```

[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]

                     MODERNIZING FINANCIAL SERVICES
                   THROUGH INNOVATION AND COMPETITION

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON DIGITAL ASSETS,
                         FINANCIAL TECHNOLOGY,
                             AND INCLUSION

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 25, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-50
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
54-315 PDF                  WASHINGTON : 2024                    
          
-----------------------------------------------------------------------------------     
 
                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                     
                    SUBCOMMITTEE ON DIGITAL ASSETS, 
                  FINANCIAL TECHNOLOGY, AND INCLUSION

                    FRENCH HILL, Arkansas, Chairman

FRANK D. LUCAS, Oklahoma             STEPHEN F. LYNCH, Massachusetts, 
TOM EMMER, Minnesota                     Ranking Member
WARREN DAVIDSON, Ohio, Vice          BILL FOSTER, Illinois
    Chairman                         JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 RITCHIE TORRES, New York
BRYAN STEIL, Wisconsin               BRAD SHERMAN, California
WILLIAM TIMMONS, South Carolina      AL GREEN, Texas
BYRON DONALDS, Florida               SEAN CASTEN, Illinois
MIKE FLOOD, Nebraska         
C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 25, 2023.............................................     1
Appendix:
    October 25, 2023.............................................    35

                               WITNESSES
                      Wednesday, October 25, 2023

Kelley, Jodie, Chief Executive Officer, Electronic Transactions 
  Association (ETA)..............................................     5
Lenz, Jimmie H., Director, Master of Engineering in Financial 
  Technology, Duke University; and Principal, Frontier Foundry-
  Advanced Research and Financial Services.......................     6
Palaniappan, Ram, Founder & CEO, Earnin..........................     8
Sanz, Parris, Executive Vice President, General Counsel, and Head 
  of Policy and Government Relations, WebBank....................     9
Spotser, Mitria W., Vice President and Director of Federal 
  Policy, Center for Responsible Lending (CRL)...................    11

                                APPENDIX

Prepared statements:
    Kelley, Jodie................................................    36
    Lenz, Jimmie H...............................................    50
    Palaniappan, Ram.............................................    55
    Sanz, Parris.................................................    62
    Spotser, Mitria W............................................    80

              Additional Material Submitted for the Record

Hill, Hon. French:
    Letter from the American Fintech Council to the Center for 
      Responsible Lending and the National Consumer Law Center, 
      dated October 23, 2023.....................................    86
Steil, Hon. Bryan:
    Innovative Payments Association (IPA) press release, ``IPA 
      Supports Introduction of New Earned Wage Access House Bill 
      Sponsored by Representative Steil,'' dated October 25, 2023    93
    Letter from 119 labor, civil rights, consumer, legal services 
      and community groups and academics opposing the Earned Wage 
      Access Consumer Act........................................    96
Kelley, Jodie:
    Written responses to questions for the record from 
      Representative Waters......................................   103
Lenz, Jimmie H.:
    Written responses to questions for the record from 
      Representative Waters......................................   105
Palaniappan, Ram:
    Written responses to questions for the record from 
      Representative Waters......................................   107
Sanz, Parris:
    Written responses to questions for the record from 
      Representative Waters......................................   109
Spotser, Mitria W.:
    Written responses to questions for the record from 
      Representative Steil.......................................   110
    Written responses to questions for the record from 
      Representative Waters......................................   115

 
                     MODERNIZING FINANCIAL SERVICES
                   THROUGH INNOVATION AND COMPETITION

                              ----------                              

                      Wednesday, October 25, 2023

             U.S. House of Representatives,
                    Subcommittee on Digital Assets,
                              Financial Technology,
                                     and Inclusion,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. French Hill 
[chairman of the subcommittee] presiding.
    Members present: Representatives Hill, Davidson, Rose, 
Steil, Timmons, Flood, Houchin; Lynch, Foster, Gottheimer, 
Green, Casten, and Nickel.
    Chairman Hill. The Subcommittee on Digital Assets, 
Financial Technology, and Inclusion will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Modernizing Financial 
Services Through Innovation and Competition.''
    I want to thank our great panel of witnesses for being 
here.
    And I now recognize myself for 4 minutes to give an opening 
statement.
    Having used an extensive amount of time over the last few 
months to work in a bipartisan fashion to craft digital assets 
bills--one on payment stable coins and the other on taking 
hearings and crafting a regulatory framework for digital 
assets--I am excited that the subcommittee has come together 
today to explore financial technology issues more generally, 
which is a major focus of this subcommittee.
    Since our task forces that Mr. Lynch and I were involved in 
back in 2018 and 2019, on fintech and on AI, today we want to 
continue that broad foundation regarding the state of fintech 
today, and specifically, the innovative products and services 
that financial technology enables for our consumers.
    My goal is for Members to use the time to better understand 
the fintech ecosystem and its evolution from, when we were 
together 4 and 5 years ago, disruption, to much more of a sense 
of collaboration, and how it can deliver products and services 
that consumers want and can benefit from, and the policy 
questions that we should be thinking about as lawmakers.
    At a time when there are so many exciting new technologies, 
like digital assets, quantum computing, and the greater use of 
artificial intelligence (AI), it is important to remember that 
innovation and technology have always been at the heart of 
financial services. That is true even of the humble ATM, which 
changed the way we thought about cash and credit, how we pay 
for things, and how we have had access to money over the past 
50 years--to access that cash whenever we wanted it, whenever 
we needed it. And that was no small feat back in that 50-years-
ago timeframe.
    But like the ATM, I believe that fintech today has the 
potential to drive even greater innovation in financial 
services, while also delivering even more customer-centric 
experiences based on trust, convenience, and service in an 
increasingly-digital world. For example, Earned Wage Access 
products allow people, as the name suggests, to access their 
wages as they earn them. This can give people flexibility and 
liquidity to meet short-term credit needs, for example, when a 
bill is due next week but payday isn't until the end of the 
month.
    The same goes for bank-fintech partnerships, a great way 
that community banks in Arkansas are meeting customer demand 
through new products and services at a scale through white-
label offerings. Or Buy Now, Pay Later (BNPL) products, like 
the old layaway systems, which many of us grew up with. This 
gives consumers a technological way to have a choice at 
checkout and more flexibility to pay on their own schedule in a 
way, that they can easily understand.
    The massive rise in popularity of these kinds of financial 
products demonstrates that consumers already recognize how 
these innovations are improving their lives. However, changes 
driven by technology also merit thoughtful consideration of how 
they affect existing laws and regulations, particularly if laws 
and regulations inhibit that innovation.
    The key is that we have balance between both consumer 
protection and innovation. And that being said, I think the 
benefits of fintech firms and the products and services they 
provide far exceed the risks that they might pose. And that is 
why I am excited about the bills attached to this hearing that 
talk about our regulators, the sandbox innovation centers in 
our regulators, and their evaluation of their own technological 
prowess.
    So today, we look forward to hearing from our excellent 
witnesses about fintech and how it innovates innovative 
financial products and services that consumers want, and what 
lawmakers should be thinking about to make sure we get that 
balance between innovation and customer protection just right.
    With that, I yield to the ranking member of the 
subcommittee, my friend from Massachusetts, Mr. Lynch, for 4 
minutes for an opening statement.
    Mr. Lynch. Thank you, Mr. Chairman.
    And I want to thank our panel of expert witnesses for 
coming before the committee and helping us with our work.
    I also want to recognize Lacy Clay, a continued friend, and 
former Member, who is here from Missouri, and I want to thank 
him for his great service to this committee and to Congress in 
general. Welcome back, my friend.
    Before we begin discussing fintech and Buy Now, Pay Later, 
I would like to acknowledge that the House still does not have 
a Speaker. And while I appreciate the relentless drive that the 
chairman has in continuing with our work, I don't want to 
pretend that this Congress is functioning, because it is not.
    And I think, in a sense, to go about committee work sort of 
business as usual feels inappropriate and tone-deaf to the 
larger, global situation. When you think about the attention we 
could be spending in focusing on the situation in the Middle 
East, or in Ukraine, or on other very, very important and 
urgent matters here in Congress and in our own country, we do 
not have a Speaker.
    I would just suggest to my colleagues that that should be 
job one, and we should not divert any energy or attention away 
from getting a Speaker so this government can begin to function 
again, because we are not.
    And even though there are bills attached to this hearing, 
they go nowhere without a Speaker.
    So, I just implore my friends on the other side--and I do 
have friends on the other side, and the chairman is one of 
them--that we redouble our efforts to try to get this 
government back on track, because we are losing the faith of 
the people that we represent. And we are losing face with and 
the confidence in our international neighbors.
    Every day that this House of Representatives goes without a 
Speaker, we are diminished in the eyes of the world and of the 
people we have an obligation to represent. We are not 
representing them today. We don't have a Speaker. We are 
dysfunctional, and we are not fulfilling our oaths of office to 
those very people who supported us to take these positions.
    We are in the midst of two wars, and as policymakers, we 
have a responsibility to address the current situation. And 
while I remain engaged and interested in this topic before us, 
it pales in comparison to the lives being lost as we speak.
    For several weeks, we have waited for my friends on the 
other side of the aisle to move forward with a Speaker. 
Instead, they have played their own internal politics and put 
that forward and put that ahead of the people that we are here 
to represent.
    So, I simply urge my colleagues to end this mess and begin 
governing as we were elected to do.
    Now, with respect to the subject matter that is before us, 
I believe technology does have the potential to lower costs and 
improve accessibility for those left out of the traditional 
financial services sector. However, while remaining interested 
and really believing in the potential of fintech and Buy Now, 
Pay Later products, I want to say that some of these are simply 
repackaged versions of traditional finance, but packaged in a 
way to evade laws and regulations under the claims of 
innovation.
    Simply put, all fintech and Buy Now, Pay Later is not 
equal. Some of them, I think, are making honest and deliberate 
efforts to reach the unbanked, to save consumers cost, and to 
reduce the friction in the traditional system.
    But in November of 2021, as Chair of our Fintech Task 
Force, I held a hearing that examined fintech liquidity 
products, such as Buy Now, Pay Later, Earned Wage Access, and 
overdraft avoidance products. The emergence of these products 
raised larger questions about consumers' need for liquidity and 
whether consumers make enough to afford those necessities.
    With the rising interest rates that we have in the country 
now, we are seeing greater problems, greater default rates, and 
other issues that amplify the problems in this area. So, I 
question whether these products are truly innovative, as 
industry may claim, or just redesigned for regulatory evasion.
    With that, I appreciate your courtesy, Mr. Chairman, and I 
yield back.
    Chairman Hill. The gentleman yields back.
    I am going to yield to the gentleman from Massachusetts, 
Mr. Lynch, the time of Full Committee Ranking Member Waters.
