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Earned Wage Access and Fintech Policy Primer with Ben LaRocco of EarnIn

Earned Wage Access and Fintech Policy Primer with Ben LaRocco of EarnIn

Expand for full transcript

This episode of Fintech Layer Cake podcast features earned wage access and a fintech policy primer with Ben LaRocco of EarnIn. Listen to the show on iTunes, Spotify, or your favorite podcast app and find the transcript, below.

Intro

Welcome back to Fintech Layer Cake, where we uncover secret recipes and practical insights from fintech leaders and experts. I'm your host, Reggie Young, Senior Product Lawyer at Lithic. On today's episode, I chat with Ben LaRocco, the Senior Director of Government Relations at the earned wage access fintech company, Earnin. Ben gives a great primer on policy, what is a policy function, how does it work, those sorts of questions and much, much more. Then he and I dig into the current state of earned wage access policy and regulation in the US. I thought Ben's breakdown of when it makes sense to have policy function was great. I also really liked his articulation of what a good regulatory outcome looks like for policymakers on a particular issue.

Fintech Layer Cake is powered by the card issuing platform, Lithic. We provide payments infrastructure that enables companies to offer their own card programs. Nothing in this podcast should be construed as legal or financial advice.

Full Transcript

Reggie Young:
Ben, welcome to Fintech Layer Cake. I'm really excited for this episode. On the podcast, we've done episodes before as sort of primers where we talked about, hey, how to set up a compliance team or how to find a good bank partner, that kind of stuff. We haven't done one on policy. It's actually been on my to-do list for over a year. I've wanted to do a policy primer. But also, earned wage access, super interesting, super active space, one of the most cutting-edge fintech policy spaces that someone could work in right now. So excited to have you on to both do a primer, and then we can spend the second half of this episode talking about what's happening in earned wage access.

Ben LaRocco:

Yeah, awesome. Happy to talk about both of those things. Really appreciate you having me on and looking forward to getting into it.

Reggie Young:

Awesome. Maybe as a starting place, let's go to the basics. What is a policy in governmental affairs function? I think folks are probably familiar with, oh, let me talk to legal or let me talk to compliance. But policy is not a function that every fintech company has, or if they do, sometimes it's like- I did a little bit of policy work in Bluevine. Sometimes it's nested or hidden in the legal compliance of function. I cannot do policy and I cannot hold a candle to the work that you do. That is far beyond me. But I would love to start there. Let's tease that from the basics what policy is.

Ben LaRocco:

Yeah, absolutely. Very often, the policy team rolls up to the GC in the legal compliance function. It also might be in the external relations function, so coupled with PR comms or sometimes even sales. A lot of GR teams are more focused on getting government contracts or something like that. At the end of the day, the government relations function is trying to get government officials, and these can be legislators, regulators, procurement officials, etc., to either do things or to not do things. You want them to do things that are potentially helpful to your business.

A lot of fintech is in a little bit of a regulatory gray space. A lot of financial services have been around for a very long time, and there's a very specific regulatory framework on how those operate. Some aren't. EWA is an example of that, and we'll talk about that later. You might want to get government officials to say, yes, treat my product this way. Alternatively, they might want to treat them in a way that you don't want, or they might be wanting to take an action that you don't want them to take. So you want to tell them why that would be harmful to the folks that are important to them.

A lot of regulators and legislators, quite frankly, don't really understand these topics that are cutting edge and niche. And so a lot of what we're doing is really storytelling, so really taking how a product works in a very complicated way that a product person or an engineer can really understand. But most legislators especially have almost no technical background. They’re lawyers, they’re insurance salesmen, they’re teachers, all kinds of different things, and telling about the product and the repercussions of decisions that might be made and how those effects will be had on their constituents.

And even most regulators are dealing with dozens of different products. And as fintech and financial services continue to evolve and get more niche and complicated and specific, they often don't appreciate all of the nuances between things. So you have to tell the story. You have to explain. You have to answer questions. But at the end of the day, it is really just saying, hey, please, government official, do something that helps my company, or please don't do something that hurts my company or our customers, etc.

Another way to think about it is when you think about maybe more of a sales or a biz dev framework. We're doing deals, but the deals that we're doing are with government officials. So you're trying to pass a law. Essentially, you've got a lot of interested parties in that. You're doing a new negotiation. What does this side need? What does that side need? How do we convince both the folks that are directly impacted and the folks that aren't directly impacted that it's in their best interest to consummate that deal, and then working through the process.

