FTC Settlement With Credit Karma Underscores Agency Attention to A/B Testing

In September 2022, the Federal Trade Commission announced that it had taken action against credit services company Credit Karma for allegedly deploying dark patterns to misrepresent that consumers were “pre-approved” for credit card offers. 

The FTC alleges that the company used claims that consumers were “pre-approved” and had “90% odds” to entice them to apply for offers that, in many instances, they ultimately did not qualify for. 

The Consent Order requires the company to pay $3 million that will be sent to consumers who wasted time applying for these credit cards and to stop making these types of deceptive claims.

“Credit Karma’s false claims of ‘pre-approval’ cost consumers time and subjected them to unnecessary credit checks,” said FTC lawyer Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “The FTC will continue its crackdown on digital dark patterns that harm consumers and pollute online commerce.”

Credit Karma provides tools that allow consumers to monitor their credit scores and credit reports.  To use Credit Karma’s services, according to the FTC, consumers must provide the company with a variety of personal information, allowing Credit Karma to amass over 2,500 data points on each consumer, including credit and income information. Credit Karma uses that information to send targeted advertisements and recommendations for financial products, like credit cards.

The FTC’s proposed complaint alleges that, from February 2018 to April 2021, Credit Karma falsely told many consumers that they had been “pre-approved” for credit offers, leading consumers to apply, incur a hard inquiry on their credit reports, and, if they are denied, potentially damage their credit scores unnecessarily. 

It’s what else the FTC alleges in the compliant that should be of interest to digital marketers.

According to the FTC’s complaint, Credit Karma knew that its purported “pre-approvals” conveyed false “certainty” to consumers, based on the results of experiments, also known as A/B testing, showing that consumers were more likely to click on offers saying “preapproved” than those saying they had “excellent” odds of being approved.

When user interfaces are designed, including with the aid of A/B testing, to trick consumers into taking actions in a company’s interest and that lead to consumer harm, such design tricks have been described as “dark patterns” by the FTC.

Dark patterns were the focus of a public workshop held by the FTC last year.

According to the FTC’s complaint, Credit Karma violated Section 5 of the Federal Trade Commission Act by falsely representing that consumers were pre-approved for credit offers or had 90% odds of approval.  The complaint alleges that Credit Karma’s conduct harmed consumers by: 

• Deceiving them about whether they were approved: Despite Credit Karma’s claims that consumers were “pre-approved,” for many offers, almost a third of consumers who applied were in fact denied. Credit Karma often only revealed the possibility of denial in buried disclaimers or false claims that consumers had “90% odds” of approval. Credit Karma was aware that its consumers were misled: for example, its own customer service training materials cited “I was declined for a pre-approved credit card offer …. How is that possible?!?!?!” as a common issue representatives would encounter.
• Costing consumers time and harming their credit score: The complaint alleges that, in response to Credit Karma’s false claims, numerous consumers wasted significant time applying for credit card offers.  Additionally, when consumers applied for these offers, third party financial companies made a “hard inquiry” on their credit reports, which in many instances lowered consumers’ credit scores and harmed their ability to secure other financial products in the future.

Under the FTC Act, the FTC has the authority to take action against companies for engaging in unfair and deceptive acts or practices.  The FTC’s proposed order against Credit Karma requires the company to:

• Stop deceiving consumers: The FTC’s order prohibits Credit Karma from deceiving consumers about whether they are approved or pre-approved for a credit offer, as well as about the odds or likelihood that a consumer will be approved for a credit offer.
• Pay $3 million in consumer redress: The order requires Credit Karma to pay $3 million to the FTC, which will be sent to consumers who were harmed by the company’s actions.
• Preserve records: To help prevent further use of deceptive dark patterns, the order requires Credit Karma to preserve records of any market, behavioral, or psychological research, or user, customer, or usability testing, including any A/B or multivariate testing, copy testing, surveys, focus groups, interviews, clickstream analysis, eye or mouse tracking studies, heat maps, or session replays or recordings.

Consult with an experienced FTC defense lawyer about how A/B testing could potentially expose digital advertisers to liability and related marketing-related liability minimizing strategies.

Richard B. Newman is an internet lawyer at Hinch Newman LLP.  

Informational purposes only. Not legal advice. May be considered attorney advertising.