issuers themselves. Under this business model, while subscribers to the CRA's services are still provided with more detailed reports analyzing an issuer, these services are a minor source of income and most ratings are provided to the public for free. Proponents of this model argue that if the CRA relied only on subscriptions for income, the vast majority of bonds would go unrated since subscriber interest is low for all but the largest issuances. These proponents also argue that while they face a clear conflict of interest vis-a-vis the issuers they rate (as described above), the subscriber-based model also presents conflicts of interest, since a single subscriber may provide a large portion of a CRA's revenue and the CRA may feel obligated to publish ratings that support that subscriber's investment decisions.

Open Source model

In October 2011, a new collaboration based business model called Wikirating was developed by Austrian mathematician Dorian Credé. The online community credit rating platform aims to provide a transparent source of credit rating information, reviewed by a worldwide commnunity.