The deal gets introduced in the beginning, and then there's an amendment that comes up. And something else happens that we didn't know about, so then we got to change it, and then you got to go back. It's document control. It's herding cats, and a lot of times, stuff that's not even any related to it. There's some controversial topic that happens, completely unrelated to something. The governor doesn't like the tax increase that the legislature did, or some cultural item, completely unrelated to anything. It happens. And then just no bills get passed, or whatever. You’ve got to manage all of those different items in order to ensure that the deal gets done.

Reggie Young:

The last point, it makes me think of the Credit Card Competition Act. I’ve been watching that a little bit. Obviously, at Lithic, we care about card policy. And there's not as much movement in cards as in most, I think, other fintech areas. But it's been interesting to see the Credit Card Competition Act is thrown around at the federal level as, oh, let's sneak into this bigger bill, let's sneak into this other bigger bill. These have nothing to do with credit card and interchange concerns, but it's just sort of this big package. I think it's one of the tricky things about policies, you have to deal with these curveballs. It's not necessarily a linear strategy.

Ben LaRocco:

Exactly. On the federal level, really only a handful of bills get actually signed into law each year.

Reggie Young:

Less and less every year.

Ben LaRocco:

Yeah. Credit Card Competition Act, is it going to go on the FAA, Federal Airline/Aviation Administration Bill? Is it going to go on the National Defense Authorization Bill? Completely unrelated, but those are the things that have to get passed, and so then everybody adds that to that. That's also something on the federal level, you can roll everything together and do it. Most states have pretty strict germaneness rules, where you can't necessarily throw a bunch of bills together, so you have to get a pass on its own. So knowing those rules, and is there a crossover deadline where it has to pass the House by a certain date and then get to the Senate to be considered. Those don't exist on the federal level, but states, they do. And so just being able to negotiate all of those different unique requirements and the different bodies that you have to deal with are also something that gets very complicated quickly.

Reggie Young:

Yeah. I mean, this is totally unrelated to EWA and the policy conversation we've been having so far, but I'm really curious on that point. Do you think it's better to have the state level like bills must be germane? Or do you think, the Federal, anything goes, let's do a hodgepodge bill? Do you think one is better than the other?

Ben LaRocco:

I think there's trade-offs. There's definitely trade-offs. I'll just give you two states. The state of Virginia is only in for six weeks, one year-

Reggie Young:

Sounds like a great schedule. How do I get that?

Ben LaRocco:

They come into session on January 9th, and then they're out by the end of February, something like that. It's crazy. But then you have other states, Ohio, which is where I'm from and where I worked to start my career, they’re in, basically, year round. In Virginia, it is incredibly intense for that period. Essentially, all of the work needs to get done outside of that session period. But there's urgency to get stuff done. So if you need to get stuff done, people want to do it, if you want to get it done. In Ohio, because there's not that urgency, things tend to take a lot longer. So if you need to get something done, it's harder to do something fast in Ohio often than Virginia. But also, because you have more time often, you have more time to work things out, it's not quite so intense. So there's a trade-off. And there's so many other different trade-offs that you have. I don't think that there's any like, this state does it great or that state does it better, or if you did this on the federal level, it would get rid of the dysfunction or anything like that.

Reggie Young:

That’s what I was hoping for, to solve Congress's problems.

Ben LaRocco:

Yeah. I would say that I do think the federal level is a lot more entrenched and it's a lot harder to get something done than on the state level. But that's kind of by design. The repercussions on the federal level are much higher. I used to work in government relations for Amazon. And one of the things we talked about at Amazon was one-way doors versus two-way doors. So make a decision in terms of that. A one-way door is something that you walk through it, you can never come back. And a two-way door is something that you can easily walk through it and come back, and it's no big deal, the costs are very low for that.

So when you think about policy, the federal level is like a one-way door. To get something passed on the federal level might take years, decades. There are fights that have literally been happening for 20, 30 years. And so in order to get something done on the federal level, that's sort of a one-way door. If you get it done, you're not coming back. Whereas on the state level, not ideal, but it's not uncommon to sort of pass something, then have to come back two years later, three years later, and clean something up or tweak something. It's a lot easier to fix those things on the state level because you often don't have the luxury of seven or eight years of negotiating something and going through all those iterations.

Reggie Young:

Yeah. I just want to return to one of the first points you made around how a lot of the job is  storytelling and it's explaining, hey, policymakers- these bills often are born because there's some very interested group that pushes a very particular view of a problem to a policymaker, they introduce it. And so policy teams often have to go and be like, wait, there's other views and there's other considerations. And you've never heard of this  financial product before. There's actually these secondary and tertiary consequences.

