Voiceover:

Welcome to season two of Under the Hood, a podcast series brought to you by Synapse. In this series hosted by Synapse founder and CEO, Sankaet Pathak, Under the Hood takes a deep dive into various challenges and opportunities in FinTech. Topics range from technical design and architecture, to regulatory and policy challenges.

Sankaet:

Hello, everyone. Welcome to Under the Hood. Today, we're talking about FinTech culture, failing forward fast, and the need for various regulatory sandboxes. And joining me for the discussion, I have Rodney Williams, who's the co-founder of SoLo Funds, and Adam Shapiro, who's a partner at Klaros Group. Guys, welcome. Would love to hear more about both of your companies, maybe give everyone an intro, and then would love to dive in. Rodney, do you want to go first?

Rodney:

Definitely. First, pleasure to be here. Obviously, Rodney Williams, co-founder and president at SoLo Funds. I would tell you, the story about SoLo stemmed from a personal experience of our friends and family needing access to capital and short term loans. And when we looked at the market, we just felt that there weren't things that we thought was equitable enough. We felt that we could bring something that built communities, but also gave back the choice and the power to the people. And that was the premise for SoLo.

Rodney:

I think, after we double clicked, we found out it was a much bigger problem than just our friends and family, where most Americans actually, when they do have an unplanned expense or an emergency, they actually need a resource to call on. So, SoLo is a marketplace that allows members to make a request for up to $500. They self-select a tip and donation. That's a gratuity, 100% optional and not required to meet the obligations of the loan. And then lending members, which are also like you and I, can scroll this marketplace and decide who to ultimately lend to. So, that's essentially the product. It has a lot of other things, but that's what we do. Pleasure to be here.

Sankaet:

Yeah. Thanks for being here. Adam, what about you? You have vast experience, from building financial products, all the way down to regulations. Would love to give audiences some perspective into your background, your history, and what you're doing currently as well.

Adam:

Sure. Thanks, Sankaet. I think vast experience is probably a real tactful way of saying old there, but I'll take it. So, I started my life as a regulator in the UK, amongst other things being sort of chief of staff to the chairman of the agency there, and then running the consumer risk group. At some point, I married an American and moved over here. Just try and keep the accent. It fools people into thinking I'm smarter than I am sometimes. Spent a bunch of time at a consultancy called Promontory, including sort of building and running their FinTech practice group there, as well as working with more traditional institutions. Spent some time at BBVA, helping build open banking APIs. And now, mainly spend my time, co-founded a consultancy called Klaros. We're basically a bunch of geeks that are fascinated by both what's happening in FinTech and what happens in regulation and the intersection between the two.

Adam:

We saw that there was a little bit of a market gap, that in this world, people's business strategies are usually totally intertwined with their regulatory strategies. And, we saw a lot of people that were very good at advising on business strategies, a lot of people that are very good at advising on regulation, but that sometimes you need a group of people with the expertise in both to help put it together and work out how to optimize between the two. So, we've set out to do that. We work with kind of everyone, from sort of pre-launch startups through to large banks that actually are interested in trying to do something different.

Sankaet:

Well, that's a great overview. Just to set up the topic a little bit, I think I've talked to both of you about this separately. I am very interested in hearing your thoughts on, what do you think the FinTech culture currently is? I could probably kick this off with my high level thoughts. I think we're moving in the right direction, where we're building more innovative and equitable products for people, which essentially is the goal, how can we democratize financial services for everybody. But, I also fear that not everyone is set up for success, in the sense that, I'm not sure if the FinTech culture currently incentivizes innovation in a safe way, which is, can we fail forward fast, quickly make mistakes and learn from them, with the mindset being, everyone's aligned, from banks to FinTechs to regulators, that we're trying to build something that actually has a positive impact on people? And, how do we do it the fastest and the safest way possible is probably the biggest debate.

Sankaet:

But, maybe just start off with you, Adam. How would you define the current FinTech culture? What do you think is working super well? What do you think is an opportunity for growth? Would love to hear your thoughts.

Adam:

Well, I mean, I'm very bullish about a lot of what happened or what's happening in the market, and I see all sorts of things. And I think the proof in the pudding is that, you sort of see so many of the traditional players that sort of end up copying a lot of the FinTech innovators. I know people like to grumble about that. I actually think that's a thoroughly good thing. It means the innovators are onto something, and it also helps spread the benefit of innovation quicker. And so, from my point of view, I'm much more interested in getting really good financial products to consumers and small businesses than I am in sort of who ends up sort of delivering those. I think this is just the whole sort of growth of FinTech is a terrific positive for the financial services that real people have access to overall.

Adam:

With that said, and I do think that there are real challenges in how do you build safely here and recognizing that a lot of what we do in the FinTech world is solving for some of people's biggest and most important needs, and the stakes are just a lot higher than sort of some other products that other innovators work on. There's a real cost to getting this wrong. And, in an odd way, I think the FinTech world and the traditional world have sort of different sides of the same problem. I too often see FinTech innovators not really understanding why we have the regulatory and compliance framework we do.

Adam:

And often, when you are innovating in an area, you've really got to not just look at what the rules are, but why those rules are there, and what's the underlying public policy reason that caused, which is usually a really good one that people agree with, that caused us to need those rules, and then working out how to apply it to their own product. And, too often, the people that have expertise in that come in slightly too late in the process, and that actually can sort of lead to people going down blind alleys and ending up failing slower than they need to, because they just didn't have the right people in the mix at the beginning.

