How Clair Built Earned Wage Access

Speaker A: All right, welcome to another episode of the Headless Banking podcast. We've got Nico Simcoe, CEO of um, Claire, joining us today. Hey Nico, how's it going?

Speaker B: Hey Jeff. Thank you so much for having me.

Speaker A: Yeah, yeah, excited to have you on. We've known each other for a while and I think it'd be good to have this discussion. So kind of we talked about in the pre game is we'd love to dive into the world of earned wage access. It's actually kind of hasn't been a hot topic until the last two months and now we have multiple states issuing some sort of guidance or legislation and requirement instructions for these earned wage access companies and what to do. But before we dive in, maybe just give your background how you got into this business and that'd be great.

Speaker B: Absolutely. So I'll, uh, take maybe a minute or two here to talk about this, but I came to the US over for my studies. I'm originally from Europe. I, uh, after college I worked at a bank focused on payments. And during that time I saw what Uber was doing with Ubermoney, which was basically giving debit cards to drivers. And at the end of every ride, drivers could get their money immediately. Pretty amazing tool to attract more drivers to the application and also kind of disrupt the two week pay cycle for America's workforce. So kind of left my job at that bank in 2018, 2019 and started off building kind of the vision of what could be the best bank for America's workforce, which was a bank connected to your job. And uh, you could get a ton of features within that are only available if you have employment data. And so today Claire is available at over 10,000 employers. We have hundreds of thousands of consumers on the platform and we're uh, developing more and more products to make sure that all of America's workforce is able to use our features.

Speaker A: Awesome. Thanks for that intro, Nico. I think you know this is the Headless banking podcast, so we want to get into the weeds how you guys built this thing. Also would love to talk about various go to market strategies across the underway. Jack. Space. Access space. As you know, there's a lot of different ways to kind of skin the cat, if you will. So yeah, how did you guys do it and why did you do it that way?

Speaker B: Yeah, I love, uh, I mean one thing about this podcast is you guys are looking under the hood and not just on the, uh, what do you say, like look at the icing of the cake and run away right away with an opinion. Well, look, I'll Tell you, I think that Klair has multiple products. You know, the big marquee one that we have, and that is I think pretty special, is our on demand pay earn, which access solution. Uh, and I'll kind of share because all of this is public around like how we decided to build it and why. So, and then maybe as a, as a second step I'll, I'll talk about the distribution. So when we started the business, we were like, look, we want to make these free instant advances available to every consumer that signs up for our digital bank. And we wanted to do it in a way that was compliant because our view was we want to IPO this company in a few years, so we want to be ahead of any compliance that's going to come our way. And when we reached out to both some regulators as well as law firms to say what is your opinion? Every person we talked said something different. And that was a little bit frightening because we were like, wow, how are we supposed to build a product when there's full regulatory uncertainty? I mean for anybody who's built fintech products before, you know how hard it is to build these things. But then add up that like every regulator you know, you talk to says something different about it and nobody can agree on what it is. So our view was, is there a way to get a silver bullet as a way to protect ourselves not only from existing regulatory uncertainty, but also future regulatory uncertainty? And the solution that we found specifically for the again on demand payer and wage access solution was, well, we need to remove us as a technology company away from the equation of we're the people advancing or you know, whatever you're lending, uh, in states now like California and I think another one, you are basically qualified as a lender when you make advances. So our solution was let's remove ourselves from it. And what we found in kind of the law and the construction of how it's built is there is an entity called a national bank. There's many of them out there that kind of Alexander Hamilton invented many, many, many years ago that basically says, well, national banks are not overseen by the variation of state lending rules or wage advance rules. They basically are overseen by the federal government, most of them by the occ. And so any changes in state rules kind of they have preemption rights. And what that means is they can operate with a bit more regulatory certainty. And so we went into the strategy four was could we work with a national bank for them be making advances to consumers so that as a technology company we don't have to do it. And what that gave us is a lot of regulatory certainty. So if you look over the past month or two, Missouri, Nevada, I think now, Maryland also, uh, they all say relatively different things. So you know, point made I think three or four years ago that the regulatory uncertainty was only going to increase and all of that happening. Well, you know, the national bank is roughly unaffected. And so that was our strategy, was the first piece of the equation. Well, let's get a national bank to do these advances as under their umbrella. Once we did that, right, which took two and a half years, we then still needed state licenses as a servicer for the bank. And so we applied for all those licenses that took during those two years, basically two years to get all the licenses. Well done. And then when we got that done, then we still needed to build the entire, you know, what we call paycheck detection eng, uh, repayment engine. We still needed to connect to a processor, we needed to find Rails that were instant and cheap. Uh, that's why we partnered with the same bank for lending as the bank bringing deposits. So the money actually never leaves the bank. And that, you know, again was an enormous amount of financial innovation because no one had really built this in the back end. And that allows us to grow a lot. So now let's maybe move to your second question around distribution which is how do we distribute? Well the way we distribute uh, so far was we said well it's going to be very difficult to go employer by employer. First of all, it's because employers are not really shopping for like a wage advanced solution. That's one of these, you know, nerdy innovative products that exist but they don't walk around saying well I need to find a wage advance solution. Like they say, well I need a payroll solution. So we said, we're like, well let's go to the solutions that have HR data that is interesting and that also have a reach. And so we got lucky that many workforce management payroll companies wanted to partner with us to add what they saw as a feature. For us it's our product, for them it's a feature to add kind of the card plus the weight advance solution. Some m of them have come to us and say how do we make it our own brand and how do we embed it even more? And so that's some of the things we're working on currently. But that's basically how we ended up distributing. And today Clare is really active at around, you know, over 10,000 employers out there, quarter million active users. So that's really the kind of the reach that it gave us.

