The Federal Trade Commission is sending more than $2.5 million to consumers who were manipulated by false credit card offers on Credit Karma’s platform.
The payments are the fruition of an action the FTC brought against the fintech two years ago, after it discovered “dark digital patterns.” The agency alleged that Credit Karma presented users with card offers that they were “pre-approved” for, or had “90% odds” of acquiring, when in reality they did not qualify.
“The credit card industry is tightly regulated, and consumers are generally protected against unfair, deceptive marketing practices,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “This reiterates to industry participants that deceptive advertising campaigns will not be tolerated in the credit space.”
Accumulating Data
Credit Karma might be best known for its credit score and credit reporting tools, but to access those services consumers must provide their personal data. The FTC reported that Credit Karma accumulated more than 2,500 data points on its users, including credit and income information. The company then leveraged that data to send personalized ads and credit card offers.
Once a customer clicked on a “pre-approved” credit offer, the platform initiated a hard pull of the user’s credit report, which had the potential to damage the customer’s credit score if the card was denied.
According to the FTC, Credit Karma was aware that its pre-approved card offers created false hope for consumers. In training materials for its customer service personnel, Credit Karma expressly mentioned that denial of a pre-approved offer was a common customer complaint.
Almost a third of Credit Karma’s “pre-approved” customers were denied after making applications. Though the fintech mentioned that denial was possible, that information was often buried in legal disclaimers.
Coming to a Head
Regulators have become increasingly concerned about the role fintechs play in the banking-as-a-service model. Though most financial technology companies are heavily involved with consumer financial data, they aren’t subject to the same regulations that financial institutions must follow.
Those issues came to a head after the Synapse failure, by which the fintech’s lax accounting practices cost its customers millions. There was widespread speculation that the severity of that collapse could lead to a reset of the BaaS model, and the FDIC has recently rolled out new rules designed to hold fintechs accountable to the same rules as banks.
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