I think the little bit of policy work I've done, I’m just amazed how effective that can be, not because you're unduly manipulating, but because, yeah, these lobbyists just generally don't have time to consider all the secondary impacts and they may not have the expertise. I want to hit that point because for listeners, there's a lot of value. And every day, people who write comment letters and reach out to their local legislature and say, hey, this bill that you think is going to have these good effects actually is going to harm those consumers that you thought it would benefit because XYZ and you may not be thinking about it, because  you can actually have an impact that way. It's not like shouting into a void.

Ben LaRocco:

No. I think if there's actually one takeaway that I would love your listeners to hear, it's that a very small number of passionate people can really make a huge difference. I'll give you one nonfinancial services-related story real quick. I also used to work in the scooter industry. That's sort of how I got into EWA, was I basically did this for scooters. When scooters were coming, when they hit the market, a scooter wasn't in the vehicle code. Is it a bike? Is it an e-bike? Is it a moped? Is it a motor scooter? And it didn't really fit. Does it need a license plate? Does it need insurance? Can I park on the sidewalk? None of those questions were answered. And so we wrote model bills, we wrote and got these introduced in states all across the country and got them passed into law.

But basically, once the VC funding for scooters dried up, the scooter industry no longer had the means to go out and pass these bills. We passed 20-some bills in one year. And then for six years, no states passed a bill. I just saw on LinkedIn yesterday that Illinois passed a scooter bill that would allow scooters in Illinois. And it was basically because this one woman, she was a local small entrepreneur, she wanted to bring a fleet of scooters to her small town. And she did it just as a citizen. And she finally got it done six years later, just because she was able to be dedicated to it. So I think that that honestly plays itself out all over the place, that both a small number of passionate people can get stuff done. And also a small number of people that are passionate can get bad things stopped, or things that they don't want to happen stop, too. So definitely, folks out there, if you have an issue, contact your legislators, they want to help.

Reggie Young:

Yeah, definitely. I'd love to chat a little bit. I covered this earlier, some fintechs have policy functions, some don't. What explains that? When does a dedicated person headcount makes sense for a company?

Ben LaRocco:

Yeah. One of my previous jobs was a manufacturing company of about $6 billion in annual revenue, and I was the only government affairs person. It was a traditional manufacturing company. It didn't have a ton of issues that were being decided on a day-to-day basis by government officials, and so they didn't need very much. We worked on some tax issues, some shipping issues, that kind of thing. But generally, it wasn't super controversial.

I think the amount of government affairs and probably, quite frankly, legal and compliance folks too, although you can have a lot of compliance folks without necessarily a lot of need for government affairs folks, is directly proportional to the ambiguity of the space that you're operating in. So if you are, let's just say, Brex or Ramp or somebody like that, that is just going after a better way of using credit cards or spend management, you probably are not going to need a ton of use. You're not going to go out and try to change the credit card laws in order to show a better value to B2B customers. But where you're EWA, how the law looks at us is quite nebulous. And the business is, long-term viability depends on us getting a regulatory framework that we can continue to operate in. And so it makes a lot of sense to invest in that.

You can think of it in little ways like marketing, too. Some companies have a marketing strategy that is advertising on Facebook and Google. Some companies have a marketing strategy that is a large sales team that is out going to conferences and calling on potential customers and something like that. It really depends on the business model and what the long-term needs are in order for you to build that. A lot of times, the reason that a fintech exists is because it's not something that traditional financial services thought of in the same way. And so that's often when you need the policy help or the legal help to navigate that new thing that nobody's really thought of before.

Reggie Young:

Yep. It's a tricky function, too. There's one aspect of it, you made the comment earlier of informed citizens who are passionate can stop bad things from happening. That stop bad things from happening is one aspect of policy. And it's tricky. I feel like policy deals with the same problem that legal and compliance does, where if everything's going well, things may not be happening. That is the good outcome. And so it's really hard to point to that and be like, look at my performance review, we didn't get sued. It's like, okay. That's not really a thing you can cite easily that the human brain can grok. Policies, they’re kind of similar. There's the element of we got these EWA bills passed or revised or whatever in these states, but also we stopped these others. That's a really hard problem or metric.