Speaker A: Yeah, I mean this podcast always ends up in talking about regulation because you cannot build a financial product without having your compliance and your legal ducks in a row. So I love the fact how you guys got started. You really took a, ah, strong lens and said, hey, how can we build a product that's not going to get into run afoul of um, all of these potential state regulations. We have no clue what's going to happen. You're the only company that's done it this way. Right. In the earn wage access space or are there others?

Speaker B: I think so. I cannot know for certain because you know, there might be companies doing it out there, but it's a path I don't recommend to everyone. You need to be very well financed and have very supportive investors because you will go for two and a half years building infrastructure with very little to show, I would say in terms of like, you know, marketing tactics and other things because for a long time you're just building infrastructure. So I think we are the only ones. Yes.

Speaker A: But uh, in the end of the day like that's actually if you're going to build any fintech, I feel like that's the case. Right. Like if you're doing it correctly, it's going to be a year to two years to get all your shit together in order to go. If you're trying to do it faster than that, probably not realistic and your odds of success will go down.

Speaker B: I think that's right. You can cut corners but everything's a risk and reward. Right. There are wage advanced companies that decided that they would not kind of go the full compliance route. Meaning like what I would call, you know, bazooka to kill a fly mentality, which is like go down and get banking, some level of banking licenses at the state level and partner with a national bank, which is really hard. But what they say is like we're going to use those resources and try to create wage advanced regulation state by state. Again that's 50 separate regulations you need to enable. Yeah. If you're going to build a fintech. Our approach was let's try to bite the very difficult thing upfront. There are some companies that decide to kind of put their resources to go and get, you know, in our case, licenses in every 50 state and that will take months and months and months, if not years and years and years for even the states to start considering it. And in the meantime you're kind of fighting an uphill battle with, you know, with your customers and with, with actually the consumers and the regulators to try to debate, you know, kind of the regulatory certainty of what you're building. So you're actually maybe on a period of like five years. It's actually cheaper to do it all upfront, but it's way more expensive in the first two to three years. So I think you're right. If you build any fintech you should do it right from the get go and not push the can down the road. But that's expensive. So you need good investors and you also need a lot of discipline.

Speaker A: Yeah, I mean I've worked with a lot of fintech startups that have done it both ways and in my experience, you know, you kind of have to come into the project with a few million dollars because you're not even get a sponsor bank on the phone if you don't have three or four million dollars in the bank.