    Mr. Lynch. A report from California's Department of 
Financial Protection and Innovation found that fees averaged on 
APR are more than 300 percent. Additionally, I don't believe 
that consumers should have to pay to access wages that they 
have already earned in that system.
    The Consumer Financial Protection Bureau (CFPB) has issued 
guidance that cautions against Buy Now, Pay Later products, and 
several State regulators have opened investigation into whether 
Earned Wage Access and overdraft avoidance companies break 
State lending laws.
    And lastly, we are seeing a trend towards fintech players 
partnering with small, online banks to conduct bank-like 
activity. This raises questions as to whether fintech companies 
are using bank partnerships to evade State laws. Regulators 
have raised numerous red flags about the fair lending and 
consumer protection practices of these banks.
    In closing, while consumers do have a true need for 
liquidity, products that are seemingly lower cost but do not 
comply with lending laws are not the answer. As policymakers, 
we should be exploring true innovative approaches to improving 
access to credit and financial services products.
    I look forward to hearing from our witnesses on what they 
view as innovative approaches.
    And I yield back. Thank you, Mr. Chairman.
    Chairman Hill. I appreciate the ranking member's opening 
statement.
    Today, we welcome the testimony of Jodie Kelley, the chief 
executive officer of the Electronic Transactions Association; 
Jimmie Lenz, the director and master of engineering in fintech 
at Duke University, and managing principal of Advanced Research 
and Financial Services at the Frontier Foundation; Ram 
Palaniappan, the founder and CEO of Earnin; Parris Sanz, the 
executive vice president, general counsel, and head of policy 
and government relations at WebBank; and Mitria Spotser, the 
vice president and director of Federal policy at the Center for 
Responsible Lending.
    We thank each of you for taking the time to be with us this 
morning. Each of you will be recognized for 5 minutes to give 
an oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Mrs. Kelley, we are going to start with you. You are 
recognized for 5 minutes.

STATEMENT OF JODIE KELLEY, CHIEF EXECUTIVE OFFICER, ELECTRONIC 
                 TRANSACTIONS ASSOCIATION (ETA)

    Mrs. Kelley. Thank you.
    And good morning, Chairman Hill, Ranking Member Lynch, and 
members of the Subcommittee on Digital Assets, Financial 
Technology, and Inclusion.
    My name is Jodie Kelley, and it is my privilege as CEO of 
the Electronic Transactions Association (ETA) to speak with you 
today about how the payments technology industry is powering 
the U.S. economy, helping consumers and small businesses, and 
fostering financial inclusion through the deployment of 
innovative, secure, and cost-effective products and services.
    Each year, ETA members process more than $44 trillion in 
purchases worldwide. The payments infrastructure is 
sophisticated, secure, and fast, processing hundreds of 
thousands of transactions a minute and using cutting-edge 
technology to do so securely.
    ETA members are committed to providing consumers, including 
historically-underserved Americans, with payments choice and 
choices that are secure, widely accessible, easy to use, and 
affordable. I would like to take a moment just to highlight a 
few of those products.
    We are all familiar with credit and debit cards which are 
used for the vast majority of transactions in this country. 
Credit and debit cards are accepted virtually everywhere, are 
easy to use, and provide zero liability protection for 
fraudulent transactions.
    Prepaid products also provide cost-effective and convenient 
payment options for millions of consumers. And the utility of 
prepaid cards was never clearer than during the COVID-19 
pandemic, when ETA members helped Federal and State Government 
agencies deliver billions of dollars in benefits, including on 
prepaid cards.
    Prepaid cards are also particularly helpful for consumers 
with limited or no access to other financial services--9 out of 
10 unbanked Americans use prepaid cards for core financial 
functions, including paying bills or receiving income. And 
given their utility, numerous Federal and State Governments 
deliver benefits through prepaid cards every day.
    Digital payments are also widely used. Peer-to-peer payment 
(P2P) services allow people to quickly make payments to friends 
and family, usually for free, using apps online or on mobile 
phones. And digital wallets store payment credentials, such as 
credit, debt, and prepaid cards, that can also be used to make 
secure purchases in person or online.
    There are also digital products for consumers who transact 
in cash, that allow them to order a product online, then take a 
QR code to a local store and complete the purchase with cash. 
And similarly, many P2P solutions allow cash-based consumers to 
load their P2P account on their mobile phone by presenting cash 
to a local retailer.
    And finally, Buy Now, Pay Later allows consumers to 
purchase an item without paying the full price upfront, with 
payments made through, typically, four cost-free installments. 
These products serve all consumers, including historically-
underserved consumers, by providing them with an interest-free 
option to purchase the items they need, when they need them. 
These products are convenient, they are simple, and consumers 
are adopting them at a record pace.
    In addition to benefiting consumers, these payment options 
also help small businesses to thrive. And, again, this was 
highlighted during the pandemic, when in-person shopping was 
dramatically reduced and small businesses were at risk.
    The payments industry helped small businesses adapt by 
establishing global online presences, accepting payments 
online, or by tapping to pay, which allowed many small 
businesses to remain in business. And that innovation continues 
as new technology now helps merchants to receive funds quicker 
and to access much-needed capital.
    I would like to conclude today by discussing how ETA and 
policymakers can continue to work together to ensure that high-
quality and affordable payments are accessible for all 
consumers. But first, I think it is important to note that the 
payments fintech industry is already subject to a comprehensive 
legal and regulatory framework which has been supplemented 
through robust self-regulatory efforts, including security 
standards.
    At ETA, we support policies that provide certainty, 
engender trust, protect consumers, and encourage innovation. To 
that end, we encourage policymakers to advance policies that 
are technology-neutral, principles-based, and allow for 
industry-led standards, and use the, ``same activity, same 
risk, same regulation,'' framework.
    As the industry continues to evolve, it is imperative that 
the policy framework protects consumers while encouraging 
continued progress.
    At ETA, we are proud to represent the payments technology 
industry. On behalf of the industry, I want to thank you for 
the opportunity to speak with you today, and I look forward to 
answering any questions you may have.
    [The prepared statement of Mrs. Kelley can be found on page 
36 of the appendix.]
    Chairman Hill. Thank you, Mrs. Kelley, for your testimony.
    Dr. Lenz, you are now recognized for 5 minutes for your 
oral remarks.

STATEMENT OF JIMMIE H. LENZ, DIRECTOR, MASTER OF ENGINEERING IN 
FINANCIAL TECHNOLOGY, DUKE UNIVERSITY; AND PRINCIPAL, FRONTIER 
        FOUNDRY-ADVANCED RESEARCH AND FINANCIAL SERVICES

    Mr. Lenz. First, let me thank you all for having me here. 
Chairman Hill, Mr. Lynch, it is really a pleasure to be with 
such an esteemed group of my colleagues up here. It is great to 
have this opportunity.
    As you mentioned in your opening comments, I am currently 
at Duke University. I lead the master of engineering in 
financial technology. I also have another role where I lead a 
team in advanced research and financial services for Frontier 
Foundry, and that company works directly in industry.
    My roots in this industry go back about 35 years. I 
actually checked with the Financial Industry Regulatory 
Authority (FINRA), my broker check, to see when I was first 
licensed, and it was in 1985, which I am guessing is before a 
lot of you were born, but I have been in financial services 
that long. And my career in financial services has been defined 
by innovation.
    When I started, there were no laptops or computers on 
desks. Exchanges were still open outcry. There was not a lot of 
technology, but it was coming, and that is what has kind of 
brought me to where I am today.
    I have seen innovation do so many things to the industry, 
and to finance in general, and what that has meant for 
consumers is huge. When I started, spreads on stocks were 12.5 
cents, an 8th, often 25 cents, 50 cents. Now, typically a 
penny. Everything is transparent. You can do everything online.
    And how did that come about, online trading, online 
banking, online access? Well, innovation. And sometimes, 
innovation comes from areas that people don't expect. I know 
that most people, when they think innovation, they think about 
the big players--big banks, big brokerage firms.
    But the first bank to put accounts online was a small 
community bank in Knoxville, Tennessee. The first bank to give 
folks access to their accounts, Presidential, and then, 
Stanford Federal, were small players.
    Mr. Hill, you mentioned ATMs. They weren't invented by a 
big bank; it was a Scottish engineer, who sold it to a big 
bank.
    Those kinds of developments are directly beneficial to 
consumers at the end of the day. And while we think about 
innovation in terms of big, big financial institutions, at the 
end of the day, these trickle down to consumers. They mean 
access, they mean price advantage, and they mean transparency.
    Are there risks involved? Absolutely. I have spent my 
career basically looking at risks. I was a trader on the 
electronic and algorithmic side, I ran a trade desk, I ran a 
brokerage firm, and I was a chief risk officer of one of the 
largest brokerage firms in America, along with a chief credit 
officer.
    Did I care about risk and did I think about it? Every 
single minute of every single day. But risk is what we do. It 
is inherent to the business. It is inherent to what I think is 
the financial system in the United States.
    With innovation comes that, but you don't get that 
tradeoff. You can't have no-risk situations and still move 
ahead. Everybody needs to take a little bit of risk. It needs 
to be measured. It needs to be quantified. It needs to be well 
understood. But remember, when you eliminate risk from any 
equation, you also eliminate reward. There is a reason we call 
the risk-free rate of return the lowest rate you can get, and I 
think sometimes that is forgotten.
    The other thing I think that sometimes doesn't boil up is 
the fact that innovation doesn't happen in a vacuum. Sometimes 
there are failures, and it actually happens more often than 
not. In fact, one of the things I tell my colleagues and my 
students is if you are not failing on a pretty regular basis, 
you are not trying hard enough.
    And I think as we go forward, as we think about innovation, 
in particular in financial services, we need to be very mindful 
that it does come with some tradeoffs. Are there going to be 
risks present? Absolutely. Should they be well understood? 
Absolutely. But options are always a positive thing, and more 
options are better.
    Thank you very much for the time.
    [The prepared statement of Dr. Lenz can be found on page 50 
of the appendix.]
    Chairman Hill. Thank you very much, Dr. Lenz.
    Mr. Palaniappan, you have 5 minutes for your oral remarks. 
Thank you for being here.

      STATEMENT OF RAM PALANIAPPAN, FOUNDER & CEO, EARNIN

    Mr. Palaniappan. Chairman Hill, Ranking Member Lynch, and 
members of the subcommittee, thank you for inviting me to 
testify today on modernizing financial services through 
innovation and competition.
    My name is Ram Palaniappan. I am the CEO and founder of 
Earnin, a company focused on improving the financial health of 
our customers by giving them more control and choice over their 
finances.