Ben LaRocco:

Exactly. I think this is something that- in every company that I've ever worked at and when I talk to my colleagues at other companies, everybody's struggling with this, is it's easy to measure CAC cost, or it's easy to measure engineering hours needed to ship an update or a new feature. It's much harder to quantify the cost of, again, killing that bill, passing a bill. So when you're doing your annual budgeting and strategy and reviews, okay, so how do we measure the folks on these teams that are a lot more nebulous compared to some of the harder sciences? Essentially, you often have to use proxies or something like that, that is easier to measure but not necessarily the right measure.

Reggie Young:

Yeah, it makes sense. Last topic I want to hit on the general policy primer and then we can switch to more EWA-focused stuff is how does a policy function actually work? What does the day-to-day work look like for somebody in your shoes? And what makes a general policy function particularly effective?

Reggie Young:

Yeah. That's a really great and important question. I like to say that policy is like  a house. You can build a $100,000 house, you can build a $1 million house, you can build a brick house, you can build a wood shack, you can have marble columns. So you can't just say, how do you build a policy function? It's how do you build a policy function to meet the needs of your business. Again, when you're one person and you're covering a lot of issues, then you might only be an expert in one particular issue and you might rely on trade associations or outside counsel or something to really manage all of your other things.

When I was at Amazon, Amazon has every issue that Walmart cares about. They have a whole fleet of airplanes, has every issue that UPS and FedEx care about. It had every data issue that Facebook and Google cared about. So we were working on all of those different issues and different states were important in different times. They also had a whole other team that was doing procurement for AWS. That is a very different policy function than- in Earnin, we basically only are worried about earned wage access legislation and the specific impacts of that on business.

So you really need to find the right mix of things for you. But typically, how that works is you have the internal folks, and they are working with a team externally as well. That could be contract lobbyists in the state. So I will work with somebody, again, in, say, Ohio or Virginia or wherever we're working, and they'll be on the ground in Columbus, Ohio. And so there'll be talking day-to-day with the legislators and regulators there. I'll be talking to them. I'll come into Columbus every once in a while and meet with folks on the federal level, too. You sort of have a financial services contract lobbyist who has maybe 10 or 15 different clients. So they're in there working with the committees every day but on a bunch of different issues. And so they're getting different intel on different issues, and they can share with different clients.

Trade associations in fintech, there's sort of two or three main trade associations. There's FTA, the Financial Technology Association, AFC, the American Fintech Council, Innovative Payments Association. Maybe there's a couple others that you can mix in there, too. And so you work with them. Their staff, they're working with the various legislators on the state and federal level, too. It's really managing- and I think a lot of folks in legal might be doing this the same way, too. You have your business outside counsel. You have your regulatory outside counsel. Are they writing some stuff? Are you writing some stuff? And how does that play out? You might have an issue with one state in particular, so you're getting somebody from a firm that is just specifically in that state to work on that issue. And it's similar to that in government relations.

Reggie Young:

Yeah, it makes sense. I know a common thing lawyers or in-house teams have to deal with is, oh, you're getting sued, and it's one state. The actual in-house lawyer isn't going to go and show up in court. You're going to hire a local, smaller law firm that’s going to actually show up and advocate there. So kind of similar, you outsource the actual boots on the ground, because those people have the relationships and connections and know how to talk to the local folks, which is super important.

Ben LaRocco:

Yeah, exactly. So it's management. But then it's also- again, we talked about storytelling in the beginning. It's also, okay, you tell your story in one way, but then your contract lobbyist didn't tell the story differently, so how do you train them and get them to give it the right way and ensure that they're equipped with the knowledge that they need to answer the tough questions when they're doing that. And so there's a lot of layers, the Layer Cake podcast here.

Reggie Young:

Totally. I think my experience working in policy is a huge aspect of the job is psychology, just  applied psychology. I love that aspect.

Ben LaRocco:

Yeah. Well, in order for it to succeed, everybody has to win. It's not necessarily like a court case where somebody wins and somebody loses, especially on a real niche issue, like any fintech issue, because anything that's controversial is just going to be no. They're never going to bring it off. They're never going to vote on it. They're never going to do it. It's not like people are really jockeying for votes on this niche financial services issue. You really have to find a place where everybody understands that doing something is better than doing nothing, and there's some sort of agreement on that.

Reggie Young:

Yep. And this is a perfect segue to talking about EWA because I think EWA is a good example. The states are not saying yes or no. It's like, okay, to what extent are we going to allow it and what are the requirements? What's the safe harbor for you can do this and it's not a loan?

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Reggie Young:

So with that transition, what are some of the key issues that earned wage access policymakers need to consider? I know you already hinted at a big one of does this count as loans. Is earned wage product a loan? Feel free to dig into that one, but I'm also curious what some of the other top nuances are.

