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February 6, 2017

#Fintech: Credit Karma + The Credit Score

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#Fintech (financial technology) is a red-hot category right now, worldwide. Many unicorns (companies with a valuation greater than $1 Billion) have already been crowned, and yet the arms race has only just begun. That’s because so much of the TBTF (too big to fail) banks’ precious revenue streams remain ripe for ‘disruption’ and billions, if not trillions, of dollars will be at stake as blockchain gets set to come online in the years ahead.  In a previous post, we looked at one #fintech unicorn, SoFi, and the explosive growth enabled by their HENRY membership model:

+ Fintech: SoFi + HENRYS

Credit Karma is one #fintech company that has largely flown under the radar in the land of unicorns. The company was launched in 2007 after an initial $500K angel investment by Peter Thiel’s FF (Founder’s Fund) Angel LLC and have since raised a total of $368 million. The company is currently valued in excess of $3.5 billion, had more than $200 million in revenue as of 2014 and is profitable.  As of September 2016, they had more than 60 million members.

creditkarma

 

“We have a long-term vision – and it is to become a one-stop shop for a consumer’s personal finances and credit … the eventual goal is to be the “Amazon” of financial products for consumers.” Credit Karma’s Billion Dollar Vision

Business Model

Credit Karma gives its members access to their credit score for free, without any hidden costs or subversive subscriptions to third-party services.

“Credit Karma isn’t interested in making money from consumers directly, and instead it makes its money by matching their now 36 million users with the right financial products advertised on their site.”

Their strategy is to serve their members with two types of advertisements: a) products/services that will help them save money on their current interest payments b) credit products from partners, such as a credit card from AMEX.

“We have a hyper-targeted ad strategy,” Ra explained. “We have [consumer] credit data and know what financial products will work, and so that is what we advertise to [consumers] when [they] are on the service. We’ll show [them] credit cards, loans that make sense based on [their] spending and credit profile. [Consumers] never see a generic ad on Credit Karma.

CK ad

Credit Karma attempts to target their ads based on your credit score and the corresponding data that links to that score, including:

  • accounts
  • collections
  • bank accounts
  • public records
  • credit inquiries

“Credit Karma uses the VantageScore 3.0 credit score based on your TransUnion and Equifax credit reports. That is why you see two different scores on your account. The VantageScore 3.0 model is among the newest, most predictive credit scores out there.” How Accurate is Credit Karma

Under this model, the company has grown like crazy. As of September 2016, they had more than 60 million members and recently expanded into Canada:

“And the company, which gives out free credit scores and generates revenue from selling lending leads, is adding 1 million to 2 million users — which the company calls “members” — per month, a Credit Karma official told an investment banking audience yesterday.” CreditKarma hits 60 Million Users

The company is now expanding it’s ‘member model’ into the lending space, putting it in similar territory to other fintech lenders:

“Credit Karma today facilitates originations of student loans, business loans, auto insurance, auto loan refinances and personal loans,” CreditKarma hits 60 Million Users

Will Credit Karma move into the mainstream banking business, similar to SoFi?

Future View

Fintech fundamentally marries finance with technology, hence ‘finance technology.’  Credit Karma has successfully onboarded customers onto their digital platform for a cost of acquisition that includes the cost of pulling the credit score from TransUnion and whatever they spend on marketing.  Since their base model is already profitable, the addition of lending, refinancing, and insurance will give them new revenue streams from their current customer base.

Karma - Goldman

+ Credit Karma – Personal Loans

Take the example above, a partner offer from Goldman Sach’s P2P Lending platform Marcus. Credit Karma already has so much credit data from its users that it can create highly-tailored offers that can be quickly executed on through partner platforms  In addition to credit cards, personal loans, and auto refinancing, they even have a new tax feature to enable members to file their taxes.

Karma - tax

Given the Credit Karma vision to become the ‘Amazon of personal finance,’ the company is now positioning itself to capture a portion of the major revenue streams from mainstream financial services.  With the data they have on a customer base that sits at more than 60 million, a market with healthy growth rates for the foreseeable future, and some significant cash reserves in the war chest, we think that Credit Karma is well positioned to emerge one of the major ‘disruptors’ in the mainstream banking system, along with SoFi.

fintech loan originiation

The criticism of Credit Karma is their ad first model. They make money through referral fees, leveraging their database to generate lucrative leads for financial services firms such as American Express. They claim to work with partners and advertisers who ‘share our vision of consumer empowerment‘ and yet most of their ads are for credit products that most people don’t need more of.  They have many new and emerging tools on their platform, such as the ‘Home Affordability Calculator‘ and ‘Debt Repayment Calculator’ but ultimately they only get paid when a client converts. In comparison, the SoFi model is much more exclusive as they are highly selective of their members and offer much better benefits than a platform like Credit Karma; therefore, we like SoFi’s model better over the long-term when compared to Credit Karma and think there is still a lot more room for new ‘disruptors’ in #fintech the years ahead.