    Our primary product, known as Earned Wage Access, or EWA, 
addresses the problems caused by the archaic and rigid system 
of fixed paydays. Two-thirds of our country lives paycheck to 
paycheck, and much of their lives revolve around waiting for 
payday. With EWA, workers can access the money that they have 
already earned without waiting for payday.
    Around 2 million people use our product: retail workers, 
teachers, nurses, and even government employees, such as TSA 
agents and over 100 congressional staffers. Today, there are 
also several other companies that offer similar EWA products.
    I would like to tell you about how Earnin started. I didn't 
set out with the intent to start a company. I was working at 
another company, and there I heard that some of my employees 
were running into overdrafts. And I spoke with one of them. I 
was surprised because I thought we were paying everybody well, 
so I spoke with one of them.
    The problem that she had was she needed money the next day, 
couldn't wait till the following payday, and it was already 
halfway through the week. So, I said we would pay her for the 
days that she had already worked, but I couldn't make the 
payroll system do that, so I gave her the money that she had 
already earned, and we settled it on payday.
    And I continued doing this in person for a handful of 
people for about 4 years. Then, I left the company, and they 
wanted to know if I would still do it for them. And I didn't 
mind doing it. These were people whom I had seen in the office 
for years.
    At first, I did this over Instant Messenger, and that was 
not very convenient, so I built a web form. When I had this web 
page up, people whom I didn't know tried to use the product, 
and I did it for them as well. And what I realized was that 
when you give someone access to the money that they have 
already earned, when they need it, their life is much simpler. 
They are paying all of their bills. The bills are not piled up 
on payday with late fees. There are no more overdrafts, no more 
expensive loans, and that is when I realized that if I didn't 
try to make this into a product, I would always feel bad about 
myself.
    We now do this at scale. Every month, over a million people 
use Earnin to pay their rent on time, to buy gas to get to 
work, and to buy groceries. And by accessing their wages when 
they need it, our customers are avoiding over a billion dollars 
a year in overdraft fees.
    The benefits of EWA are not just financial. I met with one 
of our customers in Columbus, Ohio. She works at a hospital, 
and her daughter has a passion for dance. And she was telling 
me that she needs to pay for the dance classes upfront at the 
beginning of the month, and if not for our app, she wouldn't 
have been able to do that. To me, it is amazing that through 
our app, her daughter is able to pursue her passion for dance 
and participate in dance competitions.
    If we want more financial access, if we want more financial 
inclusion, then we need new financial products. If we need 
financial products to work, we need innovation and the right 
regulatory frameworks for them. EWA is one of the innovations 
that provides a great option for people who do not have any 
good ones, but it does not fit well into existing regulatory 
frameworks.
    The Consumer Financial Protection Bureau (CFPB), under 
Director Cordray, exempted EWA from the payday rule, and in 
recent budget proposals, the Biden Treasury Department has said 
that on-demand pay arrangements, a common term for Earned Wage 
Access, should not be considered loans for tax purposes. We 
agree, and think EWA needs its own regulatory framework. EWA 
solves problems in a unique way, with much-needed consumer 
protections.
    Last year, Treasury Secretary Yellen spoke about how the 
delays in our payroll system harm those with lower incomes. EWA 
helped solve that. But if we don't create new legislation and 
regulations, then we are left with the same products we already 
have, and that means we are satisfied with the status quo and 
we are comfortable with the amount of inequality we have.
    I believe we can do better, and I think we all want that, 
and that is why we need legislation and regulation that 
preserves and promotes innovation and consumer choice.
    I would like to thank Congressman Steil for the discussion 
draft, and I look forward to working with all Members to find 
solutions that help consumers.
    Chairman Hill, Ranking Member Lynch, and members of the 
subcommittee, thank you for the opportunity to testify today, 
and I look forward to answering your questions.
    [The prepared statement of Mr. Palaniappan can be found on 
page 55 of the appendix.]
    Chairman Hill. Thank you for your testimony.
    Mr. Sanz, you are now recognized for 5 minutes to give your 
oral presentation.

  STATEMENT OF PARRIS SANZ, EXECUTIVE VICE PRESIDENT, GENERAL 
 COUNSEL, AND HEAD OF POLICY AND GOVERNMENT RELATIONS, WEBBANK

    Mr. Sanz. Thank you, Mr. Chairman.
    Chairman Hill, Ranking Member Lynch, and members of the 
subcommittee, I am honored to appear before this subcommittee 
today on behalf of WebBank to discuss how responsible bank 
partnerships, like WebBank's, drive innovation, enhance 
inclusion for underserved consumers, and support compliance 
with applicable laws and regulations. We also wish to express 
support for innovative BNPL and EWA products, and efforts to 
regulate them as noncredit products.
    My name is Parris Sanz. I am the EVP, general counsel, and 
head of policy at WebBank. WebBank has the longest track record 
of successfully overseeing third-party lending programs through 
bank partnerships and has originated and funded over $180 
billion in consumer and commercial loan products.
    The bank provides its credit products through the platforms 
of its nonbank strategic partners, including well-recognized 
technology companies like PayPal, Intuit, Shopify, and Toast. 
Based on the bank's experience as a pioneer in the industry, we 
believe that bank-fintech partnerships can unlock the greatest 
strengths of each participant, yielding a sum greater than its 
parts.
    Fintech companies develop amazing technology platforms that 
deliver minimal friction, state-of-the-art customer 
experiences, serving customers on their mobile phones and 
online, where they want to transact. These technologies provide 
the ability to scale up quickly and reduce cost, but banks 
often struggle to develop them on their own.
    Banks like WebBank have deep expertise in financial product 
design, regulatory compliance, and oversight. When these 
capabilities are combined, they enable the parties to bring 
innovative and valuable financial products to market 
efficiently and at scale, while ensuring legal and regulatory 
compliance.
    At WebBank, we believe the best way to operate these 
partnerships relies on three key pillars. First, the bank must 
engage in rigorous due diligence and risk assessments of the 
fintech partner upfront and on an ongoing basis, commensurate 
with the applicable risks of the partner and the program.
    Second, the bank must carefully structure its agreements 
with the fintechs to limit the bank's exposure and to ensure 
that the bank has the rights it needs to control the program 
effectively and to oversee its lending programs, including 
control of the credit policy, marketing, and customer-facing 
materials.
    Third, the bank must apply ongoing supervision and 
oversight across all aspects of third-party lending programs. 
Banks should require their fintech partners to adopt and 
maintain bank-approved compliance management systems and to 
regularly test, audit, and report on them.
    WebBank's application of these core pillars has enabled us 
to bring valuable consumer products to market in compliance 
with applicable laws and regulations, subjecting our fintech 
partners to the supervision and oversight of the bank and its 
regulators.
    But some stakeholders would have this subcommittee believe 
that bank partnerships are inherently problematic because they 
present the theoretical possibility of supporting high APR 
consumer products. They point to rare exceptions of banks 
supporting high-APR programs through bank partnerships to claim 
the bank partnership model itself is problematic, ignoring that 
most high-APR programs come from other entities, not bank 
partnerships.
    Moreover, these stakeholders take the position that if a 
nonbank has a predominant economic interest in a bank-
originated loan, then the partnership is a rent-a-bank, and the 
nonbank must be treated as the lender under State law. This 
position is illogical and completely inconsistent with Supreme 
Court precedent and the realities of the secondary market.
    For example, if a bank originated a 5-year installment loan 
and sold it to a credit fund in the first year, the conclusion 
is that the purchaser is the true lender, subject to the myriad 
laws of the State in which the borrower resides, which would 
bring the entire secondary market for such a loan to a grinding 
halt.
    These stakeholders attempt to obscure the reality that the 
bank partnership model is a neutral one by which banks and 
fintechs can work together to leverage what they each do best 
to drive innovation, inclusion, and compliance, while operating 
within the regulatory perimeter.
    WebBank provides the strongest counterexample to these 
claims by providing consumers with financial products that are 
innovative, inclusive, fairly priced, and comply with all 
applicable laws and regulations.
    For all these reasons, State and Federal lawmakers should 
be wary of attacking bank partnerships, lest they throw the 
baby out with the bath water. Laws affecting bank partnerships 
that are intended to keep out predatory programs have been 
overly-inclusive and have the effect of keeping out responsible 
programs as well.
    Accordingly, we ask members of this subcommittee to support 
efforts to create greater legal certainty regarding the 
treatment of loans originated by banks and bank partnerships. 
We ask Congress to support a more reasonable and practical 
framework than the predominant economic interest test to 
determine when the bank is the true lender and when 
inconsistent State laws are preempted by Federal banking laws.
    Finally, WebBank cautions this subcommittee against 
adopting a one-size-fits-all approach to regulating BNPL and 
EWA products that conflates them with traditional credit 
products. To do so risks overregulation that is not appropriate 
for such noncredit products.
    The appropriate balance between financial innovation and 
regulation lies in a tailored regulatory framework based on the 
provider's activities and commensurate with the actual risks 
associated with such products.
    Thank you for the opportunity to testify today, and I look 
forward to answering your questions.
    [The prepared statement of Mr. Sanz can be found on page 62 
of the appendix.]
    Chairman Hill. We appreciate your testimony.
    Ms. Spotser, you are now recognized for 5 minutes for your 
oral presentation.

STATEMENT OF MITRIA W. SPOTSER, VICE PRESIDENT AND DIRECTOR OF 
      FEDERAL POLICY, CENTER FOR RESPONSIBLE LENDING (CRL)

    Ms. Spotser. First of all, good morning, everybody. On 
behalf of the Center for Responsible Lending (CRL), I would 
like to thank you, Chairman Hill, Ranking Member Lynch, and 
members of the subcommittee, for the opportunity to testify 
today.
    Two words really stick out in the title of this hearing, 
and those are, ``innovation,'' and, ``competition.'' And the 
core of my testimony is going to focus on those two words and 
talk about why it is important that we actually remember what 
those words mean and why they matter.
    And I am going to start with, first of all, why they 
matter. We believe in innovation in the financial services 
market, and the Center for Responsible Lending does as well, 
but we believe in it because, done correctly, innovation 
improves lender efficiency. And by improving efficiency, 
lenders will be better able to market a product at a more-
affordable cost to consumers.
    The goal here in innovation is to expand access by 
competing on price. The reason why that matters in this 
conversation in particular is that some of the regulatory 
exceptions that are being asked to be made today are to, in 
fact, not have to compete on price. So, we are talking about 
products that are asking that they not be held accountable to 
the same disclosure obligations that other financial 
institutions, credit unions, community banks across this 
country are required to do. And the rationale behind that is 
that somehow, these products are different.