Adam:

The traditional institutions kind of often have a different version of the same problem, which is that people are so scared of their compliance departments, that the compliance departments don't come in until far too late. And, I think the people that succeed best in both worlds are the people that can develop agile processes that sort of have that compliance and risk and regulatory expertise in the mix really during the development process and not just as something that comes along sort of later at the end of the process.

Sankaet:

So, Adam, that's a really, really good point. Is there something that you think, one or two fundamental gaps, that you think maybe FinTech innovators don't get about building in financial services? Are there few areas that you're like, "Yeah, people really just don't understand this specific thing about the banking and the regulatory and the finance culture," that you would want to highlight?

Adam:

Well, I think one thing that really helps people build well is an understanding of the history of sort of what has caused problems that regulators, public policy makers more generally, have legitimate concerns about. What can we learn from history about what's gone wrong, and sort of what does that mean for how we ought to build? And what does that mean? So, let me give you one example that... I think it's a lot harder to sort of reign in sort of... It's important to understand the sorts of things where little things have caused a lot of harm to people. You can see a lot of that in terms of how things were or weren't explained in the mortgage crisis that caused a lot of harm in communities, actually, especially lower income and minority communities. And, a lot of that stemmed from people just playing that little bit fast and loose with how they described their products and that adds up over time.

Adam:

And, just understanding that history, you see why regulators will come down on something you could take. For example, the action that the Consumer Financial Protection Bureau took against LendUp. I don't think LendUp was being malicious when they were talking about how they wanted to report things to the credit bureau. They just got ahead of their own product roadmap, and they started describing things that weren't in place yet. And, I think if they just realized sort of the way that sort of regulators were going to think about that, they would've been just more precise about what they'd have described, and they would've avoided a series of issues that ended up being really detrimental to the company's ability to make progress.

Adam:

And, understanding the history in this world and understanding the sins of perhaps some in the traditional industry that people are looking out for just helps people just build carefully and describe their products carefully. And, if you're building really good product, the description of what it is without embellishment is going to stand by itself and you'll get a lot of customer loyalty from telling people exactly what you are doing. Sometimes, the need is just a little bit to sort of trust in the fact that you are doing things for a reason, and that you don't need to oversell those in order to be successful.

Sankaet:

Yeah. Rodney, turning to you, I think you are very quickly growing FinTech. I'd love to hear your opinions on, how do you define FinTech culture? What do you think is working quite well? And where do you think there are areas of opportunities of improvement, with the goal being kind of, how do we put the best products in the hands of our customers as quickly as we can and democratize financial services? What do you think is working? What do you think isn't working?

Rodney:

Yeah. Definitely, I could spend an hour answering this question, but I would tell you, I'm excited about the FinTech ecosystem. I'm excited about the environment. I think, for the first time in history, spokes people, spokespersons of marginalized communities are finally building financial service products for the community that they are intimately aware of. And that's never been done. There was a comment that Adam talked about, alongside the mortgage crisis. Let's be very clear. The historical discrimination of communities are mostly done by larger financial institutions, historically. The largest institutions in the world are probably the biggest culprit, not the financial, not the FinTechs, historically, looking at data.

Rodney:

So, that's the lens that I come from. That's the lens that I see, right? The lens that I see is that, we have a historical financial system who technically was originally designed to create inefficiencies that have hurt people, especially certain underserved communities. Then there's a series of changes and updates that have tried to right size that. But, the biggest culprits of hurting communities still are large institutions.

Rodney:

Now, as it relates to FinTech, I think FinTech, as a community, as a technology, has made it easier for founders like myself, with ideas, to bring things to market, and to do it, not from the lens of the historical financial system, but from the lens of what's right and what's wrong. It's very, very different for me in that aspect. And that is definitely what's tough about FinTech. Trying to do something new, trying to do something disruptive, trying to rewrite the wrongs of the predecessors is really difficult. And, the level of scrutiny, especially in this current climate, is extremely high. And that's also, it's very expensive. It's very expensive to navigate the regulatory environment of today, for any organization, especially a FinTech.

Rodney:

Let's talk about a startup. In our journey, four years ago, we participated in at least five startup accelerators. We went from couch to couch across the entire country, raising money to then have a conversation with the regulator. These are the challenges of the founders that are trying to go out and build something that they believe is equitable or new or different, or that has an opportunity to make an impact in a way that hasn't been done before. That is challenging. I don't see it getting any easier, but that's what I don't like about the current FinTech environment. I think there needs to be room for innovation. I think there needs to be room for disruption, especially within FinTech and new startups, new competition.

Rodney:

I think the regulatory environment around older, larger financial institutions probably needs to be more regulatory scrutiny around them, because they continue to be the biggest. They tend to do the most damage. If I drive down my neighborhood in West Adams, in Los Angeles, I can't find a Chase Bank. I can't find a Wells Fargo. I can't find any large financial institution. What's there is what's left. [inaudible 00:17:33] What's left is the check cashing place. What's left is the Western Union place. What's left is the worst financial service products that that community could possibly have, if they're thinking about changing their potential financial situation. What's left there is... No one wants to innovate in that market. That's what I'm ultimately getting at. So-

Sankaet:

And, why do you think Chase isn't there? What is driving Chase out and driving these predatory check cashing money order places in?

Rodney:

It's tough for me to answer that question for that large institution, but I can tell you what my sense may be. I think that, historically, it's just been a better business decision to focus on market segments with higher deposit potential, larger income. I think it's financially maybe better dependent. I think that there's a lot of misconceptions with certain communities that data and technology can undo, but those misconceptions tend to still drive the way we innovate. And there's a misconception, for example, that these individuals are financially illiterate, for example. That is a completely incorrect assumption.

