Why Square Should Have Just Bought Credit Karma to Begin With
(Editor’s Note: Sorry for the delay on this! Ian was sick yesterday and had to go to the doctor’s so we couldn’t publish Julie’s column)
Hi all, Julie here. Quick note: I’ll be leading a free 30 minute yoga class and meditation the morning of the election (10am ET) for subscribers and members of the Fintech Today Community Chat. If you are interested, shoot me an email at julie.verhage328@gmail.com or send me a DM on Twitter and I’ll give you the Zoom link.
Speaking of politics….It figures something DC related would be the topic for the newsletter this week. We have antitrust as the soup du jour two days before the election.
While it comes as little surprise that Intuit’s purchase of Credit Karma is coming under scrutiny, I find it a bit more shocking that Plaid and Visa are facing issues as well. I don’t recall anyone telling me to anticipate that deal possibly getting delayed or blocked.
Ian is doing some more research on what exactly is going on with the Plaid deal. We don’t know too much so far, only that the DOJ may soon sue to block the deal. From the WSJ story that has the most information I’ve seen so far, the DOJ has asked a federal judge in Massachusetts to order Bain and Co. to “comply with a civil subpoena and hand over work material related to the Plaid deal. The department alleged Bain ‘has tried to stymie’ the investigation and has claimed legal privilege over important documents, at Visa’s direction.”
I really look forward to hearing what Ian finds out, and I think we all still give this deal a chance at going through. And if not, Plaid can just go public via a SPAC since that’s what all the cool kids are doing these days and be worth even more than what Visa bought it for.
Credit Karma was always a toss up, and its executives and board members knew this and took a great deal of time thinking about it before announcing it back in late February. In the end, they thought it could go through, and I believe Credit Karma has a kill fee should it not.
My former colleague Eric Newcomer took great interest in this deal when it was announced, as did I, since we have both relied on Credit Karma to file our tax refunds for free the last few years. If this deal went through, we were worried that could potentially go away. (Although now we both run our own businesses and will probably have to hire accountants anyways, so the joke is on us).
At the time, Eric saw parallels between this deal and a 2011 attempt by H&R Block to acquire another DIY tax software company that regulators blocked, preventing the company (the second largest player in the digital DIY tax prep software game) from buying its third place rival (the creator of the software “Tax Act”).
Intuit is the biggest provider of DIY tax filing software in the U.S., splitting about 80% of the market with H&R Block, according to Bloomberg Intelligence analyst Julie Chariell. Credit Karma’s market share is only 3%, but it’s growing fast. Founded in 2007, the San Francisco-based company has attracted more than 100 million users, including about half of all U.S. millennials. That’s twice as many as Intuit. Credit Karma’s free tax-preparing business grew by about 50% last year, according to the company.
“There’s no question the acquisition could and should face scrutiny,” said Aaron Edlin, a law and economics professor at the University of California at Berkeley. “There’s a huge concern when the leading firm in an industry such as tax software buys another firm that is competitive, particularly that’s offering free tax software.”
Late last week, we found out not only are the two companies not as confident about this deal getting approved anymore (news of scrutiny first came out in August), but they are taking steps to get ahead of these concerns. Credit Karma might be selling its tax business to Square in order to get ahead of those concerns. With the tax products being the key cause for concern, selling that segment off to another company could solve the issue.
Two questions come to mind after that. First, why would Intuit want to buy Credit Karma without the tax software?
@ohadsamet Right. Without that, they basically just bought Mint again. How’d that work out? (Leaving aside that maybe they bought tax prep to cripple it…)
And second, WHY DIDN’T SQUARE JUST BUY CREDIT KARMA TO BEGIN WITH?! We talked about this fairly extensively in our Fintech Today Community chat and here are key reasons why this deal makes sense (while the Intuit deal was always a bit of a head scratcher).
- Square could embed this with its payroll product and make it easier for employees to submit taxes through a Square-powered portal
- Access to a bunch of historical consumer tax data
- Great complement to their SMB base by giving them an overall view of SMB financial health that feeds back into Square Capital.
- For Cash App, Square got a huge boost in adoption from tax refunds and stimulus checks over the past 12-months, so leaning into that makes a ton of sense for a product that has a ton of potential and is the current market leader in many ways
- According to the IRS, more than 70 million individuals prepared their own taxes and filed them online for the 2020 season, a 25% increase from 2019
- Cash App said it had more than 30 million users in June, a lot, but a far cry from the number of people filing taxes online that shows huge cross-selling potential
This makes so much more sense to me. With the deal in flux, I’m super anxious to see how this all shakes out and what the final price/terms are.