Credit Karma will get FTC fined over credit card promise to approve

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Credit card affiliate sites are an interesting niche for US credit cards. Major issuers often use companies in this space to increase their new bookings. These third-party companies fill a critical niche for major credit card issuers. Issuers typically rely on their techniques to gain accounts, such as direct mail, digital and social media, and branch referrals. Although there is no hard data on the importance of credit card affiliate sites, Mercator’s insight into the market suggests that credit card affiliate sites account for between 20% and 25% of new account volume.

In a market with over 500 million active credit cards and typical new account volume operating at a rate of 150 million accounts, credit card affiliate sites account for 30-35 million new accounts per year.

What is a Credit Card Affiliate Site?

A credit card affiliate site is a third party source of accounts. Typically, the company has a series of financial education templates to educate consumers; then the company helps direct the consumer to a specific credit card. The affiliate site makes a premium for reserved accounts or, in some cases, just an application. This industry affiliate site suggests that the market will reach $107 billion in fee revenue by 2026 and links to American Express, Capital One and Chase programs. There are even affiliate sites for affiliate sites, such as Credit Karma and Credit Sesame, as the site suggests.

The business is simple, with low barriers to entry. You sponsor a credit card for issuer “X” and incur a fee, often between $25 and $300.

It might seem like small potatoes, but it’s big business for bigger companies, like NerdWallet, which went public in 2021. We’ve covered from Intuit $7 billion acquisition of Credit Karma in a rags-to-riches story about the person who built the company.

Intuit is an exciting company, and Credit Karma is not their first venture. Everyone knows QuickBooks and many have used MailChimp. According to current estimates, according to the company’s latest public filings, Intuit’s Credit Karma will generate $1.8 billion in revenue. That’s a lot of affiliate fees.

So why FTC Care?

The FTC website says they have taken “steps to prevent Credit Karma from misleading consumers with allegedly false ‘pre-approved’ offers.” The full text can be found here, although some data is redacted to conceal confidential information. The essence of the action can be found on page 3, points 12 and 13.

12. Despite claims of pre-approval in Defendant’s emails and other marketing materials, the financial product companies have not yet approved the consumers to whom Credit Karma sent these offers. As one such company explained: “The Company does not approve, pre-qualify or pre-screen consumers to whom to offer the [Company’s credit card] through Credit Karma.

13. For many of these offers, nearly one-third of consumers who received and requested “pre-approved” offers were later declined based on review of financial product companies’ underwriting, that’s that is, the actual process by which they made approval decisions. Additionally, in some cases, about a quarter of consumers have been denied approval due to disqualifying financial and credit characteristics, such as poor credit history, account charge-offs, and bankruptcies.

Luckily for Credit Karma, they are not a financial institution, otherwise they would likely face the CFPB. There we would find a list of standards related to banks such as Reg B, Reg E and Reg Z.

The truth in lending matters.

Preview by Brian RileyDirector, Credit Advisory Services at Groupe Conseil Mercator.

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