Ben LaRocco:

It’s probably better that I start a little bit, go back, just so that everybody knows what earned wage access is, what the policy issues we’re talking about. When we work, we're working right now, we're earning money. As soon as you earn money, that money is legally yours. It's not like it becomes yours on payday. You earn it, it's yours. And you are essentially allowing your employer to have control of your money until payday because payroll is complicated, and payroll is complicated for a lot of reasons. It's been complicated for a long time. People used to get paid every day back in the day, and then payroll taxes and healthcare and overtime and all these things. That doesn't happen anymore. So we have wage and hour laws, which make it complicated.

But you have this situation where people- if you're living paycheck to paycheck, you might only have $50 in your bank account, but you have hundreds or even thousands of dollars that's legally yours, but you don't have access to it. And so that's the value proposition that comes with earned wage access. We basically say, that's your money, you should have access to it, we give you access to it. There's two main business models. One is direct-to-consumer that anybody can download an app. Earnin is a direct-to-consumer company, so anybody can download Earnin. We’ll verify your wages, provide you a portion of those wages, and then we get paid back on payday. And then the other one is business-to-business. That’s where it's specific to an employer. If you are at Target, Target offers this as a perk to its employees, and they have a vendor that they use, that you can only access if their employer chooses to have a contract with it.

So those are the two main business models, although what we've seen in recent years is they're sort of combining. Earnin has a couple of business-to-business contracts. I think as we look out in the future, while that's sort of evolved as the beginning,  technology is enabling those lines of [inaudible]. So what the flow of funds is we advance money to people based on their wages, then we get paid back on payday. Well, that looks like a loan. But we don't charge interest, we don't charge a finance fee, and there's no legal right to repayment. It's completely non recourse. It's not based on credit score, and there's no implications if you pay it back to have a negative implication on your credit score. Not very well [inaudible].

It looks a little bit like money transmission. When you go to use an ATM, it's not your money that you're taking out of ATM. It's the ATM company's money. So I bank at the Congressional Federal Credit Union, which is this little credit union in DC, but I go to the Citi ATM that's by my house because that's an easier one. So City gives me their money, and then three days later, my credit union pays Citi back. Nobody thinks that that's a loan for three days, and the $4 fee that I took should be annualized as an APR. You have that.

And then it also looks a little bit like payroll. This is your money. If you're getting it today instead of Friday, it's money that's legally- so you have this situation where it looks a little bit like a loan, it looks a little bit like money transmission, it looks a little bit like payroll, but it doesn't fit in any of those. And so what we've done as policymakers is we've tried to take the important consumer protections from the lending laws, the important consumer protections for money transmission, and important ones from payroll and create a new bucket. And so this is essentially where the discussion is. So do we take a new bucket and then decide what the appropriate safeguards are in that bucket? Or do we say, well, we just are deciding we're going to put you in one of those existing buckets. So far, the most common one for that has been the lending bucket. That's sort of what the real debate has been.

And I should say this is a little bit- this is also different on the state and the federal level. Most financial services have both the state and federal component to them. Like usury laws are almost entirely in the purview of states. Money transmission is in the states. But actually, like the Electronic Funds Transaction Act is a federal bill that treats some things differently. So you're debating slightly different issues on the state and federal level. On the federal level, we're not talking about fee caps or other things like that. It's really more about disclosures. And on the state, it’s different because what they're looking at is a little bit of a different framework.

Let me pause there. I can go deeper into that and what's happened on the state and federal level, but maybe let me pause and you tell me where you want me to go.

Reggie Young:

Yeah. No, I'd love to get into that. I want to comment on something you said. I think folks may get the notion that, oh, earned wage access companies or other companies in fintech different industries, whatever, who are advocating for policy, it may be like, no, we don't want to be regulated at all, but it's not actually. Like you were just saying, you're taking the best lessons that make sense from the Truth in Lending Act and other sort of whatever credit-type productions and saying, let's pull the relevant ones and apply them to earned wage access in a way that actually makes sense.

Because, actually, if you just shove a square peg in a round hole, you can end up with misleading disclosures. You're going to end up misleading the consumer into thinking they're getting a product they actually aren't. The disclosures can be way off base if you're taking something that is meant for a product that is very different from EWA or whatever kind of policy you're playing. So it's a super important point. Policy work isn't like, oh, no, we don't want to be regulated. It's like, no, no, we want to be regulated correctly.