    Let's take an example. And since I have a very short amount 
of time, I am only going to give one example. But let's take a 
product like Earned Wage Access, and the notion is, well, you 
get your wages early. But these third-party products are not 
connected to the employer. The employer is actually not 
transmitting your pay. The third party is, in fact, using their 
own financials, their own cash that they have available, and 
they are submitting it to the consumer. The company does not 
actually go to your employer to deduct that amount from your 
paycheck. So, it is not an employer payroll deduction, and the 
recourse is not against the employer. The recourse is against 
you and your bank account.
    That is a loan. The reason why it is a loan is this. We 
have all been working in the financial services sector for a 
number of years, and I have to tell you, any time I advance 
cash to someone with the expectation that they repay that 
capital to me, it is a fundamental business proposition where I 
look at their ability to repay that based on their future 
income. That's called underwriting. It is a really important 
component of underwriting that every single financial 
institution does.
    So, you are always repaying a loan based on your future 
earned income, and I am always structuring the repayment of 
your loan based on when I anticipate those wages will come. 
What we have here is not a fundamental distinction of the 
characteristics of the product; we have a really interesting 
way to explain a product that already exists.
    I am from a small town, and we have these kind of 
traditional sayings, and one of them is, if it looks like a 
duck, it swims like a duck, and it quacks like a duck, it is 
probably a duck.
    Buy Now, Pay Later and Earned Wage Access look and function 
like credit. They look and function and act like capital and 
loans. And they should be regulated as such.
    And here is why this matters on the second end about 
competition. I talked about the fact that I am here from the 
Center for Responsible Lending, but we are also an affiliate of 
a financial institution, Self-Help, and we have the Self-Help 
Federal Credit Union.
    The reason why this matters so much is because this 
committee is also inherently concerned about the brick-and-
mortar financial institutions in your district that work with 
your constituents to actively report credit histories from 
payments, and to push them into assets and develop long-term 
relationships with them that lead to wealth-producing assets.
    They are all required to meet the same disclosure 
obligations that these institutions are somehow representing 
they should not be subject to, but that is not competition. 
That is, in fact, inherently anticompetitive.
    I say to you that we have no aversion to Buy Now, Pay Later 
products and Earned Wage Access products, anything that people 
want to do with respect to these products, as long as they are 
required to be able to produce the same information about their 
costs, and as long as they compete under the same 
characteristics that every financial institution in this 
country should compete on, and that is price.
    Voluntary tips and monthly subscriptions disguised as 
excuses other than actually charging the cost of credit are not 
competing on price.
    Thank you.
    [The prepared statement of Ms. Spotser can be found on page 
80 of the appendix.]
    Chairman Hill. Thank you for your testimony.
    I appreciate the entire panel's participation.
    The Chair now recognizes himself for 5 minutes for 
questions.
    In my opening remarks, I talked about community banks in my 
home State of Arkansas partnering with fintech startups to be 
on the cutting edge of technology and meet consumer demand. We 
are blessed in Little Rock to have a venture center that has 
been open now for 11 years, and our fintech partnership with 
FIS, the publicly-traded company there, has Little Rock at the 
top of its innovation hub, looking for fintech solutions that 
they can offer to banks for both internal compliance and cost 
reduction, as well as customer acquisition and customer service 
aspects of it. And it has been impressive over the last decade 
to watch their innovation and the expansion of what they are 
doing.
    According to McKinsey & Company, when you look at the top 
100 banks by asset size, 80 percent of them have now partnered 
with at least one fintech company over the years on that same 
sort of approach, internal improvement and reduction of cost, 
or customer acquisition or service.
    Mr. Sanz, why is it when only a few years ago, we viewed 
this fintech-bank situation as disruptive and the fintech 
companies were testifying that they were going to put 
traditional commercial banks out of business, that we now see a 
lot more collaboration? Can you reflect on that change over the 
past few years?
    Mr. Sanz. Yes. And thank you for your question, Mr. 
Chairman.
    I would say that over the last few years, many banks have 
come to the realization that if you can't beat them, join them. 
The DNA of banks and fintech companies are very different. 
Banks are focused on risk management and regulatory oversight. 
Fintech companies' focus is on the customer experience, minimal 
friction, ease of use, and essentially, bringing, if you will, 
Apple-like design principles to financial services and 
products.
    These are technologies that are difficult for many banks to 
develop internally, both because they don't have the DNA, if 
you will, and often because they don't have the resources to do 
it.
    Chairman Hill. Let me interrupt you there, because that 
brings up a good point, I think, about traditional banking, 
their access and the use of Big Data to enhance their own 
customer database, their own geographic data knowledge.
    Would you say that has really helped banks reach out to 
more customers and expand the product availability to people 
who have little or no credit history, because the traditional 
banks just don't have access? Have you blended that in with 
what you are doing with the fintechs?
    Mr. Sanz. Yes, absolutely. Although banks certainly have 
developed their own internal technological capabilities,certain 
technologies definitely have been outside of their focus. I 
will give you one example. WebBank established a partnership 
with a company called Petal. Petal had developed cutting-edge 
technology with respect to cash flow underwriting, pursuant to 
which they could ingest bank statement transactional history, 
consumer-permissioned information. And with that, they could 
develop a risk score for someone with a no-file or thin-file 
credit history that could be used to either underwrite them a 
loan or in conjunction with traditional scores.
    We have partnered with them since 2018, and we have been 
very successful in being able to provide introductory credit 
cards to credit invisible consumers who likely would have been 
declined by other financial institutions.
    Chairman Hill. That is helpful.
    Just continuing with that theme, since you partner with 
these companies and you provide that bank compliance focus, 
really to Ms. Spotser's concept about everybody playing by the 
same rules, effectively, WebBank has a high standard of 
compliance. So, what do you think recently about the third-
party risk management guidelines that have recently been 
published?
    Mr. Sanz. Yes. Thank you for the question. I will tell you 
that our view is that we generally agree with the sentiments 
and thoughts expressed by Governor Bowman. Although we think 
that some of the principles put forth are helpful, it is a one-
size-fits-all recipe that is being provided, that doesn't 
provide sufficient tailored expectations for smaller 
institutions.
    When we initially saw the guidance at WebBank, we held it 
up to ourselves and felt comfortable that we live up to those 
principles, but we are a bank that has been focused exclusively 
on managing fintech partnerships for over 25 years, with 250 
people dedicated to it. As I look at that guidance and think 
about other banks which would want to begin to leverage 
relationships with fintechs, I think it could be very daunting 
in terms of the resources----
    Chairman Hill. Thank you. In my time remaining, if you 
could respond in writing just how you would tailor that scope 
so that we could have some feel for that in the committee, that 
would be very helpful.
    That concludes my time, and I turn to my good friend, the 
ranking member of the subcommittee, Mr. Lynch, for his 5 
minutes of questions.
    Mr. Lynch. Thank you, Mr. Chairman.
    Ms. Spotser, you highlight, I think very well, the conflict 
between the business practices of credit unions and traditional 
small banks, and what they have to do in order to report and 
track the creditworthiness and loan performance of their 
products versus the carveout that is being urged by folks in 
fintech and Buy Now, Pay Later.
    There is a generational change going on here where a lot of 
young people-- I don't think my two girls have ever been in a 
bank. They do everything on their phone. They have that iPhone, 
and so they are much more likely to gravitate towards this 
product. And I think in a way that is what the industry is 
doing here. They are sort of following customer preferences.
    But there is a trap. We have seen a spike in delinquency 
rates among Buy Now, Pay Later customers that is worrisome, 
especially in recent months where interest rates are going up. 
And I know that many Buy Now, Pay Later products don't charge 
interest rates. They have different ways of monetizing this.
    However, there is pressure in the general economy, so 
people are borrowing more, so the default rates and delinquency 
rates among Buy Now, Pay Later customers is far higher than 
those who are nonborrowers in that space. And I just wonder if 
you could talk about the trap that young people or anyone using 
that product might fall into?
    Ms. Spotser. Sure. The biggest issue here is that these 
products are marketed as being interest-free and free. And as a 
consumer, the first thing I think is that really means that it 
is free. And then, when you go into the weeds of looking at the 
product, there is a service fee or something else that is 
associated with it. So, the costs themselves are not upfront.
    So, you are right, sir. I think to the extent that there is 
a technological advantage, you have an app, although there are 
very few financial institutions in the United States right now 
that do not have apps. But to the extent that you have that, 
there is some familiarity and ease.
    But what we are seeing as the most significant point here 
is that we are not accurately reflecting the cost of these 
products. And because of that, we do have an increase in 
delinquencies because individuals are, in fact, not fully aware 
of the costs upfront, whereas, financial institutions, 
traditional brick and mortar do have an obligation to disclose 
that.
    Now, I want to be clear: I believe that these institutions 
have that same obligation to disclose it. That is a regulatory 
matter for which the Consumer Financial Protection Bureau will 
hopefully provide some guidance. But it is imperative that 
people actually disclose the full cost of credit.
    Mr. Lynch. Right. And simply looking at that one payment, 
monthly payment, does not illustrate or give a picture of the 
true cost of that overall purchase, right?
    Ms. Spotser. Yes. Not if you are charging a service fee or 
a late fee that comes on top of that. And there is an 
expectation--one of the issues here is that these are not one-
and-done products even by their own analysis. There was a 
report from FTI Consulting that was convened by Earnin and a 
couple of other organizations, and they are saying that 
consumers use these products every 2 weeks.
    We remember a product that looked a little bit like that. 
So, it is not just the $100 that you borrowed and the $10 fee 
there, and then, the expedited processing fee, none of which 
are disclosed as actually being the cost of credit. But it's 
the fact that you are going to do that 3 or 4 times. And 
because I have access to your bank account, there is a high 
probability, since I am saying that my product is being used to 
cover overdrafts, that I, in fact, am overdrafting your account 
in that process. So now, I need to borrow even more money.
    And one of the things that we want to be clear about here 
and why we are saying, not, again, that these products should 
be taken out of the market, but that they should be upfront 
about their disclosures, is that consumers have the right to 
know what the full cost is and to understand the risk that they 
are taking by taking out one of these products.
    Mr. Lynch. That's great. What are some of the standards 
that you would like to see applied to the Buy Now, Pay Later 
space and some of these arguably innovative platforms that are 
offering different ways, although not fully transparent, to 
consumers on financing their debt?
    Ms. Spotser. I would like them to abide by the existing 
law, which is the Truth in Lending Act and the Credit Card Act, 
to the extent that their products actually meet those 
obligations. And that means that they would be upfront about 
the cost of their products.
    Mr. Lynch. That's great. Thank you. I yield back.
    Chairman Hill. The gentleman yields back.
    The gentleman from Ohio, Mr. Davidson, who is also the Vice 
Chair of the subcommittee, is recognized for 5 minutes.
    Mr. Davidson. I thank the chairman, and I thank the 
witnesses. I really appreciate your expertise and your time and 
travel here to help educate us and inform us on policy.