Speaker B: Right, exactly. That's the difficult part. Sponsor banks like to work with big companies. Why? Because they put their, you know, their charter on the line. Right. You know, in our case, if a consumer takes a wage from the Claire app, they don't take a wage advance from Claire, they take a wage advance from a national bank. And so the national bank needs to be sure that you can do all the stuff around the advances the right way because then you know, the reputation is on the line.

Speaker A: Awesome. And it's amazing that you were able to kind of convince, I guess pathword to be the first earned wage access sponsor bank because there's not, there isn't one that's um, pretty innovative.

Speaker B: Exactly. We're very, very lucky that our bank partner, I mean pathword is mission and their name is about paths forward, which is kind of helping the middle and lower earners, I would say in the US have access to better financial solutions. And so our missions are so intertwined and they really kind of took to heart what we were building and then they got a lot of comfort around the management team as well as the investors that we have and went on this mission with us and we've built a very, very close relationship and you know, a lot of the innovation is thanks to them.

Speaker A: M that's amazing. Most people don't have such a good story with their sponsor bank. So it's great that you guys are able to foster that. I want to talk about the regulation a little bit more. Like what has been going on from. You're the expert here. What's your read on these states that have come online? And if you can give it to us quickly like, you know, what's the difference between what Nevada, I mean, Nevada and Missouri did the same thing, but then like what's Connecticut doing? Maryland and some other states.

Speaker B: So the biggest question that all these states are asking themselves is, is a wage advance a form of lending? Right. Because the law in the United States is built in a way that it's like not the federal government that decides this, it's the states. So it's a very difficult question to answer. It's true. It's because the argument to make it a form of lending is actually very simple, is to say if you advance money to people with the expectation of getting paid back, that my friend is offering credit and it's a loan. Right. Pretty simple. The argument to not make a loan is a little more nuanced, which is basically saying, well, becoming a lender has a lot of restrictions and small dollar lending will naturally never been be well built for lending kind of book of law. And so we need to create a different category for this. And the reason why we need to create a different category for this is if you take a consumer, their paycheck arrives on a Monday, but the Friday before their rent is due, happens all the time, or like a bill is due, it's better for them to pay maybe 2, $3 or $5 to get a hundred dollars right now than to pay their rent late and have a $75 late fee. Right. And so wage advance products are built for this. They're built for emergency cash, then way, way, way cheaper than payday loans. And also they don't carry interest to an annual level. What that means is you can't just like take a wage advance and then like, what's the word? Like say, oh no, I won't pay for for months and months and months, which basically your interest annualizes which payday lender and credit cards have an incentive for you to do what it does is wage advances. You pay one fee and then there's an automatic repayment method. So I think the nuanced argument is this is therefore not traditional lending and therefore this needs to have its own wage advance regulatory body. And that's why Nevada and Missouri agree. Right. But that's also, if you go in the simpler argument, there are states like Connecticut that says, well guys, I'm so sorry, but if you advance money to people with expectation getting paid back, that's a loan. And that's, I think what a lot of states will debate. Our view is, and I'll be transparent, is like for me the most important thing is regulatory clarity and the ability to like operate in any state and give that confidence to our partners above anything else. And so right now the only way to do that is to agree that this is a form of lending. But you know, for us it's, it's more about compliance. So tell me how to be compliant and I will tell you what product I will build. Not like I believe X. And then I will force everybody to change their minds. That's a little bit clearer stance.

Speaker A: Gotcha. Yeah, it's so interesting that it's this whole, you just, you're actually, we're trying to create a new category and that's why it's so why this thing can't be regulated or has not has yet to be regulated because it's not alone. And it's also a service that lower income folks who, you know, their options are limited. Like do you want, do you want to. So we should tell them to go get a payday loan and pay exorbitant interest rates. I think politicians and legislators, they want to do the right thing and the argument to kind of create a new category is probably what's best for the constituents.