Ben LaRocco:

Exactly. When we go to a Republican sometimes who’s like, oh, we don't want any regulation, we're like, well, it's not about regulation, no regulation. It's about good or bad regulation. We had this bill in Texas last year that ended up we lost- like the horseshoe of politics. We lost both the hard right who wanted no regulation whatsoever, and the far left that thought that the bill didn't go far enough. And so we lost both of those factions.

You look at the vote count of who actually voted for it, it was just a totally, how did that happen? So that's exactly it. And part of being new in a lot of new industries, regulation is not good because it could be stifling. One of the issues with us, and I think a lot of fintech, is as the industry matures, how do you show that it has matured in a way that most financial services are very heavily regulated? So how do you transition from that, okay, we're a start-up to now we're a mature industry. Earnin has been around for more than 10 years. We have millions of customers. The industry in general has, by my estimate, somewhere between 3 million and 5 million people use this service across the country. So there's a lot of people using this. And so how do you create a framework that allows and ensures they have access to it, but does it in a way that's responsible, that's congruent with similar laws for other products, etc.?

Reggie Young:

Yeah, it makes sense. Yeah. Now we can dig into the actual action that you're seeing on the state and federal level and where things stand. There's been a ton of movement in the past year. For the past few years, it's really kind of heated up. So I'd love to hear the lay of the land for EWA..

Ben LaRocco:

Sure. The sort of beginning of EWA regulation starts with the payday rule. This was a rule that was issued by the CFPB under Richard Cordray, who was an Obama appointee. It has been in various litigation for years now. It was finalized in 2017. A lawsuit over that is why the CFPB funding is in jeopardy now with the Supreme Court because, basically, that lawsuit has made its way up to the Supreme Court. But in that rule, there is basically a safe harbor for EWA companies. There were two safe harbors. One was called wage-based advances, and one was called no-cost advances. Those translate roughly now into B2B and D2C. B2B was called wage-based advances, and D2C was called no-cost advances. But they're basically very similar.

They essentially said, as long as you don't have any collections activity, you don't base the product on a credit score and you don't report people to credit, and you don't charge finance charges, then you are exempted from the payroll. Basically like, here's what the payday loans, title loans, etc., are, you are not one of them if you meet this criteria. At that time, the industry was really in its infancy, not very many people using it. But that was the first like, okay, this is what the industry is going to look like. And really, all downstream regulation has flowed from those policies. Nothing happened for a long time. A couple of states introduced bills, but they were very like 1.0, not very sophisticated in the way they were written. The industry wasn't aligned. Different people, every company wanted a policy that helped their specific company but didn't help the other companies. None of those went anywhere for a number of years.

Then maybe I'd say probably three years ago is really when things started to accelerate a little bit on both the state and federal level. On the federal level, the Treasury Department put out a report that basically said, for tax purposes- which is a little bit different than financial services purposes. So you also have what's a loan, what's credit? There's five different laws, they are different sort of under all of these things. And so it basically says, for tax purposes, on-demand pay arrangements are not loans. And so they said that. And then there's also the beginnings of a federal bill that would clarify on how to treat EWA more broadly. That bill just ended up getting introduced a couple of months ago, but people have been kicking around ideas and thinking about how to write it for years, literally two years before it was introduced. So it's on the federal level.

Really, the big controversial issue on the federal level is called the Truth in Lending Act. You refer to it. This was passed in the 1950s. It essentially tried to create a similar framework so that all loans would be treated and disclosed some way. It doesn't have fee caps in it. It just has disclosure rules. And the main disclosure rule that has is an APR calculation, annual percentage. So take all the interest, all the fees, annualize them, and display that number. There's other rules that guide this. There's UDAAP, which covers everybody, unfair, deceptive acts and practices, unfair abusive acts.

Reggie Young:

It’s called the dopey and asshole regulation because it's just a general don't be an asshole in your business practices and marketing.

Ben LaRocco:

Yeah. There's ECOA, the Equal Credit Opportunity Act, which basically says you can't discriminate based on race and religion and those sort of things. So  you have all of these different laws where you might have something that is considered one thing under one rule but not under the other. And so how do you apply these different standards for different roles, because they're honestly all a little bit different. Then you have the Military Lending Act, which is a whole different set of rules for military members only.