Rodney:

I'd give you an example. Number one, 82% of our members are from underserved zip codes, but 49% of our borrowers have a college degree. That's completely opposite of what someone would say about this community. And it's not that they're financially illiterate. It's that they're living on a very, very tight budget. I have participated in this exercise, not by choice, but I would love to have both of you guys participate. If I give you $20 and say, "You need to make this work out from Monday to Friday," that's the life of this user. But they're going to work. They're educated. They understand finances. They're just on a very... They don't have a margin of error as it relates to paying things.

Adam:

You know, I'd agree with that. It's kind of my experience is that, absolutely the best financial managers and budgeters are the people that really have to watch out for every cent. And it's kind of like not going to have any forgiveness for any mistakes that they make. And, I do think that this is something that is hard sometimes for people in FinTech who want to solve everything for FinTech to realize that, there is so much that we can do, but there are some things here that actually are a lack of money. And, I think that that's a really good question for everyone that's trying to serve the mass market to ask, what are the problems that we can solve for people? But let's also be realistic about what problems we can't solve and have the humility to realize we're only going to be part of the answer and work out what part of the answer we can be.

Sankaet:

But how much of this is a cash flow problem? And how much of this is just having no disposable income altogether? Because, if you're... First off, I'm surprised by Rodney's data. You're telling me, close to half of the customers in SoLo Funds have a college degree. So I'm assuming, at some point that is going to materially impact their wealth, what's the reason why has it not yet? And then to Adam's point, is this a problem that can be solved? Or is this a problem that's just a cash problem and it cannot be solved altogether?

Rodney:

Yeah. I mean, for SoLo, I saw this problem increase crime, not just mess up your credit. And I'm just going to be very clear. I've had family members get a flat tire, lose their job because they didn't go to work that next day. The light bill's due on Friday, and their kids are starving. And, within that 24-time period, this hardworking part of the com... Because there's no discretionary capital, no savings, this particular person had to contemplate selling things or stealing. That's just what they had to judge. It was a luxury to be able to go to a payday lender.

Rodney:

But said differently, they were actually smart enough to not go to a payday lender, because they were like, "I'm already, from a credit standpoint, I'm probably up to my leverage in terms of credit. If I go into a payday lender, there's no chance I'm going to pay this back. That's going to increase the fees over time. Ultimately, it's just going to put me in a worse situation, right?" So, these types of shortages and cash flow is... There's a shortage in cash flow that requires very, very detailed budgeting, but then there's unplanned expenses and emergencies that completely disrupt their ability to live as a human. The result is a bad choice in most cases.

Sankaet:

So what does this need? Does this need a disruption in the business model? A change in the regulatory landscape? Just thinking out loud, if you're going after the market like this, as an entrepreneur, the traditional Fig-1 writing isn't going to work. So, you're going to need a different solution. And, is that just an underwriting solution? Is that a monetization solution? And then how does the regulatory landscape fit into all of that? Would love to hear your thoughts on that.

Rodney:

I mean, we designed SoLo to address each one of these things very, very specifically. And we took all the little intimate knowledge. I like to say I have a PhD in this community, right? So, number one, we underwrite based on cash flow. We do not use credit report. It's not a realistic measure. When you think about during COVID, I think your credit scores was at an all time high. Meanwhile, the majority of Americans are waiting on a stimulus check, right? It's not a real time measure, and it has no forward looking capabilities.

Rodney:

When you think about cash flow, and then you think about your pay period coming up, that data is actually really, really significant data in being able to predict a person's ability to repay at a particular moment in time. It's proven for us, for example, it'll be three times better. Our score is actually three times better than traditional scoring methods that payday lenders ultimately use. To say differently, our repayment rates are over 90% of our borrowers.

Rodney:

Now, the other pieces that we did that was really important, for us, we needed to remove the institution. There's just a significant lack of trust in this community for financial institutions. Financial institutions have just not lived up to the commitments that they have made. And for us, that meant empowering another human, another individual to be their lender. That's what that meant is, if you remove the institution from the transaction, we felt that that human to human connection would give us a platform to teach financial literacy. And, what I'm ultimately saying is that, 100% of the capital on our platform is actually by another member. And, when a person on our platform gets a loan, they know that Mike from Idaho ultimately funded that loan.

Rodney:

It also teaches them that... This is also really important for us. By giving borrowers the choice on when they're going to pay... You have to teach borrowers that there's a cost. There's a cost of being late. There's a cost to not paying on time. There's also a less cost if you pay on time. One of my favorite stats is that, with every request that a borrower makes on SoLo, they actually self-select less to tip and less to donate. By the time they get to their, for example, sixth loan, they're not donating to SoLo at all. 19% of our loans funded on our platform actually do not have a donation to the company, but they always tend to have a tip to the lending member. It's like, when you go get coffee from Starbucks, and you want to tip the barista because the barista did a great job. It's the same way that when someone has a flat tire and a stranger gave them $200, they're going to tip them because they understand that that person went over and beyond to help me in this situation.

Rodney:

But that's how we designed this platform. I would tell you, we're not the Andreessen Horowitz FinTech, or the NEA FinTech, or the QED FinTech. I can name them all. We didn't raise a huge war chest of capital. We've raised $14.5 million, but we've done over 400,000 loans. We're doing 40,000 loans a month. We're growing 20% to 30%. It does not matter. We spend $0 on marketing. It's because we've actually delivered something that borrowers feel empowered to use. They tell everyone about it. And then we also built something that lenders still feel very, very connected to this community. 82% of our lending members, they also live in underserved zip codes. So, they're like the person living in the townhome lending to the folks in public housing right down the street. A perfect example of this would be like Harlem. And I'll leave with my final last stat that I think tends to blow people's mind. 30% of our borrowers have also lent. What is that?