    It is a dynamic time in our financial markets, and fintech 
is really making people wrestle with these things. Even as I 
listen to you all, and your statements have some overlap and 
agreement and some healthy disagreement, it is important for us 
to understand this because we have to adapt as well to make 
sure that our laws stay relevant and functional so that our 
markets do that for our consumers.
    I just think it is great that we have this subcommittee. It 
took a while for the Financial Services Committee to get to 
here.
    But one of the constants has been go back to the Bill of 
Rights, the Fourth Amendment, the right to privacy. So much of 
our data is collected through the payment system, through 
financial technology, going back to the whole Bank Secrecy Act 
and the third-party doctrine. It has all been established with 
financials.
    I had a conversation recently where I was asked, why would 
a business still accept cash? And there are a host of reasons, 
but one of my answers was, maybe they don't want to spy on 
their customers or facilitate spying by others on their 
customers.
    This week, the Consumer Financial Protection Bureau--or 
about a week ago--introduced their 1033 privacy rule, and there 
are lots of comments coming on it. People have digested about 
300 pages and gone through it.
    And, Mrs. Kelley, I just wonder what you think about 
payment privacy as we work towards, maybe a payment privacy 
act?
    Mrs. Kelley. Yes, Congressman Davidson. Thank you for that 
question.
    We represent the payments industry, and there is no issue 
that is more top of mind for the payments industry than 
security and trust. Consumers have to know that their data is 
secure. They have to know that they can trust the system, and 
they have to know that their privacy remains intact. So, as we 
think about the issues of data security, privacy, and trust as 
an industry--I was saying that is exactly why the industry has 
devoted billions of billions of dollars to security to----
    Mr. Davidson. Yes, it has to be secure. But obviously, you 
collect information about the consumer to know this is who they 
say they are, and that they have the credit that they claim to 
have.
    I think the concern is, what happens with that information 
afterwards? There is a big market for it. How do you protect it 
and recognize kind of the property right that consumers have? 
And I think that is the fundamental question.
    I look forward to collaborating with you, and your sector, 
and frankly, people broadly, because I think this is something 
where the CFPB is focusing on one of the core issues our 
consumers care about, which is their data. And people are 
monetizing it in a lot of ways. And, frankly, the government is 
kind of exploiting it in some ways.
    So, I look forward to wrestling with that. I think that is 
one of the most important topics for our committee to resolve.
    Mr. Sanz, in your testimony, you lay out how poorly-devised 
State laws have created legal uncertainty regarding whether 
bank-originated loans will remain enforceable on their original 
terms after they are sold to nonbank entities. Obviously, the 
structured credit market is a very big part of our financial 
markets.
    Can you relay how this legal uncertainty is impacting 
consumers and our markets?
    Mr. Sanz. Absolutely. I will tell you, Congressman, that it 
is a repeat of what we saw after the Madden v. Midland case in 
the Second Circuit. When that case came out, it raised legal 
uncertainty regarding the enforceability of bank-originated 
loans at APRs above certain State regulatory caps in Vermont, 
New York, and Connecticut, in the hands of nonbank purchasers.
    The result was that the secondary market seized up, and 
those loans were no longer originated. The impact was very 
clear. It was set forth in a study that I included in my 
written testimony, and it showed that, whereas consumers before 
the Madden decision said that FICOs below 640 were able to 
receive capital, after the decision, those loans dried up 
entirely. And when you look outside the Second Circuit, you see 
availability increasing for that same risk profile population.
    The same legal uncertainty is being created in States like 
Illinois, New Mexico, Maine, and others which are passing laws 
that basically say that if a nonbank in a partnership has the 
predominant economic interest in a bank-originated loan, that 
the nonbank itself is the lender, and subject to State laws.
    Mr. Davidson. It changes the terms of the deal. So, how do 
you know you really have a deal? It essentially kills the 
market, right?
    Mr. Sanz. Yes. I completely agree, sir. This is a one 
variable outcome determinative test, who enjoys most of the 
economics in the underlying loan. It is completely inconsistent 
with the secondary market. Banks originate loans and sell them 
all day long. That is how we can make more capital available.
    Mr. Davidson. Thank you.
    My time has unfortunately expired, and I yield back.
    Chairman Hill. The gentleman yields back.
    The gentleman from Illinois, Mr. Casten, is recognized for 
5 minutes.
    Mr. Casten. Thank you, Mr. Chairman. And I thank you all 
for being here.
    Before we start, and I do want to spend most of my time 
talking about your expertise, which I appreciate you sharing 
with us today, I just want to chat with you all for a moment as 
Americans. We are less than 3 years after January 6th, and 
after the House was attacked, we walked back to the House 
Floor. We walked through the broken glass on the floor. We 
walked past cots with National Guard officials who were 
sleeping in shifts so they could continue to protect us.
    And I went up and I sat with Mr. Hill up in the gallery and 
watched the debate start on whether or not we were going to 
overturn the Arizona election results. And I watched the 
majority of the Republican caucus vote to continue the work 
that the insurrectionists tried to start.
    And I want to thank Mr. Hill for your vote that day in not 
voting to overturn the election. I want to acknowledge that the 
chairman of this committee also did not. It should not be 
exceptional or praiseworthy to defend our democracy, but I 
understand the courage that takes in today's Republican Party.
    And I say that because we are moments from going to the 
Floor and deciding whether to elect a Speaker, someone who not 
only voted to overturn the election, but wrote the legal 
framework that his colleagues had empowered them to do the 
same. And I say that, because democracy only survives if we 
defend it.
    I hope to be able to tell you at the end of the day that 
there was robust bipartisan support for the peaceful transfer 
of power and democracy, but I fear that I am not going to be 
able to, because everything we are talking about today is 
predicated on that continuing.
    I am going to move to EWA. Mr. Palaniappan, it's nice to 
see you again. And I don't want to make you the poster child 
for the whole industry, but I'm hoping you can educate us a 
little bit.
    As I recall from our prior conversations, your payment 
model--you have a no-cost model, but people can offer to pay 
tips if they like the service. And then, you have a separate 
cost where people pay $1.99 to $3.99. I see you are nodding 
your head, so hopefully, I have that about right.
    Is $3.99 the maximum fee if they do that?
    Mr. Palaniappan. That is correct.
    Mr. Casten. Okay. And, again, I don't know if you are 
representing the industry, but what percentage of your 
customers opt for the immediate payment versus the delayed 
payment?
    Mr. Palaniappan. Thank you for the question. And I can 
speak about our numbers. I think the industry----
    Mr. Casten. Just an estimate, because I want to get through 
it, because I am trying to educate myself on this limited 
question.
    Mr. Palaniappan. We allow what we call tips, voluntary 
payments, on all transactions. Over half of our transactions do 
not have a tip, and the average tip is $1.45. And then, on the 
Lightning Speed, which is the wire light service, that is $1.99 
to $3.99; the usage varies. On the weekends, it's higher, 
because ACH shuts down.
    Mr. Casten. Okay. But overall, about 50 percent on an 
annual basis?
    Mr. Palaniappan. It could be a little bit higher than 50 
percent.
    Mr. Casten. Okay. And what is the average amount that 
people are taking out when they are doing that expedited 
payment? I see that you have a cap of $750, but what is the 
average that people are taking that they have to pay that $1.99 
to $3.99 on?
    Mr. Palaniappan. The $1.99 is a choice. They can also get 
it same day, no cost, without Lightning Speed, because we use 
same day----
    Mr. Casten. Yes. I am just talking about the Lightning 
Speed piece.
    Mr. Palaniappan. The average across all transactions is 
about $85 a transaction.
    Mr. Casten. Okay. And you may not want to answer this, I am 
sure you are a private company, but what is the return on 
equity you have to hit in order to make sure that you have the 
capital necessary to keep your business running?
    Mr. Palaniappan. I am not exactly sure how you calculate 
return on equity.
    Mr. Casten. What I am saying is you are providing, 
effectively, a working capital revolver. And your ability to 
access the capital, to fund that and to grow is going to be 
contingent on delivering some acceptable return to your capital 
provider. So, what is the number you have to hit, whether 
through tips, through $1.99, through $3.99, whatever the range, 
what do you have to manage your business to?
    Mr. Palaniappan. We don't have any thresholds that we are 
required to hit. I think we are trying to make a business that 
is sustainable. It is sort of interesting like how the whole 
pricing model came about, if you would let me talk about it.
    Mr. Casten. Again, if you are uncomfortable--what I am 
trying to understand, and let me sort of maybe get to the punch 
line and work backwards. I admire what you are doing, and I am 
trying to understand how this all sits together. But there is 
the question, I think Ms. Spotser raised of, at some point, 
where is the bright line between a lending product and an act 
of charity and something that doesn't need to be covered?
    And, of course, in this hearing, we have a bill that has 
been noticed, that would exempt the EWA industry from the Truth 
in Lending Act.
    Let me just call the question: Do you support EWA not being 
subject to the Truth in Lending Act?
    Chairman Hill. You can respond to that question in writing.
    Mr. Casten. Ms. Spotser, I would welcome your thoughts on 
that question as well, because I am trying to understand, to 
the degree this is a loan, and how we think about that.
    Chairman Hill. The gentleman's time has expired.
    Mrs. Houchin is recognized for 5 minutes.
    Mrs. Houchin. Thank you, Chairman Hill, and Ranking Member 
Lynch.
    And thank you to the witnesses for testifying today.
    Since I became a member of this committee in January, one 
of my top priorities has been to ensure that everyday 
Americans, including those who live in my district in southern 
Indiana, have flexibility and choice when it comes to planning 
for their own financial futures and for their day-to-day 
financial activities.
    Innovation in fintech has been instrumental in helping to 
bring about more opportunities for all Americans, from 
delivering products to underserved communities, to providing 
flexibility with payroll and payments.
    Clearly, financial technology has already changed the way 
people interact with their banks and the financial sector. 
While many Americans access their bank accounts online and 
invest with their smartphones, fintechs have also made it 
possible to make larger-payment purchases through flexible 
payment arrangements, which can allow an employee to access 
earned wages without waiting until payday arrives.
    With all the benefits that financial technology has to 
offer, I think we need to ensure that our regulatory 
environment ultimately helps people access some of these 
financial services products and that they have the tools they 
need to invest and save on their own terms.
    Mr. Sanz, WebBank has entered into a partnership in which 
the bank provides credit access to individuals who lack 
established credit history, an example being small business 
loans. Could you walk us through why a bank-fintech partnership 
would be critical to offering these types of products?
    Mr. Sanz. Yes. Absolutely. And thank you for the question.
    We have entered into various partnerships that take 
advantage of transactional data, as you indicated, some on the 
small business side, and some on the consumer side. I mentioned 
the consumer one before. It is one of a number, but the 
relationship with Petal stands out in that Petal has developed 
leading-edge cash flow underwriting technology that really 
provides incredible real-time visibility into the financial 
condition of a consumer.