And so as something new happens, and it is unclear how it gets applied to these different things, there is a little bit of a marketplace of ideas to decide how we consider these different things. So a federal bill was introduced, again, I said three or four months ago by a gentleman by the name of Bryan Steil from Wisconsin, and a co-sponsor who is chairman of the House Financial Services Technology subcommittee. He's the chairman. That was introduced. It passed committee a couple of weeks ago. It's not likely to move anywhere anytime soon from there, mostly because what we talked about at the beginning, there's only so many bills that passed, and so it's not likely important enough to go on its own. If it were to go further, it’d probably be part of a big financial services package that includes a bunch of other financial services bills. Again, most financial regulation takes years to pass. So it could very well be we could be having this conversation three or four years from now, and it could be in the same place.

The CFPB also has sort of regulatory authority on a few matters. They put out a couple of advisory opinions on the topic over the years. They have said that they're going to update one of those advisory opinions at some point. We don't know when, we don't know what it will say. They've been saying, we're going to update it, we're going to update it soon. But they've said this for two years. So we don't know. I mean, it could come out  literally by the time we're off this podcast, or we might not see it for months. We have no idea.

Reggie Young:

It could be another 10 years, like the open banking rules. Who knows?

Ben LaRocco:

Yeah, exactly. And so we have no idea when that's going to come out. And depending on what that says, that could have an implication on how things are treated as well. I should say, though, that those advisory opinions are non-binding. They don't go through a rule and comment period. It's basically just like, here's our thoughts on this. Even once that comes out, there are a lot of potential downstream implications that could be varied on how that affects the business.

So then on the state level, four states have so far passed bills that are specific to EWA. Nevada was the first one. And the reason for that is, basically, the regulators said, hey, we want more oversight over EWA providers. It doesn't really fit in our lending laws the way it is. And if we force it, you guys aren't going to like the way we force it. So come to us with a solution. We worked with the legislators there over the course of about two years. It took two cycles to get through. Where we really hammered it, we came up with a plan. We spent literally hours going over every line and, oh, it says this, it says that. A bunch of different companies, attorney generals’ offices, consumer advocates, legislators, regulators, etc., all put a lot of time and energy into getting that first law done.

The three other states that have passed since then are Missouri, Wisconsin, and Kansas. Pretty bipartisan. Nevada is a super majority Democrat state, Republican governor. Wisconsin and Kansas are both Republican legislators but Democratic governors. And Missouri is both Republican. So partisanship hasn't been a super huge issue on the issue. Again, it's sort of more niche. But various different versions of that bill haven't been introduced in, I think, 14 different states, something like that. California is doing something by rule. So not a legislative bill, but DFPI, the Department of Financial Protection and Innovation, is doing a rule that's been in the notice and comment period for about a year and a half now. That was actually supposed to be finalized, and just last week, basically, they had a legal review. And the legal review said, you guys actually need to go back and take a second look at this rule. We don't know why they said that. They just did that. So it's probably going to be another couple of months before whatever is finalized in California.

What's even more interesting about that California rule is even once it's finalized, it's temporary. The way that the California regulatory regime works, it basically only applies for four years. And after those four years, they basically decide, hey, we want to move forward as is, we want to make this change, or we want to do nothing. Then after those four years, we'll be, in some ways, back where we are today where we need to figure out what's going on.

Reggie Young:

Yeah. California, my state, some funky sunsetting stuff both in laws and regulations. So not totally surprised to hear that. I think the million-dollar question is what's your preferred best solution for EWA policies? If you go look at the proposals, state, federal, what would you say is the ideal that, again, this whole conversation, isn't let's earn and run wild? This is good regulation, what would you like  to see?

Ben LaRocco:

Exactly. I should say that the ideal regulation allows us to serve our customers in a way that is both safe and affordable to them and sustainable for us.  So that's an overarching view. It's going to look different in every state. Lending laws look different in every state. Money transmission laws mostly look different, although they're trying to get them to be more uniform. They have  a uniform money transmission model law that they're trying to pass in much places now. It's going to look different.

But because so much time and effort was put into Nevada, we really have said, hey, states, if you want to regulate this product, that's a good place to start. A group called the Council of State Governments, which is a multi-state legislators from all across the country, participates in this. They have a model law track. It's called the shared state legislative track. They adopt laws from all across the country on every single issue you could imagine. Hundreds of bills per year get sent to this committee for consideration, and the ones that meet a certain number of criteria, it has to be something that a lot of states haven't passed laws on before something that's new and novel, etc., to be adopted. So they adopted the Nevada bill as like the model earned wage access law. No state has to be obligated to follow that, but it's out there if states want to consider it.

