How Does Credit Karma Make Money? Business Model of Credit Karma


How Does Credit Karma Make Money

Credit Karma is a popular fintech firm that provides consumers with tools to manage their money. However, they don’t charge consumers for their services.

Credit Karma primarily makes money via commissions on targeted financial products. Credit Karma recommends products based on consumer credit information and gets a commission when the consumer buys the recommended product.

Founded in 2007 by Kenneth Lin, Ryan Graciano, and Nichole Mustard, Credit Karma is known as a free credit and financial management platform. The company also monitors unclaimed property databases and provides tools to identify and dispute credit report errors.

The company was acquired by financial software company Intuit for a purchase price of $7.2 billion in 2020.[1] Intuit also owns TurboTax and other brands. Intuit (INTU) is a public company that trades on the NASDAQ exchange.

What is Credit Karma & How Does It Work?

Credit Karma is a financial company that provides consumers with money management tools. The company specializes in providing credit transparency to its clients. Consumers can use Credit Karma to learn their credit score without going through credit bureaus. The company’s over 120 million users in the U.S, U.K., and Canada include almost half of all American millennials. [2]

Customers use Credit Karma to access their credit scores for free. The company also provides its customers with tools for every step of their financial journey. These tools include credit cards, personal and auto loans, home insurance, money calculators, and mortgage products.

Some clients use the company’s credit report and credit monitoring services. The company also offers protection from identity theft, credit tools, and tailored recommendations for financial products.

Customers must sign up as a member before downloading the app for their Apple or Android phones. The app will only work with compatible devices.

Credit Karma users can log in to their accounts using a PIN, touch ID, or face ID. The app is free to download and use. Customers can make free use of any of the tools and resources on the Credit Karma app and website.

Alerts and push notifications can provide immediate credit alerts. These alerts help users be informed of changes to their credit rating. Credit Karma checks Equifax and TransUnion on their customer’s behalf to give up-to-date credit information.

One of the benefits of the Credit Karma app is the personalized financial tools, for example, clients can access an individual relief roadmap. This tool offers tips on protecting credit, managing bills, and borrowing options. During the Covid-19 pandemic, the company provided a Coronavirus resource section with information on financial relief specific to that crisis.

Credit Karma’s free ID monitoring tool also alerts its customers if their private information has been exposed in a data breach.

In 2021, the company introduced a cash-back rewards program that randomly refunds user purchases. The Instant Karma program targets Gen Z, who are less likely to use credit cards. The Instant Karma product is linked to a debit card rather than a credit card.

The company has experienced its share of recent controversies. The Federal Trade Commission ordered Credit Karma to pay $3 million to users targeted with false preapproved offers in September 2022.[3] The complaint alleged that nearly one-third of users who applied for a pre-approved credit card were denied following credit checks. As this was false advertising, the company was fined.

As a result of this incident, the company has been ordered to preserve records of its marketing efforts going forward.

 

Business Model of Credit Karma

The business model of Credit Karma is an aggregator business model. Credit Karma collects data on financial products and services and targets it to clients on its own software.

The company aims to benefit its customers and its financial partners by effectively matching clients and tools. The company uses the data points its customers submit to provide tailored financial solutions. When clients sign up for one of the recommended products, Credit Karma is paid a referral fee by the bank or the lender.

Credit Karma has an enticing value proposition to consumers who may have low trust in traditional financial institutions. It makes it easy for clients to stay on top of changes to their credit score and to easily monitor their accounts for signs of credit fraud. The company’s services give individual’s control over their finances by giving them direct, free access to their credit score. Customers can also use Credit Karma to improve their financial literacy with free tools and resources.

Consumers increasingly use mobile apps for financial management. In 2021, 76% of all smartphone owners use mobile apps like Robinhood, PayPal, and Credit Karma to manage their finances.[4] In 2020, nearly 30% of U.S. consumers used Credit Karma weekly. [5]

Credit Karma is different from many other financial services providers because it acts as an intermediary for transactions. While many apps directly sell services, Credit Karma has focused on providing a free service that’s supplemented by advertising and offers designed to match their user’s financial needs.

Competition from other credit score companies may have pushed Credit Karma to expand its offerings. In recent years, it has launched savings and checking accounts. However, in doing so, Credit Karma puts itself directly in competition with existing traditional banks and newer online bank accounts. This is an extremely competitive market, and it’s unclear how much market share Credit Karma will be able to hold.

Credit Karma also faces some significant threats. In the United States, many bank accounts and credit card companies are increasingly providing their clients with free credit scores on their monthly statements or available on demand. Credit Karma’s credit score service may stop appealing to people if they can get their credit score more easily elsewhere.

The company might also struggle to connect with Gen Z as many in that generation don’t use credit cards. The Instant Karma program appears to be an attempt to address that challenge, but it’s still unclear if it will be successful.

Intuit’s purchase of Credit Karma suggests that the financial company saw an opportunity for potential synergies with other products in its portfolio. Intuit might have acquired the company in order to better market its TurboTax, Mint, and accounting products to millennials and Gen Z. In the future, the core purpose of Credit Karma might not be primarily to make money but to direct customers to other profitable Intuit services.

Credit Karma’s direct competitors include NerdWallet, Credit Sesame, InDinero, and Nav. Many of these companies also offer free credit score information and financial tools. Online bank account services Discover and SoFi are competitors to Credit Karma’s checking and savings accounts.

