How Intuit can use Credit Karma to help fintechs take on banks

Intuit’s reportedly nearing a $7 billion deal to acquire Credit Karma, giving it an offering that could empower fintechs to more closely encroach on bank territory.

Much like Square, PayPal and Stripe have used their scale and existing transaction flows to support forays into consumer and merchant landing, Credit Karma would give Intuit access to a revenue stream based on credit.

Intuit did not return a request for comment by deadline, and no formal announcement had come as of Monday morning. But several publications, including The New York Times and The Wall Street Journal, reported a deal was close.

The combination of Intuit and Credit Karma would address the pressure to cover the lending and transaction execution side of money flows — many of the largest mergers in financial services over the past year have covered the same ground.

It’s the flow from lending that’s the key piece for any digital financial service company that positions itself as a bank alternative.

“Lending is the goal for many fintechs,” said Sarah Grotta, director of the debit and alternative products advisory service at Mercator, adding lending is viewed as an important part of the strategy toward achieving profitability.

Neobanks and challenger banks have been gathering consumers and deposits and growing their base through free or inexpensive services. “This isn’t sustainable,” Grotta said. “Long term, they will look to turn some of their clients into interest-paying borrowers.”

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Intuit’s core business is accounting and tax software for small businesses and consumers, but it also supports gig economy payrolls with same-day direct deposit — allowing small employers to manage the irregular payment cycles of contract work and freelance. Intuit additionally offers supply chain finance products, in part through an integration with Bill.com.

Intuit’s payroll service is designed to help small businesses manage cash positions around times of a high volume of outgoing payments. The merchant credit products that Square and PayPal offer are also designed to meet that need, using a merchant’s payment flows as a way to pay down loans to fund business expenses. Stripe also made moves in the past year to offer small-business credit. And Square has moved to offer consumer credit through installment payments at the point of sale, creating an alternative to services such as Klarna and Splitit.

All of these fintechs have a growing base of merchants and consumers lured through easy onboarding to accept digital or card payments. But there’s a limit to that model, since enabling digital transactions isn’t enough to produce profits for many firms. Venmo is popular, but not yet profitable for PayPal.

The strategy also works in reverse. Online lending platform Kabbage has added invoicing to create an added money stream.

As a potential subsidiary of Intuit, Credit Karma does not offer loans, but it provides access to credit scores, credit history, and credit monitoring. Credit Karma refers offers for credit cards and loans tied to consumer data, which is a source of revenue for Credit Karma, and potentially Intuit.

Intuit’s products include the personal financial management app Mint, tying together budgeting, consumer credit, merchant credit, tax and accounting in a single bundle.

Adjacent industries have entered the lending market as a way to finance their product sales. These include cellphone providers, utilities, motorcycle dealers and utility companies; and more recently payments and major tech firms have entered small-balance lending to leverage their brand, payments customer relationship, and customer transaction data, said Craig Focardi, an analyst at Celent.

“Co-branded credit cards are also rising in popularity," Focardi said. "If these new market entrants can manage the credit risk and fraud risk on these loans, it poses an existential threat to the core transactional payment and credit products that underpin traditional banking by banks and credit unions.”

“To make the right offer at the right time, however, lenders need consumer data,” said Leslie Parrish, a senior analyst at Aite Group. “Credit Karma’s rich data repository from a large number of users can be used by Intuit to inform the types of products it offers as well as provide important insights to third parties.”

The trend also places pressure on merchant acquirers, which have gotten larger in the past year mostly through mergers and acquisitions between bank technology vendors and processors — linking credit and payment processing in a single source.

“We are continuing to see a consolidation in the financial markets of legacy large enterprises acquiring newer, nimble businesses that have done a phenomenal job of making inroads into their markets by disrupting their models through price and access,” said Lil Roberts, CEO and founder of Xendoo, a small-business bookkeeping company. “The legacy enterprises are benefiting from acquiring these companies who have built technology platforms that are far more adaptable to the lifestyles of small-business owners and the younger population.”