Credit Karma is a site that I often suggest to consumers to obtain free credit report monitoring and credit report reviews, even if only for two credit bureaus. As long as users are aware that the motivation for Credit Karma to provide those free services is to market additional financial products, they can get the benefit of free monitoring. – Steve
The Department of Justice is scrutinizing Silicon Valley giant Intuit’s $7 billion takeover attempt of Credit Karma, an upstart personal finance firm that became a competitor when it launched a free tax prep offering that challenges Intuit’s TurboTax product.
The probe comes after ProPublica first reported in February that antitrust experts viewed the deal as concerning because it could allow a dominant firm to eliminate a competitor with an innovative business model. Intuit already dominates online tax preparation, with a 67% market share last year. The article sparked letters from Sen. Ron Wyden, D-Ore., and Rep. David Cicilline, D-R.I., urging the DOJ to investigate further. Cicilline is chair of the House Judiciary Committee’s antitrust subcommittee.
Government lawyers worry that allowing Intuit to snuff out a promising startup could harm American consumers seeking free tax prep options, according to a June memo from the company side that describes Intuit’s legal strategy, which was obtained by ProPublica.
The government is particularly interested in “the influence that Intuit’s purchase of Credit Karma will have on consumer tax preparation platforms and [the] software market,” according to the memo.
At this stage of the government’s review, the DOJ has requested more information from the companies, according to Intuit securities filings. After Intuit and Credit Karma respond, the government will decide whether to seek to block the deal.
Chris Sagers, an antitrust expert at the Cleveland-Marshall College of Law, said it appeared that Intuit was seeking the deal to eliminate a competitor. It reminded him of the “copy-acquire-kill” strategy that lawmakers criticized Facebook for at landmark antitrust hearings on Capitol Hill last week. “It won’t be lost on the DOJ staff lawyers that it is likely Intuit’s motive,” Sagers said.
An Intuit spokesman didn’t answer questions about the memo but said in a statement that: “By joining forces with Credit Karma, we plan to create a personalized financial assistant that will help consumers find the right financial products that put more money in their pockets. This is a benefit neither company could easily achieve on their own.”
He added: “This combination is not about tax. We are confident in the clear consumer and competitive benefits of our combination and look forward to continued engagement with regulators.”
The DOJ declined to comment. Credit Karma did not respond to a request for comment.
As part of its probe of the deal, the government is also asking Intuit for more information about its participation in the Free File program, under which TurboTax and other tax prep companies are supposed to offer free tax filing options to most Americans. As ProPublica has reported, millions of Americans eligible for the free services end up paying for tax prep anyway, often because of industry marketing efforts to steer them toward paid options.
In 2017, Credit Karma became the only major new entrant to the online tax prep business in over a decade. Its model threatened to upend the industry. The company offers a suite of free financial services (like credit monitoring) to its more than 100 million members and then makes money by using their data to pitch them credit cards and other financial products. Credit Karma’s tax prep product was just another way to draw in more user data.
Credit Karma boasted that it “never” charged for tax prep, even for services that “could cost over $200 when filing with TurboTax.” It was a departure from the model that had shaped the tax prep industry since the mid-2000s: advertise “free” tax prep in order to draw in new customers, and then use a variety of tactics to make as many users as possible pay. TurboTax is the undisputed master of the craft.
Credit Karma is a distant threat to TurboTax’s dominance — the company filed 40 million returns last year — but the relative newcomer ranks as the fifth-largest provider of online tax filing and has been growing rapidly.
Intuit already is considering a strategy to placate the DOJ to win approval for the deal: offering to spin off Credit Karma’s tax preparation product and sell it to another company, according to the memo. Such remedies are common. The logic is that if two companies seeking to merge have some overlapping business lines, those are sold off to a third party in order to preserve competition that the merger would otherwise extinguish.
But selling off the business, known as a divestiture, might not be enough, the memo acknowledges. That’s because Credit Karma’s tax prep product might not be able to survive as a potent competitor once it is spun off.
“Credit Karma offers its tax preparation business for free, primarily to generate business to its consumer finance platform,” the memo notes. “In order for DOJ to accept the divestiture remedy, the agency will need to be satisfied that Credit Karma’s tax preparation business will be viable when separated from Credit Karma’s robust consumer finance platform.”
Some antitrust experts view divestitures with skepticism because of instances in which they have fallen apart. In one notorious case, the government allowed supermarket chains Safeway and Albertsons to merge on the condition that they sell off stores in 130 local markets around the country. Just months after the deal went through, the small firm that bought the divested stores went bankrupt. Albertsons bought some of them back during the bankruptcy process.
“I’d be hesitant to rely on a divestiture in any deal where there’s serious anti-competitive risk,” Sagers said.
Merger enforcement has declined under the Trump administration in general. And the Antitrust Division, led by Assistant Attorney General Makan Delrahim, has accepted some controversial mergers on the basis of divestitures, including the Sprint-T-Mobile deal.
The department’s guidelines state that, to pass muster, a divestiture must include all business assets that would allow the third-party purchaser “to be an effective, long-term competitor.”
The timeline for the DOJ’s investigation is not clear. In Intuit’s most recent public statements, the company said it expects the deal to close in the second half of 2020.
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