BIG BROTHER, WITH BEN­E­FITS

A third of Amer­i­can adults have given credit Karma ac­cess to their credit bu­reau files. Why? if pri­vacy is dead any­way, you might as well get free­bies, in­clud­ing credit mon­i­tor­ing, for shar­ing your secrets.

Forbes - - CONTENTS - By lau­ren Gensler and sa­man­tha sharf

A third of Amer­i­can adults have given Credit Karma ac­cess to their credit bu­reau files. If pri­vacy is dead any­way, you might as well get free­bies for shar­ing your secrets.

Af­ter the con­sumer credit bu­reau Equifax re­vealed last Septem­ber that per­sonal data from 145 mil­lion Amer­i­cans had been ex­posed in a breach of its com­put­ers, a well-worn cor­po­rate scan­dal play­book kicked in. Ner­vous in­vestors beat its stock down by a third. The CEO and other top ex­ecs felt a sud­den urge to “re­tire.” Con­gress held hear­ings. Law­suits were filed. One re­sponse, how­ever, was more sur­pris­ing: Sign-ups at Credit Karma—which re­quires con­sumers to trust yet an­other fi­nan­cial com­pany with their credit records—spiked 50%. Ap­par­ently some hack-weary folks con­cluded that the only way to pro­tect them­selves from a bad guy with their fi­nan­cial data was to arm a good guy with it too. And Credit Karma has built a rep­u­ta­tion, par­tic­u­larly among Mil­len­ni­als, as a good guy.

More than 80 mil­lion Amer­i­cans (one in three adults) are now Credit Karma “mem­bers” and el­i­gi­ble to use its grow­ing menu of free ser­vices, in­clud­ing any­time ac­cess to their credit files and scores; ad­vice on rais­ing those scores; alerts of credit ap­pli­ca­tions and new ac­counts opened in their names; help fix­ing er­rors in re­ports; and even tax prepa­ra­tion. When they log in, they also get per­son­al­ized rec­om­men­da­tions for new credit cards and loans they’re likely to both find at­trac­tive and be ap­proved for—a tar­get­ing process that em­ploys Credit Karma’s ex­ten­sive data on users so ef­fec­tively that last year it booked $680 mil­lion in re­fer­ral fees from lenders, up from $500 mil­lion in 2016. In March, the still-pri­vate com­pany was val­ued at $4 bil­lion.

But Ken­neth Lin, Credit Karma’s 42-yearold CEO and largest share­holder (with a stake worth more than $500 mil­lion), doesn’t want any­one to think his San Fran­cisco-based com­pany has led a charmed life. “The first five years were stay in busi­ness, stay in busi­ness, stay in busi­ness,” he says. “The hockey stick hap­pened in the last five.”

In­deed, Lin’s story is clas­sic: the per­se­ver­ing im­mi­grant who still hasn’t told his par­ents just how much he’s worth. (“I want to make sure it’s re­ally real,’’ he ex­plains.) At the age of 4, Lin moved with his fam­ily from China to Las Ve­gas, where his mother toiled six days a week as a casino dealer and his fa­ther worked as a cook. Lin parked cars at a ritzy night­club while dou­ble-ma­jor­ing in eco-

nomics and math at Bos­ton Univer­sity.

Af­ter grad­u­a­tion in 1998, he went to work for an un­sexy fed­eral credit union; jumped to an in­ter­net startup, which crashed; worked for UPromise; and in 2004 took a data an­a­lyt­ics job at the on­line lend­ing pioneer E-Loan in San Fran­cisco. It was a fate­ful move. Back in 2000, Lin learned, E-Loan had tried to give would-be bor­row­ers a look at their FICO credit scores—the three-digit num­bers sold to lenders that are de­rived by ap­ply­ing FICO’s pro­pri­etary al­go­rithms to the info in a con­sumer’s credit bu­reau record, in­clud­ing credit us­age, on­time pay­ments, de­faults and bank­rupt­cies. FICO and the credit bureaus didn’t want con­sumers to see their scores, and E-Loan was forced to back off.

In 2006, Lin left E-Loan and started build­ing the busi­ness that would fi­nally set the credit score free. Via Gchat, he in­vited Ni­c­hole Mus­tard, a Los An­ge­les con­sul­tant he’d worked with at E-Loan, to be a co­founder. He signed up Ryan Gra­ciano, an en­gi­neer work­ing for IBM in Knoxville, as the third co­founder, with­out meet­ing him in per­son.

For two years the trio worked from three dif­fer­ent ci­ties. They lacked a Sil­i­con Val­ley lo­cus and cred but prided them­selves on be­ing able to re­late to typ­i­cal Amer­i­cans’ fi­nan­cial con­cerns. Mus­tard had landed her­self $36,000 in debt af­ter mov­ing to Los An­ge­les from the tiny Ohio town where she grew up. (“My wife likes to call it corn, corn and soy­beans,’’ she says.) Gra­ciano’s fam­ily runs as­sisted-liv­ing fa­cil­i­ties in Pittsburgh. The team stuck to­gether. To­day Mus­tard, 45, is Credit Karma’s chief rev­enue of­fi­cer and Gra­ciano, 36, su­per­vises 400 engi­neers as chief tech­nol­ogy of­fi­cer.

At first, Gra­ciano says, the trio got “no love and no in­ter­est” from the credit bureaus. But they had a wedge that E-Loan didn’t have back in 2000: The credit bureaus had cre­ated their own scores to com­pete with FICO’s and had started selling them, along with credit mon­i­tor­ing, to con­sumers. Tran­sUnion—a lag­gard in that busi­ness—fi­nally broke ranks and agreed to sell its scores to Credit Karma, which be­gan giv­ing them to in­di­vid­u­als free in a Fe­bru­ary 2008 beta launch. The founders had been work­ing on a shoe­string bud­get and planned to cover Tran­sUnion’s charges by selling ban­ner ads on the Credit Karma site to lenders.

