FTT+ May 3: Credit Karma, Credit Card Marketing, and Becoming the Digital Bank Branch
Hi all, Julie here.
Quick update on the PPP program since we’ve been talking about that a lot. The second round of it is underway and the fintechs are finally able to play a bigger role in it.
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Not only were lenders like Square and PayPal approved prior to the round starting this time (remember, in the first round of PPP, non-bank lenders were getting approved as the funds were nearly depleted), but the Federal Reserve expanded access to the liquidity facility late last week to include many fintech lenders.
“The Federal Reserve on Thursday expanded access to its Paycheck Protection Program Liquidity Facility (PPPLF) to additional lenders, and expanded the collateral that can be pledged….As a result of the changes, all PPP lenders approved by the SBA, including non-depository institution lenders, are now eligible to participate in the PPPLF. SBA-qualified PPP lenders include banks, credit unions, Community Development Financial Institutions, members of the Farm Credit System, small business lending companies licensed by the SBA, and some financial technology firms. When the PPPLF was announced, the Federal Reserve said the facility would immediately lend to depository institutions and that non-depository institutions would be added as soon as possible.”
On Sunday, the SBA also released some data about how round two was going, such as the average size of the loan and the size of the institution providing the loan. The report can be found here.
Now that we have that important update out of the way, let’s talk a bit about credit cards and credit card marketing. It used to be that the only way you’d hear about new credit card offers was something in the mail or someone calling you on the phone. Today, there are several other options. Credit Karma, currently in the process of being acquired by Intuit, is one of them. Basically, if a credit card company wants to market a new or existing card on the website, the card company will only pay Credit Karma if a user both clicks on the offer and is approved. It’s much more efficient than sending out mailers based on data sets that you buy and hoping that 5-10% of the users actually want and are approved for the offer.
Discover, Amex, Visa and several other card companies and banks have reported earnings over the past few weeks. Given the massive hit to the economy and financial health that many people are currently experiencing, credit card companies aren’t super interested in signing up a bunch of new members right now, especially riskier ones. That has a negative effect on Credit Karma’s revenue. Here are some quotes from earnings calls to give you an idea:
Amex’s CEO: “What we are stopping for the time being includes items that are less critical in today’s environment, including traditional advertising, marketing, sponsorships and customer acquisition activities.”
Amex’s CFO: “In the balance of the year we expect to dramatically reduce our proactive marketing efforts and reinvest in the additional product benefits that Steve spoke about in his opening remarks, while reducing many other costs. As a result, I would expect our operating expenses to be down about $1 billion year-over-year cumulatively over the next three quarters. On the marketing line, we are funding the additional product benefit adjustments that Steve discussed with our other marketing cuts. The net of the two should result in a modest reduction in marketing investment levels relative to last year.”
Visa’s CEO: “We continue to manage our business for the long-term although we are pragmatic in understanding short-term circumstances. Through that end we are certainly being quite careful about our spending on our expense base, and we are pulling back on discretionary spending especially related to personnel, travel, professional services, and marketing.”
You get the idea. Of course, credit cards aren’t the only product that Credit Karma offers on its platform, but it is the one they are most known for and likely drives a big chunk of revenue. The upside for them, which a VC friend of mine pointed out when I was asking him for some thoughts, is that it wouldn’t be shocking to see Credit Karma gain market share since they are seen as a smarter way to find the most coveted customers. In the meantime, however, I wouldn’t be surprised to see the fees they earn from each approved credit card offer going down as the above companies are cutting back amidst all of the uncertainty.
Other areas, such as mortgage loans in particular, could benefit quite dramatically as consumers look to refinance at lower interest rates. Lenders such as Rocket Mortgage and Better.com, which Ian and I talked to on Thursday during our virtual event, are on its platform, and people at the company tell me that while credit card marketing spend is obviously down, the mortgage refinance business is doing well. The tweet below was a quote from Better.com’s head of product Elana Knoller, who shared a lot of insights around the mortgage refi space during her 30 minute chat with us.
See tweet here
Even Credit Karma itself I would expect to do its own marketing very differently in the next few months. Like many fintechs, expanding into new products has sometimes been slow to see dramatic consumer demand. This is a really good time for the company to try to change that and make more consumers aware of its other offerings. Most of us still think of them as a website that you go to to check your credit score or look at new credit card offers. Tax is still a relatively small offering, and they’ve done a decent amount of marketing around that. I’d certainly expect them to focus on things like tax, mortgage refinancing and finding new ways to help customers manage their finances in these tough times, rather than recommending new credit cards. Tax isn’t a revenue engine for the startup, but some of its lending products or potential additional offerings certainly could be. And while it was harder to market them before, perhaps it will be easier now as users are more likely to embrace digital offerings.
With bank branches seeing near-0 traffic due to shelter-in-place orders, I wonder if Credit Karma can transform itself into becoming the modern day bank branch—it knows your financial details intimately, and can upsell you on a variety of financial products, just like tellers do at branches (potentially even better than them). A big component that they have going for them is trust. It’s something that the entire executive team has preached since day one, knowing that if they ever lost consumer trust, it was game over. That was their edge over rivals, tech giants and traditional banks.
So, if they can succeed in growing their share not only in the credit card space, but all of those other areas that we said were at critical moments right now, they have a very bright future. If they fail, there’s going to be some pain—especially in the near term.