Credit Karma's First Year Under Intuit: A Post-Acquisition Review

A Pivotal Day for Credit Karma

Ken Lin experienced an unforgettable February 24, 2020. The CEO of Credit Karma was poised to reveal the acquisition of the company he established 13 years prior, valued at over $7 billion.

Simultaneously, significant turbulence gripped the stock market.

Navigating Market Uncertainty

Lin recalls waking to Dow futures down approximately 600 points, as the initial impacts of COVID-19 began to manifest in the market. A 5:00 AM start revealed a sharply declining market, prompting internal debate about proceeding with the announcement.

Growing anxieties within the markets coincided with the escalating spread of the coronavirus beyond China, with increasing case numbers reported in Italy and South Korea.

Proceeding with the Acquisition

The S&P 500 experienced a 3.5% decline on that day, initiating a week-long sell-off across global securities. The World Health Organization cautioned that COVID-19 was poised to become a global pandemic.

Despite these circumstances, the decision was made to proceed with the acquisition. External factors and uncertainties were deemed inconsequential at that juncture, and the deal was finalized and publicly announced.

Post-Acquisition Adjustments and Recovery

The deal’s completion on December 3rd, a year later, followed a period where Credit Karma faced challenges. These included a contraction in credit markets and the required divestiture of its tax division following a Justice Department review.

However, the subsequent 12 months witnessed a substantial recovery for Credit Karma, now functioning largely as an autonomous division within Intuit.

Factors Contributing to the Rebound

This resurgence can be attributed to a recovery in financial markets. Furthermore, the increasing commercial utilization of its Lightbox decision-making engine and heightened consumer engagement through integrations with Intuit products played a crucial role.

These developments have positioned Credit Karma for continued growth within the Intuit ecosystem.

Navigating a Period of Crisis

The impact of the COVID-19 pandemic on Credit Karma’s financial performance was substantial, exceeding simple descriptions of difficulty. Sources within the company indicate a near-total cessation of revenue streams in the initial phase of the pandemic.

Credit Karma’s primary revenue model centers on facilitating connections between financial institutions – banks and lenders – and potential borrowers seeking credit cards, personal loans, or mortgage refinancing. A referral fee is earned for each successful connection. Consequently, the contraction of credit markets due to pandemic-related uncertainty and subsequent lending halts directly affected Credit Karma’s income.

This unforeseen circumstance was not factored into the initial agreement terms.

“We experienced an approximate 60% reduction in revenue during the initial COVID-19 period,” stated Lin. “A business that had consistently generated profit for an extended duration became unexpectedly unprofitable, as rapid adaptation proved impossible. We were faced with numerous critical decisions.”

These decisions were further complicated by stipulations within the acquisition agreement. These covenants restricted significant alterations to the company’s operations while the deal underwent regulatory scrutiny.

“The covenants were structured in a manner that prompted caution from our legal counsel and board members, who advised us to proceed with extreme care. A reduction in marketing expenditures, for example, could potentially be interpreted as a breach of contract,” Lin explained.

Colleen McCreary, Credit Karma’s chief people officer, was responsible for managing the effects of the crisis on the workforce.

“I was the sole member of the management team with prior experience in executing workforce reductions,” McCreary shared. “I had outlined three potential courses of action. However, I strongly advocated against layoffs, emphasizing the detrimental consequences they would create.”

Rather than resorting to layoffs, Credit Karma implemented salary reductions. All new hiring was suspended, and existing vacancies remained unfilled. Furthermore, all paid marketing campaigns were halted. Simultaneously, the company actively worked to redeploy employees whose roles were less critical during the downturn – particularly within human resources and talent acquisition.

“We implemented pay cuts and strategically reassigned personnel,” McCreary said. “The cessation of recruiting resulted in a significant impact on that department. We transitioned those individuals into roles within product development, business development, legal operations, and content creation, seeking to preserve employment.”

Credit Karma also extended voluntary separation packages to employees who preferred to leave the company. “We offered employees who were uncomfortable with the situation the option to resign with two months of continued pay, encouraging them to pursue other opportunities,” McCreary stated, adding that this approach was preferable to a gradual attrition of staff.

Concurrently, the company shifted its resource allocation to align with anticipated growth areas during the early pandemic months. Employees were moved from the credit card and personal loan divisions to focus on home lending and auto lending, sectors that remained in demand.

This strategy proved effective in maintaining employee retention. Headcount stood at approximately 1,300 at the time of the deal announcement and remained at 1,290 upon its completion.

A Complex Acquisition

Prior to the Department of Justice’s scrutiny, both Credit Karma and Intuit recognized the potential regulatory concerns stemming from the convergence of their tax-related offerings. For years, Intuit’s TurboTax had dominated the tax preparation software market before Credit Karma launched its complimentary online tax service in 2017.

Intuit CEO Sasan Goodarzi explained that they anticipated inquiries due to both companies operating within the tax sector. However, he emphasized that the tax business wasn't the primary driver behind the acquisition. “We were not acquiring them because of the tax business,” Goodarzi stated, “it was frankly so small that we foresaw it attracting the DOJ’s attention.”

The extended duration of the DOJ review, according to Goodarzi, was largely due to the agency’s thorough investigation into the synergistic potential of the two companies. They were focused on understanding the implications for consumers, particularly within the tax preparation landscape.

Ultimately, the Justice Department mandated the divestiture of Credit Karma Tax as a condition for approving the acquisition. This stipulation ensured continued competition in the tax preparation market.

Lin, speaking about the situation, downplayed the significance of the tax business, stating, “We never believed this Intuit-Credit Karma deal revolved around the tax business.” He pointed out that Intuit already possessed a leading tax product while Credit Karma was still in its early stages of development.