Sankaet:

Oh, wow.

Rodney:

I'll give you the insight that we always had at SoLo. If you go into these communities, every church has an informal savings club. Every church does loans. I know this. Every neighborhood has someone they can actually borrow from. It's the informal savings home. It's the informal economy. Other ethnic origins of the world, they call them different things. Sou-sou. They call them partners in Caribbean culture. But, we have a society where communities are developing their own informal financial service products, because we have left them behind. And it's not that they're not capable of borrowing or not capable of lending or not capable of making the choice. It's just, the products that are standard and traditional aren't necessarily designed with their view on how to make it all work.

Sankaet:

I'll ask you a direct question. Do you think the current regulations even allow for this product to exist? Or do you think the regulations have to change?

Rodney:

Yeah.

Sankaet:

Because to your point, it seems like people are going outside the system and doing this informally nonetheless.

Rodney:

Yeah. This is my third venture-backed company. I used to work at Proctor & Gamble. I was at age, Top 40 Under 40 at 27 years old. Financially, I'm going to be okay. If this company doesn't exist tomorrow, I'm going to be okay. When I decided to start SoLo, it was to do something right. And this is the right thing. I think, for this to be supported, we may have to change, or regulation is going to have to change. I do believe that, in certain states and certain things, we're going to have to possibly be different. My goal though is that, I hope that this model can be sustained.

Rodney:

Honestly, we do have supporters. We do have advocates for what we are doing. One of the biggest reasons why we became a B Corp, honestly, after a year long process of them assessing this model versus other models, they came to the same conclusion, that this was probably the most equitable thing they've ever seen, and it needs to be supported. Now, whether what that regulatory structure looks like ultimately, I think we're open to it, and I'm looking forward to the discussion.

Sankaet:

Yeah. Adam, I know you don't have any visibility into SoLo specifically, but what are your thoughts generally on how can FinTech innovators approach novel business models and novel underwriting models, things that are kind of, to Rodney's point, really trying to scale a model that it seems like a lot of these people are doing informally anyways. What's your advice?

Adam:

Well, I appreciate you saying that, because just simply out of fairness to Rodney, when I follow a description about what he's doing there, it would be easy for listeners to think that I'm implicitly saying things about SoLo Funds, when in fact, I'm meeting Rodney for the first time today. So, I just want to be... I'm sort of fully fair to him that nothing I say here should be implicitly read across to SoLo Funds.

Adam:

I do think that innovators in this area face some really challenging structural problems, and it's important to recognize that right up front. The first off is that the US has an incredibly fragmented regulatory system. If you look at the EU system that I grew up with, you can get one regulator and that will cover you in 27 different countries. In the US, often, if you're not a bank and you're not partnering with a bank, you need to maybe have sometimes 57 different state districts and territory regulators in order to cover one country. And, that is really challenging, if you're an early stage startup trying to get off the ground. And, as you know well, Sankaet, there are some solutions to that. You can partner with banks and effectively do things under the umbrella of banks. There are workarounds, but it makes for a challenging environment, and we'll come back to that later when we talk about sandboxes and how useful they can be in this country.

Adam:

The second thing to say is that I think our lending regulatory system has largely been built around larger dollar loans. And that, if you look at sort of the disclosures and the impact of the disclosures, it can be very hard to fit sort of a hundred dollar short term loan, that you pay no interest but a dollar fee on, into an existing point. That loan has an APR of roughly 50%, which is actually illegal in a whole load of states in the country. And, this is where you end up with this great bifurcation between sort of the wide variety of lending products available to people like me. And then, there's a huge missing middle that, until you get to the really bad abusive products like the payday lenders that Rodney was talking about, and all institutions, FinTech and otherwise, struggle with that missing middle.

Adam:

So, this makes this a really challenging area to work in. I think, at a practical level, this leads to a number of consequences about how you do it. The first off is, there may be places where it's advantageous to partner with, whether it's a bank directly, whether it's a banking as a service partner that partners with a bank, or whether it's someone you could look at sort of initiatives like on both that are trying to make some innovative use of state licenses that they have to support other people's products. A lot of the time, that area is sort of something that is going to be just really helpful for people.

Adam:

The other thing, I think this is where there's also a tendency to look for solutions where you can say this is not a regulated product. And, that's where, for example, quite a lot of the earned wage access industry has gone. If you are looking at people saying this is a non-recourse cash advance, and therefore the regulations don't apply. And, that's an understandable argument, and those people have good legal opinions often to back it up. I understand why people go there. Where I think people can then fall down is then sort of not asking, well, going back to my original comments, what are the regulations and what are the principles behind the regulations?

Adam:

And, how do we show that we're meeting them? How can we make the really compelling case that we have truly, fairly and completely explained the product and how it works to our customers, and how we can show if someone asked us that, "Yes, this may not be," if you go down that route, "this may not be a regulated structure, but by God, we're doing everything that a regulated company would to do and then some. And, our consumers are not being disadvantaged by this. And, look, here's our complaints handling program that follows all of the CFPB's guidelines, regardless of whether they apply." And so on and so forth. And, it's where people take shortcuts at sort of building their ability to make that claim, that I think that you can occasionally get people to sort of make it harder for other innovators that are doing those things.

Sankaet:

Yeah. But, to your point, in areas where there's no regulation, something very novel and new, what I'm hearing, if I'm hearing this right, you're having to take a risk. Maybe you don't have to take the risk, but at the end of the day, you look at Earnin, you look at Dave, you look at Saul, you look at a bunch of these companies, they didn't inherit a regulatory model that would've just worked for the business they're trying to do. So, what other option do you have other than you have to take a business risk if you really care enough about the mission?