Speaker B: I completely agree. I think that in the reality where I run a business and you know, I want to grow it, I have to, I can't work on what the laws will be in like five to 10 years. I need to work with the laws that exist today. Right. But yeah, that's basically, you know, Missouri and Nevada's view is that, and I agree that like wage advance is so much better than rolling over your credit card fee because that actually will cost for a hundred dollars you borrow and you roll it over for a year, that will cost you on average 18 to $26. Borrowing $100 from a wage advanced solution at, you know, max, we'll call you what like $4? Maybe 5. Right. That's what it's going to cost you. 26 versus 5. I choose the 5. Right. And so to your point. That's right. I think the issue that a lot of politicians are having is, well, I'm so sorry you believe this, but the main thing for us that matters is that consumers can see different offerings for lending. And if that's the mindset that you have, then it has to comply with a law called tila. And tila, uh, translates into reg Z. So therefore we need to give you, we need to put you in the regulatory body of loans. It's a very difficult topic and we didn't want to deal with it and so therefore like indirectly. So we basically just went with the bank.

Speaker A: Yeah. And so your product is effectively a cash advance. That's what it is. Right. And that allows you to avoid any uncertainty when it comes to regulation. But you're using the bank so technically the banks and are you providing the TILA disclosures and all that stuff.

Speaker B: So again in an effort to kind of go above and beyond, we do so we have a box in the case of like Claire wage advances. Any consumer that takes it will see that it's your pr, there's no origination fee, there's nothing. So they can actually our view was can they compare what we're offering them to any other advanced products or lending products? And I think that I would agree with regulators. That's a good thing. Why? Because if I'm a consumer I want to have the same disclosures everywhere and be like okay, If I need $150 and I have three hours to decide, let me go see three or four different options right. About how much they roll over, what are the fees associated with it and let me make the best decision for me. So I'd agree with regulators that some having kind of if whether it's wage advance disclosures or you know, re you guys decide but like consistency in disclosures is super important for consumers.

Speaker A: Cool. I'm going to pivot a little bit. So like there's a, ah, 10 or so of earned wage access companies in the market today. Big ones like pay active daily pay, earn in, et cetera. There's different ways to go to market. Could you maybe just go break those down and compare it to how Claire's gone to market?

Speaker B: Yeah, yeah. So fundamentally I would say there's two big categories of providers. The first category, provider are direct to consumer wage advanced companies. So typically those will not be directly linked to your employer or to your like employer data. That might evolve with more innovation in the data space of fintech. But to this day direct to consumer companies don't have much data on whether you worked your hours, whether you're still employed somewhere. They'll ask for proof that you're going to be able to repay via like a plaid connection. But they function a little bit more like digital forms of payday lending. But the thing is because they're technology companies, it will still be cheaper than a payday loan. Right. So they're usually more expensive than the second category I'm going to talk about which is you know, employer linked ones but they're probably cheaper than a payday loan and they're formed in a certain way that kind of avoids you keep paying interest. Throughout the year, those companies have grown the most. Why? Because they don't have any barriers for distribution. Literally just go on Instagram and say, hey, you need $200. Like you can just do these six things in your phone and suddenly boom, you have $200. For a lot of people that's super appealing. There's been a lot of like importance put by many states around. If you're going to go and produce these products, you have to be clear about the fees. Right. And so a lot of these companies have been pushed away from having tips, hidden tips, automatic tips, and just kind of embed them more in a, you know, in a specific fee, whether it's percentage or flat, so that people just know what, what they're paying for. That's one category. Again, let's uh, stop real quick.

Speaker A: Who are the top three of these category that you could name?

