Intuit’s acquisition of Credit Karma could spark antitrust concerns

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TurboTax has long been the leader in do-it-yourself tax-filing software. But it has faced increasing competition from a nimble startup, Credit Karma Inc., which has become one of the preferred financial apps for young people by giving out free credit scores and helping them find auto loans and credit cards. And since 2017, it has offered a completely free tax-filing service.

Intuit Inc., the parent company of TurboTax, took note and agreed to spend $7.1 billion to buy Credit Karma last week. Several legal experts say the deal raises serious antitrust concerns, and see parallels to a 2011 attempt by H&R Block Inc. to acquire another DIY tax software company that regulators blocked.

The prospect for tech deals may be even weaker now, amid calls for greater federal scrutiny. Increasingly, legal experts are flagging concerns about the harms posed by large companies buying smaller ones before they develop into serious threats.

Sasan Goodarzi, left, and Kenneth Lin, co-founder and CEO of Credit Karma, during a Bloomberg Television interview in San Francisco
Sasan Goodarzi, left, and Kenneth Lin, co-founder and CEO of Credit Karma, during a Bloomberg Television interview in San Francisco

Intuit is the biggest provider of DIY tax filing software in the U.S., splitting about 80 percent of the market with H&R Block, according to Bloomberg Intelligence analyst Julie Chariell. Credit Karma’s market share is only 3 percent, 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 percent 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.”

Eleanor Fox, a law professor at New York University, said regulators wouldn’t just be looking at the companies’ size, but could also be concerned about whether the deal is “cornering a market.”

Intuit has told investors the Credit Karma deal should be finalized by the second half of the year, a sign that it’s optimistic it can pass an antitrust review. The company argues that taxes are only one part of Credit Karma’s offerings, which mostly revolve around selling financial products based on the data it collects from free services, including tax filings. Intuit says the deal isn’t about stifling competition and that the two companies would operate separately. When asked on a conference call about market consolidation, Chief Executive Officer Sasan Goodarzi said, “This is all about playing offense and delivering for customers.”

Representatives for the Justice Department, Intuit and Credit Karma declined to comment.

In Intuit’s latest annual financial report, it lists Credit Karma as a primary U.S. competitor. Some customers certainly see it that way. One person complained on Twitter about TurboTax’s charges. “My kids make like 2k last year but because she made 401k contributions she has to pay $80 to get a $200 refund. No thanks, @creditkarma to the rescue.”

Matt Stoller, the director of research at the American Economic Liberties Project, called it “embarrassing” that Intuit even proposed the merger. “These kinds of mergers are obviously illegal and enforcers just don't uphold the law,” he said.

In 2011, a court sided with the Justice Department and prevented H&R Block, the second largest player in digital do-it-yourself tax preparation software, from buying its third-place rival, the creator of the software TaxAct. In that case, Judge Beryl Howell ruled that the proposed merger would give H&R Block and Intuit a combined 90 percent control over the tax market.

Barak Orbach, a law professor at the University of Arizona, said he believes the Credit Karma acquisition will be approved since it could help create competition with the tech giants, who are moving further into financial products. And, despite the tough stance taken by regulators against big tech companies, T-Mobile US Inc. recently won approval for its $26.5 billion takeover of Sprint Corp. after a state-led lawsuit that sought to block the deal.

Even before the Credit Karma acquisition, the government was scrutinizing Intuit’s actions. The company is facing lawsuits and regulatory inquiries into its approach to the Internal Revenue Service’s Free File tax program. That federal program — not to be confused with software that’s advertised as free — is meant to provide low-income people truly free tax software. ProPublica has reported that Intuit hid its federal free file program in search results and redirected people to its commercial service. Intuit subsequently agreed to stop the practice.

The antitrust review of Credit Karma will likely hinge on a few points, said James Tierney, who supervised the case against H&R Block at the Justice Department: "Is this company restraining Intuit's pricing? If you got rid of Credit Karma, could Intuit raise prices? That's one question and the other question might be, is Credit Karma driving innovation in the market?"

Tierney, now an attorney at Orrick, said the Justice Department was unlikely to take Intuit by its word that Credit Karma would operate independently. "The fact of the matter is that Intuit will control Credit Karma and they have the ability to do whatever they want with it," he said.

— With assistance from Julie Verhage

Bloomberg News