A press release from Square, announcing their acquisition of the business, revealed that Credit Karma Tax assisted over 2 million taxpayers with their returns in the previous year. This figure contrasts sharply with the nearly 40 million returns processed through TurboTax during the same timeframe.

Lin highlighted the importance of combining Credit Karma’s consumer credit data with Intuit’s extensive income and asset data, particularly within a financial industry where scale is paramount. This integration was seen as a key benefit of the acquisition.

“Credit Karma has historically focused on the credit aspects of a consumer’s finances,” he explained. “Intuit, conversely, has concentrated on assets, income, and related financial information.” He continued, “Combining these datasets unlocks opportunities to develop innovative products that empower consumers with a comprehensive understanding of their financial options.”

Management Strategies: The LinkedIn Acquisition as a Model

Significant operational overlaps existed between Credit Karma and Intuit, yet a decision was made to avoid full integration. It was determined that maintaining Credit Karma’s distinct identity would better leverage the individual capabilities of both organizations.

As Lin explained, complete integration often leads to decreased efficiency. Therefore, the focus shifted towards accelerating Credit Karma’s growth rather than absorbing it into Intuit’s existing structure.

The organizational structure was intentionally designed, drawing inspiration from Microsoft’s acquisition of LinkedIn. Following its acquisition, LinkedIn was granted a substantial degree of operational independence. Jeff Weiner, the former LinkedIn CEO – now a member of the Intuit board – played a key role in establishing the guidelines for this autonomous operation.

Goodarzi emphasized the importance of shared goals, stating that alignment on objectives and priorities was crucial, mirroring the approach taken by Microsoft and LinkedIn. Beyond this alignment, LinkedIn was given “complete autonomy end to end.”

Naturally, certain integrations were necessary due to regulatory requirements and financial reporting obligations inherent in being a publicly traded company. However, for the vast majority of Credit Karma employees, day-to-day operations have remained largely unchanged over the past year.

Rich Franks, head of Credit Karma’s Lightbox group, noted that the influence of Intuit is barely perceptible to most of his team. He believes that, aside from executive leadership, all teams are focused on a unified direction, and operationally, no significant changes have occurred as a result of the acquisition.

Key Principles of the Model

• Autonomy: Granting significant independence to the acquired entity.
• Alignment: Ensuring shared objectives and priorities between the parent company and the acquired unit.
• Operational Separation: Maintaining distinct operational processes to foster agility and innovation.

Potential for Accelerated Growth

Although the acquisition did not immediately alter the organizational structure or merge the workforces, both companies proactively sought opportunities to leverage their respective products for mutual growth.

Goodarzi explained, “Ken and I share a common vision regarding both short-term and long-term goals, as well as strategic priorities. We’ve identified specific areas, termed ‘acceleration priorities,’ where we are integrating platforms to maximize impact.”

This collaborative approach has focused on accelerating the expansion of both Credit Karma and Credit Karma Money, alongside the secure exchange of customer data – with explicit consent – to enhance the precision of credit product recommendations.

Tax Season Integration

A prime example of this synergy occurred during the recent tax season. The teams successfully linked Credit Karma Money with TurboTax, enabling customers to receive their tax refunds with greater speed.

This integration represented a significant undertaking for both teams, who worked diligently post-acquisition to implement the connection in time for the filing period, just months after the deal closed.

Lin emphasized the importance of this feature, stating, “Tax refunds often represent the largest single income event for many consumers annually. Facilitating faster access to these funds through Credit Karma Money is a valuable service.”

He further noted that TurboTax processes approximately $100 billion in tax refunds each year, presenting a substantial opportunity to expand the Credit Karma membership base. In the initial year, TurboTax and Turbo customers comprised 40% of all new Credit Karma members.

Enhancing Lightbox with TurboTax Data

Beyond user-facing features, the companies are also accelerating development in areas less visible to the public, but potentially more impactful. This includes utilizing TurboTax data to refine the performance of Lightbox, Credit Karma’s machine learning engine.

Lightbox assists lenders in identifying suitable borrowers by allowing them to define specific underwriting criteria and then connecting them with Credit Karma users who demonstrate a strong probability of credit approval.

Previously, Credit Karma primarily relied on consumer credit history data for these matches. However, lenders are increasingly employing sophisticated underwriting algorithms, often incorporating hundreds of data points to assess borrower risk.

A more comprehensive understanding of a customer’s financial situation, therefore, allows Credit Karma to provide more relevant and beneficial product offerings. “We understood that credit history accounts for around 70% of the underwriting decision, but income, assets, and repayment capacity constitute the remaining 30%,” Lin clarified.

“Now, with informed customer consent, we possess a complete view of the consumer’s financial profile, which enhances the accuracy and reliability of our recommendations.”

Resuming an Upward Trajectory

The year 2020 presented considerable difficulties for Credit Karma. However, following a period of integration within Intuit, the company is now demonstrating substantial financial recovery and achieving record-breaking performance.

In Intuit’s most recent fiscal quarter, Q1 2022, Credit Karma generated $418 million in revenue. This represents a significant increase when contrasted with the $144 million and $316 million reported in the initial two quarters after becoming part of Intuit.

This positive trend was largely fueled by robust performance in the personal loan and credit card sectors, coinciding with a resurgence in lending activity within these markets.

The company anticipates this momentum will persist, leading to a revised full-year revenue forecast for the division ranging from $1.540 billion to $1.565 billion. This is an upward adjustment from the previously projected $1.345 billion to $1.380 billion.

Strategic Advantages and Future Outlook

The team is well-positioned to leverage Intuit’s ongoing investments, benefiting from insights gained during the prior tax season and enhancements to products like Lightbox and Credit Karma Money.

As long as Credit Karma maintains its current trajectory, Intuit intends to maintain its operational independence. This autonomy is seen as crucial for continued success.