Speaker B: Yeah, I mean companies that have done incredible are ram at earn in. They did really, really well. They've solved a lot of people's issues like getting them away from payday loans and helping them grow. Company like Dave went public also like a wage advanced company, there's presenting the New York crowd. I would say like Bridget is a good one as well. Grew a lot in the New York space. Again, direct to consumer maybe a bit more expensive than the employer, but they've done very well for consumers. So that's one. The other category is via the employer traditionally. So that would mean like almost all providers that you know in the, in the via employer space, the way they function is they will literally go and sell to payroll and HR managers and they will tell them, hey, add this one flow in your payroll processing and part of that makes sure that we get the money back. And because we can make the money back, your employees can just take advances at a really, really cheap cost. And so the cheap cost can be all the way down to zero. In the case of Claire, that's what we do. It's zero and because we make money off of the card. But there's also an option to like get advances to your existing card and that will kind of cost, I would say like you know, anything between 3 to $5 which is probably 50% less than if you go direct to consumer. And so and consumers prefer that consumers why? Because it's a place of trust. They trust their managers to offer this and those the big players there pay active daily pay like did great most of the time because of the flow that you need to take place, it only works for larger businesses, so like enterprise customers. So that's why, if you think about how many employees have taken wage advances at businesses, it's roughly between 5 to 10% and 90% is still untapped. It's because medium and small size businesses are just unattainable. So that's, I would say, how the market scan works today.

Speaker A: Yeah, it's super helpful. And I just want to clarify. So if you're a big company, PayActive comes in, they get involved in your. The flow of your existing payroll processing. There's a mechanism that ensures pay active or daily pay gets paid back. And then the employee can either take the funds into a PayActive wallet or a Daily Pay wallet where there's a $0 fee, or they can get it to an external bank account where there's a small fee, which is three to five dollars.

Speaker B: Yeah, I don't know all the details of PayActive and DailyPay's roadmaps, but that's typically how it works. I think also not to name names,

Speaker A: but this is generally how it works.

Speaker B: Yeah, that's generally how it works. Not everybody offers. It's not a requirement to offer a free version. Right. So some people are just like, hey, this is our fee. And some consumers prefer this. Some consumers are like, I would just know what the fee is. And then that way I don't need to like go through a flow and then suddenly the fee changes. Right. They don't want to be advertised. That's also, I think, not good for the consumer. So the most important thing is just to be upfront and clear. This is what it costs. Make your decision whether you want it or not, and it's really up to you. And that way the consumer can say, wow, I'd prefer to pay $3 right now than go and open a new credit card in order to get money or go to a payday lender.

Speaker A: Yeah, yeah. And so with Claire, you guys do both, right?

Speaker B: Exactly, we do both.

Speaker A: And the point of doing both. Why did you guys choose to do

Speaker B: both when you mean both? We're talking about both the consumer go to market and the employer go to market. Or define both.

Speaker A: Yeah, sorry, that's. I mean, going directly to consumer with your product and also going through HR and payroll companies and even direct to employers, potentially.

Speaker B: Yeah. So the way Claire goes to market is both, but in the same way. That means it's not. We're not doing both of this, you know, separately. They actually were doing both, but for one single product, which is we do, is we go via the consumer. So meaning the employer doesn't have to do anything, you know, to get their payroll process right. So we go direct to consumer at the same time as via the employer.

Speaker A: Okay, I guess one question I have too is like, how do you. Can you define earned wage access in a simple way?

Speaker B: Uh, getting money you've earned but not yet received, maybe that way?

Speaker A: Yeah, I heard a good one from a guy who was an ex visa person. He said it's either early wage access or earned wage access. And I think the way he was defining if it's early, it's a cash advance effectively.

Speaker B: I think that you can define it in so many ways. This is also the fun part of like being in a newer industry is like, not everything is determined. So the same way when I talk to different regulators, they all had a different, you know, version of like, what this product shouldn't be, in my opinion is like what I call earnware. Access is something is money you've earned. Right. But you've not yet received. I don't think we're in the business of saying we think you will work in six months and therefore we will give you money for that. That's more unsecured credit, that's more expensive for the consumer. I don't think that's a great. You know, there's better products that already exist for this. But yeah, like, the view of earn wage access is really like, hey, my paycheck is arriving in three days, but my bill is due right now. I just need the short cash to bridge this, which happens a lot for America's workforce, I would say. And can you use your own money that you've earned but not yet received in order to bridge that gap? And can you do it at a really, really cheap cost? And the answer is yes, that's earning, which access.

Speaker A: Awesome. As far as, like, how this evolves, do you, you know something that we talk about a lot at, uh, my current employer, Gusto, is like, how do you create? Why do we have this two week pay cycle and why can't people just get paid every day? And so I'd love to just hear your perspective on that and what you think.