Then came the Septem­ber 2008 fi­nan­cial cri­sis. Within two weeks, all but one of the site’s two dozen ad­ver­tis­ers had fled. With no rev­enue com­ing in, Credit Karma, by then up to seven em­ploy­ees, al­most folded. It was res­cued by $500,000 of an­gel cap­i­tal in Oc­to­ber. In the fall of 2009, a se­ries A fundrais­ing led by QED In­vestors brought in an­other $2.5 mil­lion. Lin was de­ter­mined to make that cash last. For four years, the com­pany op­er­ated from a fourth-floor walk-up above an Ir­ish pub in San Fran­cisco’s fi­nan­cial district.

Iron­i­cally, the same Great Re­ces­sion that al­most sank Credit Karma was now fu­el­ing its growth, as con­sumers sought to re­build dam­aged credit records. More­over, in the cri­sis-in­duced reg­u­la­tory fer­vor of 2009, Con­gress made it harder for those un­der 21 to get credit cards. That meant Mil­len­ni­als were com­ing of age with thin credit histo-

ries and more chal­lenges (in­clud­ing stu­dent debt) if they wanted to get a credit card, a car loan or a mort­gage. Credit Karma was there to help with a suite of tools, in­clud­ing sim­u­la­tors that let a mem­ber see what the es­ti­mated im­pact of some ac­tion might be on his or her score.

By 2013, Credit Karma had 8 mil­lion mem­bers, and credit card com­pa­nies were again ag­gres­sively hunt­ing for cus­tomers. That April, Credit Karma raised $30 mil­lion in a se­ries B round led by Rib­bit Cap­i­tal and Susque­hanna Growth Eq­uity. By mid2015 it had raised a to­tal of $368.5 mil­lion from an A-list of in­vestors. (This past March, the pri­vate eq­uity firm Sil­ver Lake put up $500 mil­lion to buy out some early in­vestors and em­ploy­ees; the co­founders didn’t sell any of their stock.)

Faced with Credit Karma’s dis­rup­tive suc­cess, in 2013 FICO fi­nally be­gan en­cour­ag­ing banks to share credit scores with their cus­tomers for free. Micky Malka, man­ag­ing part­ner at Rib­bit Cap­i­tal, isn’t both­ered by that com­pe­ti­tion. “The banks do­ing this is check­ing a box. That is not their busi­ness,” he says. “What we’re build­ing is much larger than that. Credit scores are just a means to an end,’’ Lin adds. The end: to get good deals for con­sumers and to make money do­ing it.

Lenders pay Credit Karma an es­ti­mated $100 to $300 each time a mem­ber clicks on a rec­om­men­da­tion and is ap­proved. Thanks to all the data it has on mem­bers (in­clud­ing, for some, the in­come they’ve re­ported to the IRS), more than 80% of credit card ap­pli­ca­tions sug­gested by Credit Karma are ap­proved, dou­ble the in­dus­try rate.

With con­cern about hacks and ID theft only grow­ing, Credit Karma is ex­pand­ing its of­fer­ings in that area, too. Mem­bers will soon be able to sign up for free alerts if their iden­ti­ties have ap­peared for sale on the dark web. (You get dark web protection and more from LifeLock, but it costs at least $9.99 a month.) If you’re ready to give Credit Karma ac­cess to your bank and credit card ac­counts, you can get alerts of un­usual ac­tiv­ity in those, too.

All this ag­gre­ga­tion of fi­nan­cial data raises the stakes should Credit Karma be hacked. “The risk peo­ple should con­sider is the pos­si­bil­ity of a mishap and in­for­ma­tion be­ing ob­tained,’’ says Liad Wag­man, a pro­fes­sor at Illinois In­sti­tute of Tech­nol­ogy who stud­ies the eco­nom­ics of pri­vacy. “At least with Credit Karma you get a very tan­gi­ble ben­e­fit,’’ he adds. Lin says data se­cu­rity is Credit Karma’s num­ber one pri­or­ity. While there’s no known case of its cus­tomer in­for­ma­tion get­ting into the wrong hands, Credit Karma’s record isn’t un­blem­ished: In 2014, to set­tle a Fed­eral Trade Com­mis­sion com­plaint that its mo­bile app left con­sumer in­for­ma­tion vul­ner­a­ble to in­ter­cep­tion on public Wi-Fi, it agreed to hire in­de­pen­dent se­cu­rity ex­perts to re­view its pro­ce­dures for 20 years.

Wor­ried? Even if you delete your Credit Karma ac­count, your data will be stored on its servers for an­other two years be­fore it’s anonymized.

Be­yond the pos­si­bil­ity of a catas­trophic hack, Credit Karma’s big­gest busi­ness risk may be plain old com­pe­ti­tion. Just as free credit scores have be­come com­mon, so will the model of free ser­vices cou­pled with in­di­vid­u­al­ized fi­nan­cial pitches. In­tuit, which owns Tur­boTax and Mint, with a com­bined 48 mil­lion users, re­cently in­tro­duced a plat­form called Turbo; the new ser­vice will pro­vide free credit scores as well as per­son­al­ized rec­om­men­da­tions by lever­ag­ing the ex­ten­sive fi­nan­cial in­for­ma­tion it has on users. Says Lin: “It’s al­ways great val­i­da­tion that you’re on to some­thing when you can get a $40 bil­lion com­pany to kind of move their model to look a lot more like our model.”

Co­founders (from left) Ken­neth Lin, Ni­c­hole Mus­tard and Ryan Gra­ciano in Credit Karma’s li­brary, an up­grade from their digs above a pub.

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