Adam:

Yeah. And I think the question is, anyone founding a company is going to be taking a lot of risk. I mean, if you look at Earnin, Ram was taking a lot of business risk that the tip only model was going to work in financial services. It wasn't just regulatory risk that he was taking. Everyone faces a real risk of not finding product market fit. I don't think there is anything, in that sense, very unique about the fact that you have to take some regulatory risk. But, like all the other risk you take, it's a question of doing that smart analysis to sort of find somewhere that's the right point on the efficient risk reward frontier to give your business the best chance of success. And, where I've seen some people go off the rails is where they think that, if you are going to say you're not regulated, that means that you don't want to do the things regulated firms do, because that might be an admission of... Some people I think have come to see that as a tacit agreement that they should be regulated.

Adam:

And, I don't think that is. I think it's understanding that you have to draw the line between regulated activity and unregulated activity somewhere else. But if you're just on the unregulated activity side of the line, then you sure have got a lot to learn from the regulated activity of the line. And, there's all sorts of principles that sort of are followed for good reasons to do with ensuring the really good customer experience and understanding that builds long term loyalty that you can pick from that side of the line. And so, it's not about trying to eliminate regulatory risk. Lots of startups have to take that to a greater or lesser degree. It's about managing it well.

Sankaet:

Exactly. I think your point, is regulated or unregulated operate like you're regulated.

Adam:

Yep.

Sankaet:

Rodney, recently, you ran into a disagreement with Connecticut on the model. Do you want to talk more about that? Do you want to talk about what happened there, and how you're navigating and thinking through that?

Rodney:

Not specifically, but I will talk about... I think, indirectly, just going back a couple of points that Adam made, when you decide to do something innovative and disruptive, you have challenges. At the end of the day, this could have failed dramatically.

Sankaet:

Yeah.

Rodney:

Right? These tips and donations and optionality and given choice to the borrowers and underwriting based on cash flow, I mean, the whole thing could have failed. And to be honest, everyone thought it would fail. No one actually thought that we would reach the scale that we are today. So, the business risk, we took it and I think we won there. We got product market fit. Everyone wants to talk to us, so let's cheers. I actually think we've put together the most incredible purpose driven team I have ever seen do what we have done on the shoestring budget that we've done it. But nonetheless, there should be accolades there, and I'm really proud of the team.

Rodney:

Now, our regulatory journey is just going to be complicated. It's going to take time. We welcome regulatory scrutiny, regulatory conversations. But we understand the complexities on the state by state basis. We understand the complexities, even at the federal level. And, for something that is truly new, because we are not a wage advance company. We are not Earnin. We're not Dave. We're not even lending clubs of the past. We're not our predecessors. We are something new. So, it's going to be challenging. My goal though, and my hope for regulators and naysayers and all of the individuals who have an opinion about things, is that, let's look at the data. Let's figure out what works, what doesn't. Let's figure out if there can be a framework that we can fit in. And, we are more than willing to do so.

Rodney:

My ideal situation is a sandbox. My ideal situation is a time period, where what we're seeing can ultimately be shown to the world as a new type of model. And, one of my things that I'm very excited about is, when you give these borrowers a choice, and they self-select less over time, that's something that we've seen over 400,000 loans. What is that? What is this concept that, when you... We believe that you can't teach financial literacy. You got to give them money, and let them do something with it. So this concept of, number one, paying the loan in its entirety. That's a concept that isn't taught in my community. We're taught to get the credit card. We max it out and we pay over time. Paying over time is the worst thing to tell someone who's on a budget. Because all that pay over time small fee turns into is another budget item, versus something that they need to actually remove from the budget, right?

Rodney:

So, this concept of short term, pay it in full, but when you do pay on time, the next time, it's cheaper. You're instantly rewarded the next time. It's cheaper and you get more money. Conceptually, there's a lot of really strong value that we're seeing, and we want to showcase that data. We want to partner with industries. There's something here. There's something special.

Sankaet:

Yeah.

Rodney:

And there's also something special when you think about the next challenge. We don't talk about building credit. We don't even talk about reporting credit. But I will tell you, we have something special when I can show a borrower who's paid a short term loan eight times and never has been late. That should be able to positively affect their credit report. Today, non-installment loans don't. I will tell you, everyone thinks our fight is the usual claims or tips and donations. No, no. We have a product innovation roadmap that extends way past this. This was the most novel and simplest MVP thing that we could do, to prove this concept that people can help people, and that technology can validate them and underwrite them better. The future looks bright.

Sankaet:

I want to highlight a couple of things here. One, what I'm hearing from you is, you actually encourage, and you want more regulatory involvement, and you want to be able to demonstrate and explain the model and the benefits of it. Because clearly, it seems like it's helping people phenomenally. The second piece that is very interesting, one thing about SoLo that is key to highlight is, people don't technically have to tip, right? They don't really have to tip. But it seems like, mostly, everybody's tipping. And, to your point, mostly always paying on time. What do you think is driving that? What do you think is driving this behavior of, "We're going to tip. We're going to pay back, and we're going to, by and large, pay back on time."?

Rodney:

I think it's something that they actually it's familiar to them. It's familiar because they take loans from friends and family, or from strangers in their community today. And, more importantly, to this community, financial services are faceless organizations. They're irrelevant. It's almost neutral. There's no feeling when they see Chase. It's just like, "That company doesn't understand me. I can go in there and try to apply for a $200 loan and I might get laughed." That's what realistically what would happen. So, I think, for us, the human part, they understand it. They understand tipping. They don't even understand APR.