Our position is that, basically, because that's the start, let's try to keep it as close to that as possible. There's a lot of differences between states. Do they like licensing? Do they like registration? Do they want to share data? Do they not want to share data. Some states like data, and they want to see it. Some states say, you know what, we don't really have the bandwidth for the data. In many ways, it could be hard for us because there's liability that comes with us having that data, so you keep it. So there's tweaks around the edges for that. But basically, we like to start with that Nevada bill and then work with the legislators and the regulators to see how they feel comfortable with some of those more specific questions.

I should say Connecticut passed a law last year that would consider us a loan. It wasn't EWA specific, but it basically changed the definition of loan to a way that includes EWA. They put guidance out that they said that. At the beginning, I think I said that we had to leave the state of Connecticut for that reason. Did I say that on this call?

Reggie Young:

I think it was pre-recording. But it's a fascinating point.

Ben LaRocco:

That's right. Yeah. Basically, they changed the definition of loans, and we got caught up in it. So we're trying to tweak to clarify that law so that we can begin to operate again. That's really been the one state so far that passed that law that considered us a loan. We're hopeful that other states won't follow their lead because we really saw a lot of our customers were harmed by us not being there, a lot of stress, a lot of financial stress. We have heard a lot of stories of people getting overdrafts because they didn't have access to liquidity that they had. We're hopeful that we can work to avoid that in other states.

Reggie Young:

Right. Yeah, one of the super useful exercises that I always find in thinking about policy and how things should be is what's the alternative if this thing doesn't exist. What are these consumers’ options? Are they going to payday lenders? Are they going to worse, actually more abusive-type providers that are maybe shadow regulated, aren't regulated, like functional license, like not other great options?

Ben LaRocco:

Yeah. And is it like, Joe on the corner that, we’ll give you 20 for 20, but you got to pay back on Saturday, right?

Reggie Young:

Probably doesn't give you a Reg Z disclosure with that.

Ben LaRocco:

Exactly. I think that's a great thing to think about in policy and broadly is there's not necessarily any product that is good or bad. There are only trade-offs. There are more benefits and less benefits and higher risks and lower risks, and is this better or worse than something that any given person might have an alternative to. You and I very likely have different choices than your average hourly worker in America when it comes to the financial services that we have access to. And so I think that is something that happens a lot on this product, is that well-meaning people put themselves in the shoes of other people and demand that those people make the same choices that they're making.

And that's something that, personally, just my personal politics of it, I don't want to ever tell somebody else what they should or shouldn't be doing based on my personal experiences. I definitely don't like it when other people are doing that. We shouldn't live in a world where people have to access their wages ahead of time. Well, yeah, maybe, but it's true. It's the world we live in, and it's their money. And if they want to use it and access it, they should have a right to do that. How do you feel  you're in a position to make that moral judgment for them or that financial decision for them?

And so that's something that I think is really giving the customer choice and empowering them to ensure that they can make that decision on their own is really the heart of that legislation. So how do we ensure that they have access to it and choice and competition in the market, but what are the disclosures to ensure that they're going into that conversation with open eyes and they know the risks and the trade-offs and the full costs and everything?

Reggie Young:

Yeah, it makes sense. I think I see that issue a little bit when we talk about prepaid cards because I think there's a lot of people in fintech who have never experienced that prepaid cards for a large number of Americans are actually bank accounts. Because if you're a tech worker getting a tech salary, you've probably never had to use a prepaid card as your bank account, but it's actually super important for a large swath of the country. It's a facet. People don't think about prepaid cards being, oh, this is  a functional bank account, but it's important. It's a use case that I think a lot of folks don't necessarily think about.

Ben LaRocco:

Yep, exactly.

Reggie Young:

Well, cool. Ben, this has been fantastic. Any last thoughts or comments, things you want listeners to walk away with?

Ben LaRocco:

Yeah. Again, thank you for having me on. EWA is a super nuanced topic that I think headlines and tweets often do not do a good job of explaining. And so I think in closing, I would just say that anybody that wants to learn more about EWA, the way we first met is you did that primer on EWA and we exchanged emails and we started talking, and I think that's great. So I'll put it out there. My email is ben.larocco@earnin.com. If anybody wants to message me, feel free to do it. If you are interested in EWA policy, we have a working group that meets every couple of weeks and is free to attend. Just anybody that wants a EWA policy is welcome to do it. So please reach out. Again, thanks for your time.

Reggie Young:

I love it. I can attest, Ben is friendly. So if you want to talk EWA, don't hesitate to reach out to him. Thanks for coming on, Ben.

Ben LaRocco:

All right. Thanks, Reggie. Later.

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