4 ways the Credit Karma deal could pay off for Intuit

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Intuit, owner of the personal financial software Mint and several accounting software packages including QuickBooks and TurboTax, has agreed to buy Credit Karma for $7.1 billion. The combination presents several attractive business opportunities for Intuit and could raise some competitiveness issues.

Credit Karma offers consumers free access to their credit scores and borrowing histories; alerts to possible data breaches; as well as credit monitoring, tax preparation and filing services. It feeds these customers offers from other companies for credit cards and loans tailored to their credit histories; it also helps them find mortgages. Credit Karma makes money when customers use these products.

Intuit did not respond to a request for an interview on Sunday when news of the potential deal began to circulate. Emily Donohue, director of communications at Credit Karma, declined an interview Sunday, saying, “We do not comment on rumors or speculation.”

The companies announced the deal late Monday afternoon. Intuit CEO Sasan Goodarzi said on a conference call that he has a simple goal for the merger: empowering consumers to manage their money. The agreement is expected to be completed in the second half of the year provided the necessary regulatory approvals are obtained.

There are at least four reasons Intuit could benefit from buying Credit Karma, observers said.

To obtain more data

Todd H. Baker, senior fellow at Columbia Business School and Columbia Law School, sees the deal as a data grab.

“The way I think of it is one is in the transactional data business and the other’s in the behavioral data business,” he said.

Intuit has a lot of transactional information on its own TurboTax, Quickbooks and Mint customers, but little behavioral data, he said.

“That’s because it is a really big aggregator itself on behalf of its customers,” Baker said. “Transaction data is useful for providing existing customers with good automated advice and can be used to market other services that create new revenues. It is mostly slightly backward-looking. It doesn’t help much in finding new customers or learning what consumer needs are most actionable.”

Credit Karma, on the other hand, gets “immediately actionable behavioral data tied to an identity,” Baker said. “That is much more immediately monetizable as third parties will pay for it as they do via participation on the Credit Karma site."

For instance, Credit Karma would know that a customer is looking for a credit card, has a 720 FICO score and is interested in cash-back rewards.

Credit Karma also uses behavioral data in its ongoing efforts to make behavioral tweaks to its user experience and user interface and maximize click-through, application and approval rates, Baker said.

“Intuit could easily provide a simple, free version of Mint or TurboTax to Credit Karma customers, and thereby capture both behavioral and transactional data on identified consumers," Baker said.

Intuit could profit through referral fees on Credit Karma and by charging for premium versions of Mint and TurboTax.

Brad Leimer, co-founder of Unconventional Ventures and a former head of innovation at Santander Bank, also sees customer data as critical to this deal.

“I think they are trying to figure out what to do in the consumer side of the business and how to create more revenue from consumer data,” he said. “As they’ve long underdeveloped the opportunity with Mint and TurboTax consumers, acquiring Credit Karma brings them revenue sources like referrals to credit cards and personal consolidation loans that are a good complement to Rocket Mortgage. Maybe now they realize they have to be a company with more than the occasional hook into consumers with mortgages and taxes.”

To protect or expand its tax software business

Another reason Intuit might be interested in Credit Karma would be to take over and possibly eliminate its free tax calculation service.

In 2019, nearly 40% of U.S. taxpayers filed their taxes online; 40 million of them did so with TurboTax. According to a Zacks estimate, Intuit derives nearly a third of its revenue from consumers’ use of TurboTax.

Intuit is part of a government effort called the Free File Program to make free tax preparation available to lower-income consumers. The Treasury Deparment's inspector general for tax administration issued a report this month that criticized shortcomings in the program that could be alienating potential users.

"The complexity, confusion, and lack of taxpayer awareness about the operation and requirements of the Free File Program are contributing reasons why many eligible taxpayers do not participate in the program," the report said.

In 2019, 2.5 million (2.4%) of 104 million eligible taxpayers obtained a free return filing through the program. Meanwhile, more than 34.5 million taxpayers who met Free File Program criteria used fee-based software provided by Intuit and other members of the Free File Inc. group.

The Treasury called 200 taxpayers who met the Free File Program criteria but used commercial software. Eighty-seven (43%) of these taxpayers said they were charged a fee to prepare and e-file their federal tax returns. Based on these results, the Treasury Department estimates that more than 14 million taxpayers met the Free File Program criteria and may have paid a fee to e-file their federal tax return in the 2019 filing season.

"Sufficient actions have not been taken to educate taxpayers that the only way to participate in the Free File Program is through the IRS website," the report said.

The Treasury Department has asked the IRS to educate consumers about their ability to file their taxes for free on the IRS website, and to get members of the Free File Program, including Intuit, to do the same.

Credit Karma began offering free online self-directed tax preparation, Credit Karma Tax, in December 2016.

This month, the company added the ability to integrate Credit Karma Tax with Credit Karma Savings, allowing tax filers to automatically deposit their refunds or a portion of them into free, high-yield savings accounts. It launched its savings account in October; the deposits are held at MVB Bank in Fairmont, W.Va.

By acquiring Credit Karma, Intuit could erase this free competitor to TurboTax and its savings option.

To revamp its business model

A third potential driver is that in the broader picture, consumers are moving away from paying for apps directly and toward using either free software supported by ad revenue or apps with a monthly subscription. Intuit’s model of charging for tax and accounting software might not be sustainable. Buying Credit Karma could help it find a path forward.

Leimer said that Intuit could shift from charging a set fee for preparing taxes to bundling services (e.g., Mint + Credit Karma) and charging a monthly subscription fee "where overall costs are easier to increase — basically taking services that could be relatively cheap to free and making incremental revenue off them because increases are more hidden."

"It’s as if every business was looking for a way to switch consumers' behavior from visible and discrete purchases that are made with full awareness toward those that are more obscured and discreet in order to drive more consistent sources of revenue," he said. "The problem with this is that it is wrecking household budgets just as the nature of work is shifting and income inequality is rising.”

To gain share in consumer finance

Buying Credit Karma could help Intuit take advantage of the rise of automated consumer finance.

Mint was one of the original fintech success stories. The startup launched its budgeting app in September 2007. In November 2009, Intuit bought Mint for $170 million. At the time, Mint had more than 1 million users. Today, Mint has about 15 million users.

Credit Karma has 100 million customers.

Arguably, Credit Karma has a handle on what consumers want.

“Mint was a mess because [Intuit] didn’t know that business,” Leimer said. “They didn’t understand that upselling required a value exchange beyond budgeting. They stopped innovating, and they stopped thinking about the consumer as they chased business relationships and lending revenue. It’s like they missed the opportunity that so many fintechs have seized upon the last decade as consumers and the economy changed. In essence, they acted like most banks. This is why Credit Karma and other companies have flourished — they understand that things for the American consumer have changed. That’s the last decade in fintech in a nutshell.”

This story was updated Monday afternoon to add that the companies officially announced the merger agreement.

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