Rodney:

Sometimes, I get a little frustrated because some people think that we use the tip and the donation structure as a way to kind of bypass regulatory. And, it's not about tip and donation. We don't care about the naming exercise. It's that the choice, right? When you go on our platform, on our website, it says, "Borrow on your own terms." We just wanted the choice. And we needed to communicate the choice of cost, the cost of capital. We needed that choice to be something they understood. And then they could change it however they want.

Rodney:

And when you talk to our borrowers, they say that, "No, there's no disagreement about what it costs." They're like, "It costs this. I selected it. And I can't wait to get my score up so I can choose less. And, I think SoLo has benefited enough from me, but I'm never going to not tip my lender." That's what they would say. That honestly blows my mind, always, to this day, because we're taught that we're not that empathetic to each other. We're taught that we hate each other. We're taught that there's different groups and organizations. And, I actually believe that humans are humans. And if you give a human an opportunity, in most instances, they will show up. So, we used to call it a social experiment. But, at our current volume, I don't think it's a social experiment anymore.

Sankaet:

No. It's a legitimate business, not a social experiment. It's like you're scaling a model that is, to your point, very intimately, people are very used to this. And what you're doing is you're just scaling this up, so that it's not just stuck within a community, but people can go much beyond.

Rodney:

Yeah. I'll give you an example. And this is just true stats. From downloading our app, to making a request and getting funded, it's less than 15 minutes.

Sankaet:

Wow.

Rodney:

That's magic.

Sankaet:

Yeah.

Rodney:

That's the mom on the side of the road, flat tire, "What do I do? Someone in my community told me about SoLo. I download it and I get money, and it's in my account before the tow truck comes?" That's magic. I used to think, the first time I ever ordered Uber, I thought I was the man right away, but I thought it was magic. I looked in the car. I was like, "You're going to give me a ride. What's your name? Are you really going to take me to wherever I want to go? This is fantastic." That's the equivalent of needing a hundred dollars, and in 15 minutes, it shows up in your account.

Rodney:

So, I just think... I think, when we call it win, win, win. There's win-win scenario for all of us. We believe our borrowers can get access to capital when they need it. They can price it, and they can repay it back. But more important, they're repaying back the lender. They're not repaying back SoLo.

Sankaet:

Yeah.

Rodney:

We're just trying to make this thing as efficient as possible, from a cost perspective. We operate at really slim margins. That's why I like... B Corp has seen our financials, and every now and then, regulators have to as well. I'm like, you can go and figure out what you want to go out and take. But, this is an example of a company that has chosen people over profits. I can break out my cogs, and you can help me too, right? Number one, we do not do ACH. We move money the most expensive way, which is push and pull payments, because we believe that money should be- [inaudible 00:49:55]

Sankaet:

To negotiate your contract right on [inaudible 00:49:58] That's what you're trying to do?

Rodney:

It's the most expensive option. And, oh my God, I remember my co-founder was like, "We have to give them money immediately." And I was like, "We can't afford it." We can't buy the underwriting data from Clyde, and verify them with all MLKYC and make sure there's not fraud and move money, and the only fee is optional?

Sankaet:

Yeah. Yeah.

Rodney:

We don't charge any mandatory fees for signing up. There's no subscription service. There's no "I want my money instantly" fee. There's nothing.

Sankaet:

Yeah.

Rodney:

We do not. And, that's the stuff that I talk about. Forget the laws. Assess the company. Look at the financials. So anyway.

Sankaet:

No, that's super helpful. I think one thing you mentioned here that... You talked about this, and one thing that you mentioned is, "Hey, we'd love a regulatory sandbox." So, maybe let's pivot there for a second. Adam, you mentioned this as well. What is a regulatory sandbox?

Adam:

Well, so that's something that can be very much in the eye of the beholder. I think there are a variety of models that we've seen around, which are sort of ranged from the very simple, "I'm trying to get something off the ground. I can go and talk to a regulator about it and sort of almost bounce some ideas off them," through to very formal, "We will give some kind of cover to the process of something that would normally be either definitely or possibly against regulations." And you can see that in the US most closely, in what the CFPB run in terms of project catalyst and having the ability to get no action letters, the ability to trial disclosures, where sort of existing disclosures don't work well.

Adam:

So, there's a range of actions. There are some things that are in the middle, where a regulator just says, "This is interesting. We're going to come along and we're going to observe what is happening. And, we're probably not going to give you a no action letter, but the fact that we're here and not yelling might give you some comfort." And so, effectively, there are a range of models here. There are some challenges that are, again, specific to what I was talking about, about the sort of multiplicity of regulators in this country. Let's say, the State of Wyoming sets up a sandbox that allows you to maybe operate for a bit without a license, which is another possibility, maybe to operate with a novel interpretation of Wyoming law or something that is against the law.

Adam:

There are, what, 600,000 people in Wyoming. That's not necessarily going to be a great, scalable business. It's not, I think, possible for early stage founders to go, if they're going to be subject to state regulation, go and deal with 50 different state sandboxes. There may be some models that are exceptions. There might be some in insurance, some in larger dollar lending, where you could, in a larger state, start to scale a business. So, I'm all in favor of regulators engaging, looking to be flexible. I do believe that it would be good for the world for regulators to have a somewhat higher sort of revealed preference, risk tolerance to new ideas that could benefit consumers and small businesses.

