Marijuana banking

Banking MRBs – Getting Started | Policy Implementation (part 4)

By July 18, 2016 No Comments

This is the fourth in a five-part series of articles on Banking Marijuana Related Businesses (MRBs). This installment focuses on getting started banking MRBs and implementing policies and procedures (part 2 focused on creating your MRB banking policies).

We are frequently involved in conversations with both financial institutions and regulators at the state and federal level regarding MRB banking. Although this series of articles has an emphasis on banking state legal cannabis accounts, many of the concepts discussed also pertain to banking Money Service Businesses (MSB’s) and other cash intensive business accounts as well.

I have seen a growing trend this year with regulators requiring that financial institutions apply more technology and automation to their operations, especially those that are involved with the banking of MRB’s and MSB’s. It is now a common practice for our financial institution clients to send our scope of services to their regulator to show them in advance how our services will improve efficiencies and increase their ability to properly maintain cash-intensive business accounts.

Others are having to submit our scope of services to their regulator to clean up and rectify existing problems or deficiencies.

The Role of Technology

Regulators are now seeing a greater importance in involving technology from the initial planning stage, and not as an afterthought once problems start emerging. Although we can apply our services at Hypur to clean up problems, we would prefer have those regulatory problem situations never occur.

Keep in mind that the banking of cash-intensive businesses may be very profitable, but you must devote the proper human, financial, and technology resources in order to maintain the compliance necessary to protect this revenue stream.

Baselines and Trends

Much like the popular song “All About That Bass,” when banking MRBs it’s all about that baseline. Establishing trends and baselines is critical in determining anticipated activity and creating alerts and red flags for suspicious transactions.

For many of you reading this article, MRB’s may be new to your state. How do you determine and establish baselines for an industry that is relatively new to any state, and possibly brand new to your state?

A good place to begin is with publicaly available information, such as:

  • Other states’ information. Research states that have had legalized cannabis for a while. Colorado, for example, releases data from their Department of Revenue regarding cannabis sales and the associated taxes and fees collected. They also publically list Licensed Facilities such as Centers, Cultivators, Infused Product Manufacturers and Testing Facilities. You can use this information to start backing into averages such as sales per store to start getting a feel for deposit volume. Bear in mind that a small MRB in a remote location may have a greatly different sales volume than an MRB located in downtown Denver.
  • Your own state’s information. If your state is new to this vertical, they may or may not have information that will be useful to you.
  • Market data. There are a number of research companies that exist in the MRB space. I have seen information from companies such as ArcView Market Research and New Frontier that I deemed beneficial in market research.
  • Applicant information. Finally, a financial institution will need to rely on the information provided by the applicant seeking an account.

Keep in mind that a client’s projections are estimates, but this is a very good place to start. You will most likely be underwriting these accounts based on the estimates they provide, plus research information you have gathered from state and other sources. Know that you may need to quickly adjust anticipated volume up or down based on actual activity. However, be careful not to underwrite or change permissible deposit volume midstream that would violate any of your other applicable policies.

What Activity Should You Track and Monitor?

I recommend dividing activity into the following categories:

  1. Estimated Activity (reported by clients in their account application)
  2. Anticipated Activity (derived by baseline analysis and estimated activity)
  3. Actual Activity (reported by the client as frequently as is feasible)

You will utilize all three of these categories in all phases of the banking MRB accounts.

Establishing baselines applies to more than aggregate deposit volume. You also need to consider and review not only all sources of deposits, but all methods of the client in removing money from your institution.

The ability to detect unusual and suspicious transactions applies to both credits and debits, and there are a number of moving parts that you need to control and monitor.

The other articles in this 5-part series on Banking Marijuana Related Businesses (MRBs) are:

Part 1 – Banking MRBs – Should Your Institution Do It?

Part 2 – Banking MRBs – Regulatory Guidance for Banking

Part 3 – Banking MRBs – Policies and Procedures

Part 5 – Banking MRBs – Operational Standards

A version of this article was originally published on CUInsight.org.