Our Greatest Opportunity is Open Data
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Kenneth Lin, CEO of Credit Karma, talked to us about how the rise of fintech has given consumers more access to their data than ever before. By walking through how Credit Karma increases transparency for end users, Lin shows that the financial industry is about to change in big ways. He also explains how banks and fintech companies can get on board.
How does Credit Karma make finances more transparent for end users?
When it comes to lending, there’s a huge obfuscation of rates, underwriting, and credit limits — all of which are dependent on your credit profile. As a result, it’s hard to determine how your loan offer compares to what other people with similar profiles are getting in the market.
At Credit Karma we recognized an opportunity for transparency. By providing a bunch of scores to our users, tracking the market rate for various loan products, and having a wide enough sample size, we have reverse engineered the system. So when we have a user on Credit Karma with a 720 credit score who’s being charged 16% for an auto loan, we can compare that to a thousand other people with very similar credit profiles and see whether that 16% is market, above market, or below market. That’s very useful information for our users.
It’s becoming easier than ever to manage large databases in the digital age. How do you think consumers have benefited from these changes?
Accessibility is huge. With the accessibility of the Internet, you can get your credit score and even understand the hundreds of fields in your score. The cost of access has gone down while the accuracy has gone up.
I remember back in the late 90s, people were still sending magnetic tape around to report to the bureaus. You can imagine that if you’re a bank and have to report on 100 million credit reports, sending around magnetic tape to three bureaus on a monthly basis would be quite onerous, fraught with error. That’s a very simple example how the internet has transformed the accessibility of data and made it more efficient. We’re really excited to see these leaps forward in innovation.
How do you think consumers can benefit even more from these changes in the next 5 years?
I think this is the very beginning. ATMs were innovative, mobile banking is pretty powerful, but if you think about the main pain points of consumers, they still haven’t been addressed. We certainly hope we or other companies will address them.
I’ll give you some of the consumer pain points we see. We talked a little about transparency already — the inability to compare loans, the inability to see what you’re paying versus what other people are paying. We’re already on a path to solving that. But there are other problems, such as the certainty of approval. If you look at 100 random credit applications you’ll find that 80 of them are still declined. That doesn’t make any sense in a world of big data and accessibility, and it has real ramifications for the bank in terms of costs. It also hurts brand perceptions since consumers most certainly don’t like that their credit score goes down when they apply for a loan and are declined. Finally, there are also privacy problems. Consumers send their information to a bank that declines them, and then the bank has that information and the consumer gets nothing out of it. This will all change over the next five years.
There will be a day where you will be able to put in your thumbprint and kick off a loan application as long as you have a profile on Credit Karma or some other platform. You don’t have to give your address when you call for an Uber, and you shouldn’t have to spend 15 minutes applying for a loan product on your phone. These innovations will be coming soon in the financial services space.
It sounds like you’re talking about banks and fintech companies working hand in hand?
Yes. Banks are our partners, consumers are our partners, and bureaus are our partners. It’s hard to do these things by yourself in a trillion-dollar industry. We think there are a lot of smart players and efficient processes in play already. If you think about something like underwriting, for instance, it’s actually quite advanced. The banks have figured out underwriting, how to mitigate risk, and they’ve been doing it for more than 100 years. It’s hard to think that a new startup will invent a better mousetrap overnight.
For us and a lot of other companies, playing in the space is not about making adversaries of the traditional companies. It’s about being smart, and understanding what you do well. We don’t need to reinvent the credit model; we just need to make it more efficient by using technology.
Even though consumers have access to a lot of data today, why do you think there’s still a lack of transparency?
A lot of the access to data has been asymmetric, where it’s all on the banking side and not on the consumer side. That’s why I like what we’re doing, and that’s why you see the Robin Hoods or Lending Clubs of the world — companies that give consumers their own information. You’re seeing a new generation of fintech companies that are sharing and creating the transparency and fixing the asymmetry that exists in the space.
So as we see the rise of fintech we’ll move toward less information asymmetry?
That certainly has to be the case. You see the support from the regulatory perspective, the idea that you should be able to port your own data and take it with you. Long term that definitely has to be the model. Consumers demand it.
When it comes to things like PFM, it has always been a question of whether the banks would allow it. But if banks don’t allow it there will be a huge backlash against them. It’s our data. How we spend our money is something we should own as consumers.
How does Credit Karma use data to help consumers?
We focus on three things.
First, we focus on transparency. Again, we believe that you should know what you’re paying on a loan, what you should be paying, and what the options are. It’s been very difficult historically to compare the hundreds of loans and hundreds of credit cards, mortgages, and so on. We think that is something we can lend to the space. And more importantly because we have access to credit profiles, our users can make an apples-to-apples comparisons. That’s one of our core value propositions to users.
Second is this idea of creating more and more certainty in the space. So when you apply for a loan product, we think there should be something close to a 100% approval rate. We think that consumers shouldn’t have to worry about whether they’ll be approved. We’re building a smart, scalable platform to do just that.
Third, we make make loans easy to understand and easy to apply for. There shouldn't be 20-page application forms. If you’re a Credit Karma user, filling one application form out should make all application forms in the future much more accessible.
And so what changes have you seen in the lives of your users?
One we’re most proud of is that, based on eight years of internal data, we see that credit scores continue to increase for those who use the Credit Karma platform. Maybe it’s positive selection, but we like to think that it’s partly positive selection and partly the education we’ve done.
The ability for you to see your report, and understand what the report and score mean, hopefully creates a feedback loop that reinforces positive behavior. For us, the fact that our over 45 million users consistently see their scores go up is a great reward for us and a North Star in terms of what we are doing right for consumers.
In your ideal scenario what would you do with data to improve the lives of users?
We found that most people, including myself, don't want to have to do too much work when it comes to managing their finances. Our hope is to make our product so simple and so proactive and that we remove all the friction — adding things like simple swipe, fingerprint ID, things that take 30 seconds to understand rather than 30 minutes. You know, saying to a consumer that you can save $5 a month it might sound trivial, but that adds up to $60 a year.
If you can take all the friction out of the experience, people will sign on. And that will make their lives better. We have a mission at Credit Karma to make every consumer their best financial self. So however you define what your best financial self is, we want to create those tools and give you the functionality to improve whatever situation you aspire to. Whether it’s lowering your cost of borrowing or making sure you don’t have any debt, we want to offer those tools.
Those are the things Credit Karma can do.
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