Adam:

But, what I don't see is that there's a sort of cure all panacea here. If I were to try and get closest to that, I might look to try and encourage sort of some of the larger states, especially some that have shown interest in innovation, California and New York, to be a little bit more aggressive. The bigger the state, the more scope to do that. I would also probably encourage to try and get maximum use out of the existing regulator to do structure. We've got good coordination between the states. Possibly, the most important regulatory organization that few people in FinTech have heard of is an organization called the CSBS, the Conference of State Banking Supervisors, that is the umbrella organization of all the state regulators. And, they run a lot of the shared technology between states. I could see something great where different states with sandboxes could basically sign up to applications, and you could sort of almost apply it to all the states at the same time and see who was interested in working with you.

Adam:

So, there are things that we can do, but just absent any sort of federal non-bank non-securities charter that is available to FinTechs. There is actually sort of real limits, I think, to what sandboxes will practically achieve for early stage founders, who can only spend so much time, realistically, talking to regulators in between sort of the finding good product, finding the right go to market strategy. And so, it's a really interesting area. I'm very pro US regulators doing more, but just, I think it's important to recognize that it's very hard to find a silver bullet given the regulatory structure we've got here.

Sankaet:

Is there something in the horizon that you think is promising in providing a more agile regulatory landscape to companies that are just getting started?

Adam:

So, I have to squint a bit at it. But, I do see the states having made a lot of progress in terms of increasing coordination and the ability to rely on each other's work. And, it's kind of... There's someone who sadly passed away recently, John Ryan, who ran the CSBS, the organization I [inaudible 00:56:52] skeptical himself of a lot of FinTech innovation, but has always been open minded. And, I hope the trend that he started and worked with many state regulators to achieve towards greater coordination and greater efficiency of process, and to be able to respect the ability to set state law that the US system allows, whilst making that more sort of seamless and more navigable to early stage companies. I think that there is a trend there. And if that could be built on into some kind of collective sandbox of the type that I was talking about.

Adam:

I also do see some hope that there are some, I think, organizations doing some really good work with regulators but slightly from the outside. The Alliance for Innovative Regulation is one of them. The Financial Innovation Lab as another. And, I do see that on sort of industry-wide policy issues, there are more mechanisms to try and sort of create good dialogue on innovation and to sort of try and sort of avoid the status quo bias that is very easy to creep into regulatory system. So, there is some hope in all of those things. But, I think, not withstanding that, you're still going to have to, if you're thinking of starting a FinTech company, you need to assume that you're not going to get a magic answer to this. You need to work out who in your network can give you good advice about how to think about it, who can explain to you sort of what the issues are, because there's nothing I see on the horizon that's going to fundamentally solve for the challenges we're talking about here.

Sankaet:

Yeah. Rodney, what are your thoughts? Given your experience, every state, by and large, opines on their own. And, Fintech's always, and early stage company's always on a budget. How are you navigating something like this? How do you think through this? Is there something you're optimistic about?

Rodney:

It's a challenge. We spent about $150,000 on regulatory legal, before we wrote a line of code. A series of opinion letters, surveys, and then we did it with another firm and they said two different things. So, Adam... And we used the best. That's the problem. It doesn't matter. I'm going to tell you, there was a lot of folks and firms that, in the last administration, felt that we were going to be okay. And, they believed that the model had some challenges, but they ultimately felt more positive than they felt today. So, with the complexities on a state by state level, and at the federal level, no consensus, especially on simple certain lending laws, that it's impossible for an early stage startup to do something disruptive.

Rodney:

It's much easier for them to follow someone. I can be the new X. It's much easier to be the new X, than to say, "I want to reinvent Y." I want to be like, "I want to do something completely very different." And, that was my biggest challenge is that everybody kind of just wanted to turn us into an institutional lender or lending club, but they all kind of got into trouble differently, in terms of the SEC and the secondary sale of those assets.

Rodney:

So, long story short, it's really difficult. It was extremely difficult. Now, question for Adam, because what has happened to us in particular is that, we have started to gain attention and advocacy from other geographic regions in the world, that say "This model, I like this model." And when you go to other regions in the world, there are microfinance licenses. There are licenses dedicated to these types of communities that need these types of services. And then in Mexico, I think there's a FinTech law. When does the US decide to create law or regulation for services... Back to your point, Adam, small dollar loans, products that aren't necessarily going to be mainstream in their eyes, but if you talk about the number of people who are going to use them, they're definitely more mainstream than mortgages. When do you think the US kind of starts to head in that direction?

Adam:

So, I think it's challenging the... I don't need to say that you bet against sort of almost anything getting done that requires legislation in Washington. And I think it would require legislation to come up with some kind of new federal charter that puts consistent standards that were an... Or rather than an and, to state by state or in relation to non-bank lending. So, I think it is a challenge, and it is sometimes harder to go first. You mentioned lending club. It's kind of like, to some extent, lending club benefited from being able to watch prospers stumble and were able to overtake them. And again, just being very clear that I'm not commenting on anything related to you, per my earlier comments, because I just don't have the information to, but I think you do just have to try and engage with the regulators. Listen closely.

Adam:

I think it is also important to have in your mind who the next regulator is going to be. Spent a lot of time telling people in 2017, 2018, that if the Democrats won in 2020, that likely think about the fact that sort of decisions on enforcement actions, about things that are happening now are going to be made by a different appointee in the CFPB. And so, you always need to be looking around the corner a little bit at the next regulator. And then, I think what this comes down to, you do all of those things. You find people that are the right balance between sort of understanding you need to take risk and giving you advice. They help you interpret what you're hearing when you talk to regulators. But with all of that, there is going to be a dose of luck about who ends up in trouble, who ends up being able to build a regulatory mode behind them because they find something that works.