    You can see the income that they are bringing in, and other 
amounts coming in. You can see how much they are spending, and 
how much they are saving. And these are categorized in a way 
that is not getting into the nitty-gritty or favoring a 
purchase at one kind of a store versus another. But with that, 
you can essentially effectively underwrite folks who have a 
thin file or no file.
    Similarly, on the small business side, we have been able to 
achieve similar results with PayPal, where we have flexible 
payment loans that are based on the transactional history that 
we see flowing through PayPal's closed-loop system. We are 
seeing the revenue that is coming in, and that provides really 
powerful insights, especially since COVID, given that credit 
scores are a lagging indicator and they have been really 
muddied by the stimulus.
    Mrs. Houchin. Thank you.
    Mr. Palaniappan, families working paycheck to paycheck 
currently are bound by a 2- to 4-week pay cycle, and there 
could be real-life factors and unexpected medical bills where 
they can't wait for payday. We know that according to a study 
conducted by Branch Logic, approximately 48 percent of hourly 
employees have no savings, and 83 percent have less than $500 
saved. So, the Earned Wage Access products can help consumers 
pay bills on time and avoid overdraft fees.
    Will you describe the additional benefits that come with 
giving access to consumers, depending on that traditional 2- to 
4-week wait, and how these products offered by Earnin allow 
consumers to manage their finances in a way that meets their 
own needs in paying bills before payday?
    Mr. Palaniappan. Sure. And like on the antiquated payroll 
system and people waiting 2 to 4 weeks, it actually wasn't 
always this way. Previously, people used to get paid every day 
after they worked, and really nothing else in our life works in 
a 2-week batch. Just imagine if Google said, give me all of 
your search queries, and in 2 weeks, I will give you the 
results? Nobody would use Google. That is the payroll system we 
are forcing everybody to live with, and it doesn't need to be 
that way, because the technology exists to run payroll much 
faster for people.
    In terms of benefits, like I told you about the billion 
dollars in overdraft fees that our customers avoid every year 
because they can access their wages when they need it to pay 
bills on time, to pay rent, to buy gas, to buy groceries, there 
are also lots of benefits that are not financial.
    We have heard from lots of customers who, after years, have 
celebrated their birthday on their birthday and not on payday; 
people who have gone to the dentist when their tooth aches and 
not put it away till payday because they couldn't afford to go 
to the dentist. I heard from a customer who was able to send 
her son on a field trip because she could access Earnin, and if 
not for Earnin, he would not have gone on the field trip.
    So, I think there are all these ways in which people's 
lives are being held back because we lock their pay in the pay 
cycle.
    Mrs. Houchin. Thank you.
    And finally, with the remaining time I have, Mrs. Kelley, 
what about the Buy Now, Pay Later products? What options would 
be available to these consumers if those products weren't 
available? Who is using these, and why are the flexible payment 
arrangements so popular?
    Mrs. Kelley. Yes. Consumers across-the-board are using 
them. It is an incredibly popular product, and for good reason: 
It gives consumers choice, flexibility, and optionality that 
they wouldn't have without this product.
    And similar to what we just heard, sometimes people need to 
make a purchase when it is not convenient for their pay cycle, 
for other reasons. Buy now, Pay Later allows them to do that. 
Paying what is, in fact, typically free over four installments, 
which just provides choice to consumers, that is important that 
they wouldn't have otherwise.
    Mrs. Houchin. Thank you.
    Mr. Chairman, I yield back.
    Chairman Hill. I thank the gentlewoman for yielding back.
    Mr. Nickel is recognized for 5 minutes.
    Mr. Nickel. Thank you, Mr. Chairman.
    It is great to be back here in the committee room, getting 
to work. I am excited about the work we are doing here in a 
bipartisan way. The Digital Asset Market Structure bill, the 
Stablecoin bill, I am ready to start working together to 
improve those bills and get things moving again on the Floor of 
the House.
    But today, we are here to talk about fintech, and fintech 
companies play a crucial role in driving economic growth and 
financial inclusion. We need to strike a balance that 
encourages innovation, while ensuring robust consumer 
protections, as this will not only boost our economy but also 
provide better access to the financial system for marginalized 
communities. It is our responsibility to foster an environment 
where fintechs can thrive, creating jobs and expanding access 
to affordable financial services, while never losing sight of 
the need to shield consumers from potential risks.
    Mr. Palaniappan, can you please explain the regulatory 
structure, if there even is one, for Earned Wage Access 
products?
    Mr. Palaniappan. Thank you for that question. In 2017, the 
CFPB, under Director Cordray, exempted EWA from the payday 
rule. Despite being exempt from the payday rule, there are a 
number of other regulations that we adhere to: Unfair, 
Deceptive, or Abusive Acts of Practices (UDAAP); the Gramm-
Leach-Bliley Act (GLBA); and then, privacy things, like the 
California Consumer Privact Act (CCPA).
    In addition, Nevada has passed a law that establishes a 
framework for Earned Wage Access, SB290, and Missouri has 
passed another law that has the framework for Earned Wage 
Access, SB103.
    Mr. Nickel. So, what is the need for new legislation?
    Mr. Palaniappan. I think it provides clarity with the right 
consumer protections. And Earned Wage Access has a number of 
new and much-needed consumer protections. The product is always 
available to customers at no cost. It is a nonrecourse product, 
so there are no collections, there are no penalties, and there 
are no late fees. It does not impact your credit score.
    I think we want to get those protections in the law so that 
the consumers can continue to access the product with 
confidence.
    Mr. Nickel. I have heard a lot of concerns about Earned 
Wage Access products locking people into a cycle of debt. Can 
you please explain what happens if a consumer doesn't repay 
their funds?
    Mr. Palaniappan. The service is simply paused. And if they 
want to use it again, they call us up and make us whole, and 
then they can use the product again. There are no late fees. 
There is no interest accruing. There is no impact on their 
credit score.
    Mr. Nickel. Thank you very much.
    Again, charges or interest, there are none that have to be 
repaid by the consumers?
    Mr. Palaniappan. That is correct.
    Mr. Nickel. Mr. Sanz, can you explain the role of 
technology and innovation in underwriting approaches, such as 
cash flow underwriting and promoting financial inclusion, and 
providing credit to thin-file or no-file customers?
    Mr. Sanz. Yes. I would be happy to. Thank you for the 
question. This has been an answer that I have presented a 
couple of times today. But to maybe expand more generally 
beyond our relationship with Petal, I would tell you that I 
think what many fintech players have realized is that 
traditional credit scores don't provide the insight, the real-
time insight needed to effectively underwrite consumers, small 
businesses, et cetera. And attempts have been made to tap into 
real-time information, including bank statement information, 
credit card processing information, and other receivables flow 
information to be able to see the actual real-time financial 
health of a potential borrower.
    That is incredibly powerful information, especially for 
people who are new to credit, low- and moderate-income 
individuals who have thin files or no files. If a traditional 
approach were applied to them, you would look at the FICO, and 
if they are below 640, the answer would be, no. If you look at 
their bank statement information and you can see that they have 
reasonable income coming in, they are spending at reasonable 
levels, they are net savers, for example, then they are a 
reasonable bet.
    And one great thing about this information is that it has 
actually been studied and largely validated by FinRegLab run by 
Melissa Koide. She looked at about six different firms that use 
cash flow underwriting in their business and found that these 
cash flow underwriting models are predictive. They are 
inclusive. They are helping people who otherwise have trouble 
accessing credit. And there is no indication that they present 
any proxy or fair lending problems of any kind.
    Mr. Nickel. My goal is, how can we expand credit, 
especially to marginalized communities, and communities of 
color? That is my goal.
    But in your experience, what distinguishes responsible bank 
partnerships from predatory lending practices, and how can 
policymakers differentiate between the two when we are crafting 
laws and regulations?
    Mr. Sanz. Yes, thank you. I will tell you that responsible 
bank partnerships are ones where the bank has control of the 
program, oversees the program carefully, controls the credit 
policy, the marketing materials, requires compliance management 
systems and audits them, and offers products that comply with 
the existing guidance regarding what constitutes nonpredatory 
products.
    Predatory products, on the other hand, are holistically 
problematic in terms of their repayment rates, fee harvesting, 
and repeat usage that indicates that it is not healthy 
reborrowing; it is a debt trap.
    Chairman Hill. Thank you, Mr. Sanz.
    Mr. Nickel. I yield back.
    Chairman Hill. I thank the gentleman from North Carolina 
for yielding back.
    And now, the gentleman from the inspiration for the Fintech 
Flyover in Lincoln, Nebraska, Mr. Flood, is recognized for 5 
minutes.
    Mr. Flood. Thank you to the good chairman from the State of 
Arkansas.
    Mr. Sanz, according to a study conducted in 2021, banks 
that partner with fintechs average 2.5 partnerships per 
institution. In your view, why are banks partnering with 
fintechs?
    Mr. Sanz. Thank you for the question, Congressman. I would 
say that what banks, like WebBank, have realized is that when 
you combine very knowledgeable, effective fintech companies 
with a bank, you unlock the best of each of those participants.
    Fintech companies are incredibly customer-focused. They 
build amazing tech platforms at scale with reach, excellent 
customer experience, minimal friction, what have you. Banks are 
very good at underwriting, at credit, and at regulatory 
oversight. They are not necessarily the best at building really 
great tech platforms. So, when you combine those capabilities, 
one plus one equals three, if not a larger number.
    And I think that is why you have seen over the last handful 
of years is banks coming around to the conclusion that if you 
can't beat them, join them, and that they are better off 
partnering in order to leverage the capabilities of fintech 
companies.
    Mr. Flood. I am really interested in financial technology. 
And as the chairman said, Lincoln, Nebraska, is a fintech hub 
for the United States. And we would like to have more.
    In the case of the State of Nebraska, I think that 
technology can also be useful in ensuring that smaller 
community banks--we have about 140 community banks in Nebraska, 
more State-chartered banks than anybody would ever imagine--get 
access to some of the same tools that larger banks have, like a 
slick mobile app, and an updated consumer interface on their 
website. These are the types of features that customers, 
especially younger customers, have grown to expect.
    The problem is, for some of the smaller banks in our 
communities, they don't necessarily have the bandwidth or the 
resources to provide these features that consumers are 
increasingly expecting. That is where, to your point, I think 
these important partnerships come in.
    This is a question for both Dr. Lenz and Mr. Sanz. Could 
you both speak to the potential benefits that bank-fintech 
partnerships can provide to community banks and their 
customers?