Speaker B: Yeah. Well, let's imagine that you're the owner of Jeff Restaurant, right? And at Jeff Restaurant, you're like, hey, I want to get my employees paid every day. Because it sounds logical, right? So what you'll do is you'll, you'll have to do a few things. One is you're going to have to operationally get your employees to actually clock in and out every day. Right. Without mistake. Because if you don't know that, if you don't have that data, it's very hard for them to get paid. That's already a big hurdle because many employees forget and you know, they kind of like need to go back into the timesheet and do it later. So that's number one. Number two is you're going to have to go and check that all the time data is actually accurate compared to the schedule. So then you have to do manual modifications. Imagine doing this every day. It's actually easier to do it weekly or bi weekly in batches. Right. Now let's assume you can do this. The problem you're going to have is actually financial because your consumers, right. So again at Jeff Restaurant they pay you mostly via credit cards. Credit cards clear and get in your bank two or three days after the people paid. So now you're actually paying your employees for money you're going to earn in two or three days. That's a huge cashflow issue. So then you're going to need to go and raise a line of credit. But if you're raising a line of credit, would you rather pay your employees weekly and use the cash to make your restaurant better, to get your sales up or pay your employees weekly? So therefore you pay them weekly or bi weekly, you don't pay them daily.

Speaker A: Yeah. This is the answer to why we have continue to have this not instant payroll. And it's a discussion that's near and dear to my heart because yeah, it comes down to why would a business owner actually want it sounds nice. When your bank account's getting deducted and you're waiting for potentially checks to clear for days too. Right. Or even ach debits, uh, not to mention credit card everything takes a couple days. I guess the only way it could be solved is by some sort of uh, real time settlement. Rtp, Rails. If those get adopted, it could be more feasible.

Speaker B: Yeah, I think it could get more feasible. But you're still going to have the operational and the financial constraints. Doesn't mean that maybe it's a competitive thing that the employers can do. But if the employers care so much about giving wage advances, then they can maybe just sponsor a wage advanced solution and just that's it, you know, and pay five bucks a month and then maybe per employee and if you have 20 employees that's fine. That's a hundred dollars a month to service and you have it externally and then they don't have to do the operational headache in addition to the financial headache, and they can use their money for other things.

Speaker A: Right, cool. Well, that kind of wraps it up, man. I think this has been awesome. I appreciate you taking the time. In terms of just a final question, what do you guys think about crypto? Are you going to do anything in the crypto space? Are you standard? You've got enough regulatory issues with, uh, Arduino access?

Speaker B: I think crypto is a very interesting use case. And as a technology for potential payment Rails. I see crypto today and the vast usage of crypto as an asset people believe will have more value in the future and therefore they buy. Right. And that USCIS for me is like debating the value of art, debating the value of like wine. It's the same thing. It's just an asset you invest in. But crypto for me, for the perspective of Claire, is like, what does distributed ledger technology can actually give us? One of the ones that I think is super cool is international payments. If you think about it, if you want to transfer, let's say money from the US to, uh, Argentina, you probably will go to two or three banks in between that clear this and that will cost you $15 and it will take two to three days to clear. Well, the simplest thing is you take money in USD, you put it into a cryptocurrency or like a blockchain enabled currency and then you then can push it way faster and way cheaper into another fiat currency of your choice. That I think is really, really cool. It's one use case, but I think that that's one use case that can be really used either by banks themselves or by financial technology companies.

Speaker A: Yeah, I agree with you, especially coming from, uh, the cross border payments space. And it's just shocking that it hasn't been adopted still. I don't know why it's taking so long. I mean, it's probably the complexities of, you know, having to have a crypto wallet and then get somebody's, you know, however many digits it is, get their address. I think we'll get there. But it's just too complex though.

Speaker B: It really is, it really is. But I'm excited. I think we're just in the first innings of that innovation.

Speaker A: Awesome. Well, thanks again. Excited to continue to watch the success of Claire. You guys are doing some really cool stuff. Thanks, uh, for coming on the podcast.

Speaker B: Of course. Thank you so much, Jeff.