Adam:

But, my view is, I've seen people have sort of despair that you can't do this, so we might as well try and scale outside the system. And, I think everyone that I've ever sort of seen that takes that approach, it does end up catching up with you already. And, I think you have to just try and get things done within the system. My side hustle, I should have mentioned this at the start, is that, I'm an advisor to a FinTech VC called Core Innovation Capital that, in full disclosure, is an investor in Synapse. We have a parent portfolio company called Arrived, that it works in fractional real estate. They had a really painful get off the ground process because they went through the SEC, which is a challenging regulator to navigate as in the innovator. And, they found it really hard to, first off, get a construct that the SEC would sign off with, and then get a process by which the SEC would sign off on, such that they didn't have to go back on a property by property basis, in terms of what they were doing.

Adam:

I think they gave themselves the best shot they could by that process. And, I think it's really easy for people to take the view that, "Well, this is so hard. We kind of need to take the Uber approach of ignoring it." That just doesn't work with financial regulation. Again, because I'm following a comment that was out of your own experience. Say, yet again, there's no implicit commentary on anything you did or didn't do. It sounds like you did put a lot of time and effort into this at the early stage, and that's where there is a degree that some of this, you're giving yourself the best odds. You're not making yourself bulletproof in this world.

Sankaet:

Hearing all of this, I have a question, which is, you as a FinTech, do you think you have a fear of failing or failing forward fast? Does the current environment make that harder? Or, do you think... To Adam's point, I think the point that he made that was a good perspective, which is, this is no different than any other business risk. You have go to market risk, product market fit risk, and then you have a regulatory risk.

Rodney:

Yeah. I'm a firm believer. It's my third venture. As a founder, I'm in the business of managing risk. I'm a risk manager, in a very broad sense. So, yeah. I mean, you have it absolutely right. I'm assessing the risk of failure all the time, and I'm mitigating those risks. And especially in this FinTech climate, we have advocacy and we also have the opposite. But, we also have product innovation that is getting more advocacy. And, my job is, I got to make sure that product innovation stays as close to my current product market fit as possible. And then, there's an X factor, time. I don't know how much time I have. Time is risky, right?

Sankaet:

Yeah.

Rodney:

And then the other part is capitalization, because risk for a venture and risk means something different to VCs. We've never been the fan of a VC. But, I like to think that we're doing the best job we can, but I think we're doing a good job. What I'm excited about is the innovation that we have. I am excited. I also want to commend the regulators that have worked with us. It's not all what the headline reads. I would say that, there's definitely been regulators that are more open to dialogue and discussion. To Adam's point, it's different on a state by state basis, but it's definitely there. And that's hopeful. That's the stuff that we like, and that's hopeful for sure. So, we're going to manage these risks and we're going to continue to try to bring products to markets that we believe are much needed or are much underserved. We're going to bring much needed solutions, and we're going to bring it at a scale that I think has been unmatched. I think the team that we have is completely capable to shift and adjust. And that's me managing my risk.

Sankaet:

Yeah.

Rodney:

So, I think, no matter what, I think that the future looks extremely bright.

Sankaet:

That's good to hear. I will actually admit, when I started this conversation, as I've mentioned this, I worried that the change in the mandate at the federal level and some of the recent things I've seen, it'll shell shock founders into kind of creating this culture of fear around, "Oh, we cannot do anything here, or we cannot succeed," and that would stall innovation. But, listening to this conversation, it seems like serious founders will still innovate. And, even though we don't have a perfect solution, because we have to go and partake in a 50-state buying cycle, it's no different than managing any other risk. And you kind of manage that. You execute on it. You move forward, and, Rodney, to your point, as a founder, your biggest job is reducing risk. You just methodically reduce this one, just like how you would any other.

Adam:

If I could add one more note of optimism for you. It's very easy to sort of demonize regulators here. And in general, regulators are people that have chosen this career because they want the same things that we all want. They do want good product to get to people. They may have different views about what that is, but there are going to be validity in those views. And, they can be a great source of feedback. And, they can be just as frustrated by the structural challenges of the system, probably even more so than we are. And so, it is important to sort of understand that there is a fundamental way, that if you are trying to make people's lives better then you're on the same side as the regulators. And, if you get some hesitation from them, there's probably some truth in the feedback you are getting from that. And, it's not like the people that are fundamentally trying to achieve different things, and that should give everyone some hope, I think.

Rodney:

My favorite saying to, when I meet regulators is that, my number one regulator is still my aunts and my uncles that use payday products. And trust me, there is nothing a regulator can do to me that my aunt... I'm terrified of my aunt, trust me. So, she thinks this thing is not helpful for her. It's a big problem at the family table. And you don't want a big problem at my family table. Okay.

Sankaet:

I love it. And, yeah, I would echo the sentiment. I think everybody is trying to do the right thing. I think everyone's trying to build a more equitable financial world. And I think regulators, banks, Fin Techs, I think everyone's goal is aligned. Yeah. Guys, if people, the listeners have to reach out to you, Adam, where can they find you?

Adam:

Adam@klaros.com. K-L-A-R-O-S. Advantages of being a small company, easy email address.

Sankaet:

Rodney, what about you?

Rodney:

Yeah. Pretty similar, rodney@solofunds.com.

Sankaet:

Awesome.

Rodney:

Come find us.

Sankaet:

Well, Rodney, Adam, it's been great to have both of you here. Thank you so much for taking some time. I really enjoyed the conversation.

Adam:

Thank you. It's been great.

Sankaet:

To our listeners, thanks for joining. If you want to listen to more episodes, please go to synapsefi.com/underthehood.