    Mr. Sanz. I will start with the quick answer. I will tell 
you that the benefits of a fintech relationship are available 
to all banks, including community banks. But I would say that, 
in the current environment, banks will need to invest 
substantial resources to take advantage of any of those 
benefits. The benefits could be myriad, depending on what they 
are looking for, from a slick front end to better data 
analytics to better underwriting, whatever it may be.
    But in order to unleash the benefits of any fintech 
relationship, especially given the current third-party risk 
management guidance, they will have to devote some pretty 
substantial resources to be able to structure their 
relationship with that partner and oversee it effectively. And, 
unfortunately, I think that guidance makes it difficult for 
community banks to live up to that standard.
    Mr. Lenz. Thank you for the question. And I would second 
that. I think that community banks--I come from North Carolina; 
I grew up in the southeast--serve a lot of small towns, and the 
big banks don't show up for those kinds of things.
    The opportunity that fintech allows community banks is 
phenomenal, but in a highly-regulated environment, it becomes 
difficult for them to adopt those kinds of things. The only way 
I think that community banks can stay viable is to offer those 
kinds of products, because it is too easy for consumers to get 
ahold of things. I think community banks offer a lot to the 
rural communities in particular. I think they have a place in 
the United States, and these kinds of partnerships are 
instrumental.
    The idea that a community bank can develop fintech products 
is not even possible. They are too small. They don't have the 
resources. And let's face it, even the large financial 
institutions have trouble. That is why they partner.
    Mr. Flood. Along those lines, let's talk about the recent 
guidance issued by the Federal Reserve, the FDIC, and the OCC 
regarding risk management for some of these fintech 
partnerships.
    Do you think that would it have a chilling effect on some 
of these community banks being able to offer their customers 
what a large bank can offer?
    Mr. Lenz. I think it will have a chilling effect on all 
banks, not just the small banks, across-the-board. If you look 
at where innovation is coming from, for the most part, it is 
not coming from banks. Square did not come from a bank, but it 
has afforded millions of small businesses the opportunity that 
they would only have if they were large.
    If you look at innovation kind of across-the-board, there 
is a reason that it is not coming from banks. So, yes, I agree 
with that 100 percent.
    Mr. Flood. Thank you, Dr. Lenz.
    I yield back.
    Chairman Hill. The gentleman yields back.
    The gentleman from Wisconsin, Mr. Steil, is recognized for 
5 minutes.
    Mr. Steil. Thank you very much, Chairman Hill.
    And to the witnesses, thanks for being here today. I think 
this is a really important topic.
    I want to start with you, Mr. Palaniappan. In your opening 
statement, you were talking about kind of the impetus for the 
creation of your company.
    Why are people paid monthly instead of paid daily, paid by 
the hour, meaning the transfer of money, not earned, but why 
are they not paid on a very regular basis?
    Mr. Palaniappan. Thank you for your question. People were 
actually paid every day for a long time.
    Mr. Steil. And then it shifted, right? Exactly. So, we go 
back 100 years and you carried a 50-pound sack over your 
shoulder, and you worked your tail off throughout the course of 
the day, and you expected to be paid at the end of the day, 
right?
    Mr. Palaniappan. Exactly. And society never accepted that 
employers could hold back someone's pay past that day.
    Mr. Steil. And then, these giant enterprise resource 
planning (ERP) systems came in, very expensive, complicated 
systems, with huge global companies and some smaller companies 
using them as well. And the bookkeeping became so complicated 
to navigate through where workers were paid different amounts 
throughout the day, that these massive ERP systems started 
batching the payment structures, avoid fraud, good accounting 
standards, and started doing this probably on a monthly basis. 
Is that fair?
    Mr. Palaniappan. That is correct.
    Mr. Steil. If a young person comes to the United States 
House of Representatives, works for the Federal Government, and 
they come here and they start a job, and they start after the 
15th of the month, they are 6 weeks away from their first 
paycheck. And that young person may need to put a down payment 
or a deposit on their rental unit; they are not only going to 
have to cover this month's rent, they are going to have to put 
a deposit down. And they are still not going to be paid in the 
course of 4 weeks. So, they are going to hit their third rent 
payment before they get their first paycheck. And that is true 
for countless Americans who are taking their first job. Is that 
right?
    Mr. Palaniappan. That is correct.
    Mr. Steil. And that is a huge burden on that individual. 
And further, we have really disconnected work from reward in 
this country. I think it is one of the biggest challenges we 
face writ large, outside of just the financial services space.
    But as we are thinking about our entire benefits structure 
in the U.S., how we help people get a job, come out of a 
dependency situation and lift themselves up on their feet, the 
number-one thing we can do for people, work is at the core. And 
what we have done as a country is disconnect work from reward.
    And in the case of the employment structure here in the 
United States House of Representatives, your Federal 
Government, and in countless companies across the United 
States, these burdensome ERP systems are actually preventing 
people from getting paid in a timely manner. Is that fair?
    Mr. Palaniappan. That is correct.
    Mr. Steil. And in your example at your company, people came 
to you and said, ``Can I get a loan simply on the money I've 
already earned?'' But that's not really a loan, is it?
    Mr. Palaniappan. They wanted the money that they had 
already earned. And this happens in millions of small 
businesses across the country where the business owner or the 
store manager gets asked by their employees for money that they 
have already earned.
    Mr. Steil. So, it is not a loan. It is simply giving them 
the money that they have already earned.
    Mr. Palaniappan. That is correct.
    Mr. Steil. And I am thinking that maybe there is a young 
woman or a young man, and they have kids, and it is coming up 
towards the Christmas season, so they want to work an overtime 
shift. Maybe they work at Target. Maybe they work at a store. 
If they were a waiter or a waitress and they worked an overtime 
shift, what would happen? They would take the money home, 
right? They would put it in their pocket. So, if the manager 
came to them and said, ``Hey, Mr. Bartender, do you want to 
work an extra shift, we are down somebody,'' they would think, 
``Boy, this is a great way I could save a little in my back 
pocket and buy some presents for my kids.''
    That is a work-reward connection immediately. And if you go 
to a restaurant, people work pretty darn hard in a restaurant 
because that work-reward connection is there for everyone.
    But we see many people not taking that extra shift, not 
because they are lazy, but because we have removed the work-
reward connection that historically existed in a very common 
way.
    And I think the Earned Wage Access tools that we are 
discussing in my discussion draft actually addresses one of the 
key problems that we have created as a society over the last 
100 years, which is a disconnect between work and reward. We do 
that in a number of ways.
    I think we have to break those burdens down to help people 
find that opportunity to help themselves. If your car breaks 
down, and you need $300, and you are a bartender, you can go 
ask your manager to pick up a couple of shifts and try to walk 
home with a couple hundred bucks by the end of the weekend. 
That is quite reasonable. But if you work for countless other 
companies across the United States of America, and you went in 
to your boss and said, ``I would like the overtime shift 
because I have a $200 issue,'' you don't really have that 
opportunity to actually get that money in any reasonably tight 
period of time. Is that fair?
    Mr. Palaniappan. You can get it now through Earned Wage 
Access.
    Mr. Steil. You could get it through Earned Wage Access.
    Mr. Palaniappan. And over 100 congressional staffers use 
our product.
    Mr. Steil. I think it is essential--I will wrap up here 
really quick, Mr. Hill, if you give me an extra 10 seconds.
    But I think it is essential that we look at the discussion 
draft of the Earned Wage Access bill to give stability to these 
companies, because I think it really breaks through this burden 
that many people feel where we have disconnected work from 
reward and work to access to the wages that you earn.
    Chairman Hill. The gentleman's----
    Mr. Steil. I will finalize by just asking unanimous consent 
to submit for the record a press release from the Innovative 
Payments Association.
    Chairman Hill. Without objection, it is so ordered.
    The gentleman's time has expired.
    Mr. Steil. I yield back.
    Chairman Hill. The gentleman from Texas, Mr. Green, is 
recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the witnesses for appearing today. And I am pleased 
to have an opportunity to ask a few questions on what I think 
is an important issue that has been called to our attention.
    Ms. Spotser, permit me to ask you, do you agree that the 
Truth in Lending Act (TILA) applies to loans with at least five 
installment payments, if you know?
    Ms. Spotser. Yes, sir, I believe that TILA does apply to 
loans with at least five installment payments.
    Mr. Green. And if you have a loan with less than five, then 
TILA would not apply?
    Ms. Spotser. I don't necessarily agree with that 
proposition, sir.
    Mr. Green. Is that, generally speaking, what many others 
agree with?
    Ms. Spotser. I think there is a presumption--I think we are 
still waiting for the Consumer Financial Protection Bureau to 
provide some clarity around the TILA disclosures, but we 
believe that they have the legal authority through the Truth in 
Lending Act to actually expand that standard.
    Mr. Green. I understand.
    Ms. Spotser. And, again, this would be a disclosure 
standard.
    Mr. Green. I understand.
    The point I am making is this: It seems that many of these 
companies will, with intentionality, structure their loans such 
that there are only four payments. That way, they don't have to 
engage in this debate about whether TILA applies if they move 
to five payments.
    Has that been the case as you have analyzed these 
circumstances?
    Ms. Spotser. Yes, sir. And what I think is actually really 
important is, again, by their own analysis, these are not one-
and-done loans. They are, in fact, loans that you take out one 
and then a day later you take out another and then--or 2 weeks 
later, you take out another.
    And even though we have these 4-week constructions, the 
full amount is actually far more significant, which is why the 
costs are more significant. And it is not a 4-week repayment 
period. It is, in fact, an ongoing debt.
    Mr. Green. I understand. But the point I am making is that 
the companies with intentionality are evading TILA, which is 
something that I happen to believe is important. I think Truth 
in Lending is something that benefits the borrower.
    I also believe that when you avoid these disclosures, you 
can avoid telling the consumer upfront how issues will be 
resolved when there is a dispute. And dispute resolution is 
pretty important, especially if you find that the means by 
which the dispute will be resolved is one that is not to the 
benefit, but rather to the detriment of the consumer. You would 
like to know this, I would, and I think most consumers would.
    And my concern, quite frankly, is with what you have called 
to our attention, as it relates to the companies, these fintech 
companies not wanting to be regulated or having to adhere to 
the same rules that other lenders have to adhere to, like 
saying that this is not a loan when, quite frankly, as you put 
it so appropriately, the money that the consumer receives does 
not come from the business that the consumer works for; it 
comes from a third party. That third party is making this money 
available.
    Now, you can call it many things, but it does quack and it 
does swim and it does wobble when it walks. As you have put it, 
it probably is a duck if it does all of these things.
    My point, finally, is this: I am concerned also because of 
the statistical information that the staff has afforded us, and 
I think this is pretty important. Staff has indicated that 
Black and Hispanic consumers are 63 percent and 50 percent, 
respectively, more likely to use these Buy Now, Pay Later 
products than White consumers. That is pretty important. Blacks 
and Hispanics are more likely to make less, earn less, and as a 
result, need these products more and as a result, become 
victims more so than other folks.