Credit Karma has significant costs associated with running and growing the platform. These include things like staffing, hosting, and development costs. Credit Karma’s operating expenses were not publicly available prior to its acquisition by Intuit, but in 2021, staffing expenses cost the company $246 million.

Competing in the crowded fintech marketplace is a significant expense. In 2021, Credit Karma spent $197 million on marketing. Amortization of other acquired intangible assets costs the company $140 million. Operating expenses cost Credit Karma an additional $616 million.[6]

 

How Does Credit Karma Make Money?

Credit Karma makes money in three different ways. These are referral commission, interchange fees on the Credit Karma debit card, and interest on cash loans.

Intuit’s annual report does not break down how much money Credit Karma makes from its various revenue streams.

Referral commission

Referral commission, or cost-per-action transactions, are the primary way Credit Karma makes money. These transactions include the delivery of qualified links that result in completed actions such as credit card issuances and personal loan funding.

Though Credit Karma does not disclose how much it makes from cost-per-action transactions, in 2018 the company earned a reported $680 million in referral fees. [7]

Customers can shop for various types of credit cards through Credit Karma, including:

  • Balance transfer cards
  • Reward cards
  • Travel cards
  • Cash back cards
  • 0% APR cards
  • Business cards
  • Secured cards
  • Cards for fair or bad credit

Customers can browse for cards by selecting tagged categories to narrow down to what they want. The company will also make targeted referrals based on customer data.

Personal loan products are another core referral business of Credit Karma. The company offers the following personal loan product referrals:

  • Debt consolidation loans
  • Same day loans
  • Emergency loans
  • Major purchase loans
  • Home improvement loans
  • Personal loans for no credit and bad credit

In addition, Credit Karma customers can access referrals for auto loans and insurance, and home mortgage, and refinance rates and insurance.

 

Interchange fees

Through the company’s credit and debit accounts, Credit Karma makes money on interchange fees. Interchange fees are charged to retailers when a debit or credit card is used. The Credit Karma Money Spend account is free to open. Customers can withdraw money for free from ATMs in the Allpoint ATM network.

Credit Karma makes money on the approximately 1% processing fee on goods and services transactions. The merchant is responsible for paying the interchange fee.

 

Interest on cash loans

Like other banks and financial institutions, Credit Karma uses an interest-on-cash business model. The business makes loans to bigger financial institutions, like banks, using the money in its customers’ bank accounts.

In exchange for facilitating the loan, Credit Karma receives a net interest margin on the outstanding balances maintained by its institutional clients. Additionally, Credit Karma offers FDIC insurance for up to $5 million to safeguard client accounts.

 

Credit Karma Funding, Valuation & Revenue

Credit Karma is currently a subsidiary of Intuit. After Intuit acquired Credit Karma for $7.2 billion in 2020, the company lost 60% of its revenue during the initial waves of the Covid-19 pandemic.

However, it shows signs of bouncing back. Credit Karma contributed $418 million in revenue to Inuit’s fiscal Q1 2022. [8] Unfortunately, Intuit doesn’t break down the valuation of its subsidiaries.

Intuit (INTU) is a public company that is traded on the NASDAQ exchange. In September 2022, the company had a valuation of $126 billion. Intuit also owns the popular financial services QuickBooks, TurboTax, Mint, and ProConnect.

Prior to going public, Credit Karma raised $868 million in venture capital funding during eight funding rounds.[9] Notable investors include Silver Lake, and SV Angel. [10]

Credit Karma has decreased its revenue since being acquired by Intuit. At the time of acquisition, Intuit noted that Credit Karma had nearly $1 billion in unaudited revenue in calendar year 2019, up 20% from the previous year. [11]

YearSegment Total RevenueSegment Operating Income
2021$865 million$182 million

In 2021, Intuit reported total revenue of $9.6 billion, including revenue from Credit Karma.[12] That year, the company also brought in $2 billion in net revenue. That represented an increase over the previous two years when the company reported $1.8 billion in revenue in 2020 and $1.5 billion in revenue in 2019.[13] Despite those large increases in revenue, Intuit’s net income has only grown by $500 million from 2019 to 2021.

YearTotal RevenueNet Income
2019$6.7 billion$1.5 billion
2020$7.6 billion$1.8 billion
2021$9.6 billion$2 billion

 

Is Credit Karma Profitable?

It is unclear if Credit Karma is currently profitable. However, Credit Karma did report a net segment operating income of $182 million in 2021, proving it was profitable that year. But that came after the company faced significant losses in 2020, the same year it was acquired by Intuit.

While the company has shown signs of financial recovery, it isn’t yet clear if it will be able to consistently sustain increases in revenue and not see future losses.

Whether that will matter to Intuit remains to be seen. Credit Karma’s parent company likely acquired it to leverage potential synergies across its product line of fintech solutions.

Credit Karma’s young user base might help Intuit see growth in its TurboTax and Mint products.

 

Conclusion

Thank you for reading this far!

We hope this guide has been helpful in helping you understand the business model of Credit Karma and how it makes money.

Credit Karma still has the potential to grow rapidly as more and more people become interested in managing their finances online—and as companies continue trying to attract customers with targeted ads based on their individual profiles.

If you have any questions or would like to share your thoughts on this topic, feel free to reach out to us. As always, we hope to see you back here soon!

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Sources

  1. Intuit
  2. PC Mag
  3. NPR
  4. Cornerstone Advisors
  5. Cornerstone Advisors
  6. Intuit
  7. Forbes
  8. Tech Crunch
  9. Crunchbase
  10. Crunchbase
  11. Crunchbase
  12. Intuit
  13. Intuit