    They also indicate to us that--let's see. This is 
important--female consumers are 35 percent more likely than 
males to use these Buy Now, Pay Later products. We know that 
females don't get equal pay for equal work in our society. We 
don't like to admit it, but it is true.
    Thank you for the time, Mr. Chairman.
    And for the record, if I may ask that the witnesses please 
confirm for me that 72.6 percent of the Buy Now, Pay Later 
users earn less than $75,000 a year?
    Chairman Hill. I thank the gentleman from Texas, and ask 
the witnesses if you would confirm that in writing to the 
gentleman from Texas.
    I now recognize the gentleman from South Carolina, Mr. 
Timmons, for 5 minutes.
    Mr. Timmons. Thank you, Mr. Chairman.
    Bank-fintech partnerships have created significant 
competition in the financial services industry by providing 
consumers with the services they seek. The environment created 
through open banking has yielded financial freedoms never 
before seen by consumers. Through products like Earned Wage 
Access or Buy Now, Pay Later services, consumers wield the 
flexibility to meet their financial needs at the touch of a 
button.
    With the increase in banking-fintech relationships, we have 
seen many banks face increased scrutiny by bank examiners and 
enforcement staff simply due to their business model. This 
increased regulatory scrutiny has no basis in real-world 
evidence and actively stymies innovation.
    Mrs. Kelley, do you agree that it is crucial for Federal 
regulators to continue working with market participants to 
ensure they create pragmatic guardrails around bank-fintech 
partnerships instead of pursuing regulation by enforcement due 
to the fear of potential harms?
    Mrs. Kelley. Thank you for the question. We certainly agree 
that it is very important to work in partnership to ensure that 
the necessary guardrails are in place but the guardrails that 
are put in place are appropriate and continue to foster 
innovation as we are seeing in the partnerships that you 
describe.
    Mr. Timmons. And it creates predictability as well.
    Mr. Sanz, some have criticized bank-fintech partnerships in 
the wake of the Paycheck Protection Program (PPP) on the 
grounds that such partnerships allow for high levels of fraud 
within the program. Is that a fair assessment?
    Mr. Sanz. Absolutely not. And thank you for the question. I 
think this is another example of a very limited number of cases 
being the basis for tarring all fintech programs with the same 
brush.
    Although the McCombs School of Business study out of the 
University of Texas, and the subcommittee report indicated that 
there were elevated levels of fraud in the PPP, I can tell you 
that WebBank provided over 117,000 loans for over $3 billion in 
the PPP. And in that same McCombs study, our lending was 
equated with that of traditional lenders because we did not see 
escalated fraud rates.
    And, in fact, we actually received a letter from the 
Financial Crimes Enforcement Network (FinCEN), which I included 
in my written testimony, that thanked us for our Bank Secrecy 
Act (BSA) program because it did lead to information that was 
the basis for successful prosecution of a PPP fraud.
    Mr. Timmons. Sir, I would argue that the PPP loan program 
was legislatively flawed. It was not implemented poorly. We 
needed to have better protections on our end.
    Open banking has the potential to revolutionize the 
financial services industry by allowing third-party developers 
and financial institutions to access and share consumer 
financial data in a secure and standardized manner.
    Along these lines, the CFPB recently issued a long-
anticipated notice of proposed rulemaking (NPRM), further 
defining Section 1033 of the Dodd-Frank Act, which serves as a 
first step to creating clear rules of the road for data sharing 
between banks, data aggregators, and third-party fintech 
developers.
    Mrs. Kelley, again, what lessons can we learn from rules 
similar to Section 1033 in other jurisdictions such as Europe? 
And did the CFPB correctly implement these lessons in the NPRM?
    Mrs. Kelley. Thank you for the question. As you can 
imagine, we are working our way through the NPRM and will be 
commenting as it is, in fact, a very lengthy document.
    But we welcome movement on the open banking front. We do 
think it has the possibility to revolutionize the financial 
system, including through payments. What we have seen as we 
look in other jurisdictions that have implemented open banking 
rules is the need to ensure that the incentives are aligned, 
that industry has the incentives to engage in these 
partnerships, which we think are the ones that are going to 
unlock the key.
    Mr. Timmons. Sure. Quick followup: The NPRM scope is 
currently limited in nature to the use of checking and prepaid 
accounts, credit cards, and digital wallets. What would the 
pros and cons be of expanding the scope of 1033 from the CFPB's 
initial NPRM to other financial tools?
    Mrs. Kelley. From our perspective, obviously, we are 
focused on payments. ETA is a payments trade association, so we 
are focused on payments, and we think that is appropriate. It 
has obviously been a long time coming, and we are going to work 
through this NPRM first.
    Mr. Timmons. Thank you.
    Dr. Lenz, in an article that you co-authored, you advocated 
for the advancement of legislation that will create a Federal 
regulatory sandbox to help fintech startups better navigate the 
thicket of existing regulations.
    Can you describe why you think a Federal regulatory sandbox 
is a legislative solution to foster the development of new 
financial products and services?
    Mr. Lenz. Thank you for the question. Yes, sir. I believe 
that a Federal sandbox is necessary. There are about a dozen 
States now that have sandboxes, which are fantastic, including 
my home State of North Carolina. However, most fintechs don't 
want to operate within one State; they want to operate 
nationally.
    So, the opportunity to have a Federal fintech sandbox would 
allow folks to develop new, innovative technologies that could 
be used across the United States, which I think is what 
everybody wants at the end of the day.
    Mr. Timmons. Sure. It seems predictability is something we 
are pursuing.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hill. I thank the gentleman from South Carolina.
    The gentleman from Tennessee, Mr. Rose, is recognized for 5 
minutes.
    Mr. Rose. Thank you, Chairman Hill, for holding this 
important and very timely hearing. And thank you to our 
witnesses for being here today and sharing your time and 
expertise with us.
    Dr. Lenz, in your written testimony, you noted that the 
United States has been the undisputed leader in financial 
services around the world for the past 75 years, in no small 
measure due to the willingness of its various constituents to 
take chances and embrace innovation.
    Do you worry that there is a risk that the United States 
might overregulate new and emerging fintechs, and could 
overregulation put in peril the current position of the United 
States as a global leader in the financial services industry?
    Mr. Lenz. Mr. Rose, thank you for that question. I do 
believe that overregulation is always going to be problematic, 
and we it has to be checked. I think regulation is appropriate. 
I think consumer protection is appropriate. However, I think it 
has to be done with incentivizing innovation at the heart of 
everything we do.
    We do take risks. As I said in my opening statement, that 
is part of what makes us Americans. We have seen what happens, 
what fruit has been borne from that risk-taking. And it is that 
we are the undisputed leader in the world. That has come about 
because we have been incentivized to innovate.
    I think that keeping that sort of incentive open will 
continue to lead us down that path. Problematic regulations can 
certainly stymie that or slow it down significantly, and I 
don't think that is where we want to go.
    Mr. Rose. Thank you.
    Mrs. Kelley, I would like to ask you a similar question. Do 
you worry that overregulation of new and emerging fintechs 
might cause some fintechs to relocate abroad to friendlier 
jurisdictions with less-restrictive regulatory environments?
    Mrs. Kelley. Thank you for the question. Yes. Again, we are 
not anti-regulation, but we are pro-smart regulation. The 
regulation has to encourage innovation if we are going to 
continue to see the kind of advances that we have seen. So, we 
are always focused on and do worry about regulation that 
stifles that innovation.
    Mr. Rose. Thank you.
    And, Mr. Sanz, I will go ahead and pose the same question 
to you. Do you worry that overregulation of new and emerging 
fintechs might cause some fintechs to relocate abroad to 
friendlier jurisdictions?
    Mr. Sanz. Absolutely. I worry that overregulation will have 
a dampening effect on innovation within the U.S., and that it 
may lead to innovation moving abroad. I worry that the current 
regulatory environment is one that has become so intense that 
banks like my own that have been focused on bank-fintech 
partnerships for 25 years and, arguably, with a source of the 
FDIC's proposed guidance on how to run those third-party 
lending platforms the right way, is seeing the most-intense 
regulatory reviews in its history.
    Mr. Rose. Thank you.
    Mr. Palaniappan, according to a study conducted by Branch, 
approximately 48 percent of hourly employees have no savings, 
and 83 percent have less than $500 saved.
    Will you describe how innovative products like Earned Wage 
Access are allowing consumers from all walks of life to manage 
their finances differently and in such a way that it could 
actually help them grow savings?
    Mr. Palaniappan. Thank you for your question. We see with 
Earned Wage Access, just with our customers, that our customers 
are avoiding a billion dollars a year in overdraft fees, and 
that can go to savings. We also see other things.
    On the overdraft fees, it was interesting, I met with a 
customer of ours from New York, and when she came to meet with 
me, she brought a journal with 27 days on which she had avoided 
overdraft fees because she used Earnin. So, it is a lot of cost 
savings. People are paying their bills on time and not getting 
late fees on bills. And that is money that can go into savings.
    We also see that incomes go up when someone starts using 
Earned Wage Access. As Congressman Steil mentioned, people are 
actually more eager to work and they get more shifts and they 
get overtime.
    Lots of my customers cannot afford to put $50 or $100 in 
their gas tank, so they fill up $10 at a time. If something 
unexpected happens and they can't buy gas, they used to miss 
work. Now, they can download the previous day's earnings and 
they go into work. They are working about 3 hours more per 
week.
    There are lots of interesting things. If you work in 
retail, there are different types of jobs. At some jobs, you 
are tied to a particular store. And there are other roles where 
you are tied to a department and you work across multiple 
stores and that role pays higher.
    One of our customers was offered a higher-paying role and 
did not take it because she could not afford to front the gas 
money and wait for reimbursement.
    Mr. Rose. Thank you. I appreciate your answers.
    And I yield back.
    Chairman Hill. The gentleman yields back.
    I ask unanimous consent to submit a letter to the record 
dated October 23, 2023, from the American Fintech Council to 
the Center for Responsible Lending about their report on Earned 
Wage Access.
    Without objection, it is so ordered.
    And I want to join my friend, the ranking member, in 
welcoming our former colleague, Lacy Clay, to the hearing room 
today. We miss Mr. Clay on this committee. And I want you to 
know that your relatives, both current and former, in Arkansas 
are well-represented in the Second Congressional District.
    I want to thank all of the witnesses for their testimony 
today. This was an excellent panel.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, this hearing is adjourned. Thank you.
    [Whereupon, at 11:44 a.m., the hearing was adjourned.]

                            A P P E N D I X

                           October 25, 2023
                           
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