This is the first in a five-part series of articles about banking MRBs. These articles are intended as an overview of marijuana banking, not an exhaustive guide.
These articles are based on our banking, payments and legal experience and discussions with the many parties interested in increased availability of banking services for cannabis businesses to improve safety, transparency and tax compliance.
We talk daily with financial institutions currently banking MRBs and those interested in doing it. We also talk regularly with state and federal regulators, state officials tasked with administering state cannabis programs as well as marijuana and marijuana related businesses.
Hypur’s technology was designed to fill in the gaps between financial institution’s existing systems and the regulatory requirements of banking highly regulated and cash intensive businesses. Our software includes features specifically designed to help financial institutions bank marijuana businesses.
We know what it takes to bank MRBs. We work with financial institutions every step of the way – from early-stage exploration through board and regulator approval to policy development and boarding their first MRB account.
This first article focuses on determining if banking marijuana related businesses (MRBs) is right for your financial institution.
Why Consider Banking MRBs?
There are many factors to consider when deciding whether you should bank MRBs. The two most common reasons we hear from banks and credit unions for why they’re considering banking state legal cannabis businesses is (1) the revenue opportunity and (2) the market conditions.
Banking MRBs requires different processes (staffing, technology) and more risk so banking services should be priced differently. Volume-based pricing is common and is what we recommend as it provides the best risk-based approach. Financial institutions with only a few MRB accounts or who serve state-licensed cannabis accounts before their state allows retail cannabis sales often charge fixed monthly fees. These financial institutions typically move to volume-based pricing when retail sales start or if they take on more accounts.
Most MRBs have struggled to get, or keep, a bank account so they understand how challenging it is for a financial institution to serve them. Because of this they’re grateful to have an account and will pay higher fees for the privilege.
Banking MRBs can generate considerable non-interest income which is a great way to supplement traditional revenue ss competition from non-traditional banking players increases.
Financial institutions who are early adopters, and develop a reputation and an understanding of the market, can be market leaders.
Customer acquisition costs are low. In most markets there is little to no competition serving MRBs. Even in more mature markets, the industry is growing rapidly so there will be plenty of new business opportunities.
As mentioned above, MRBs are appreciate of financial institutions that provide them an account and are very compliant – providing considerably more information during initial and ongoing monitoring than traditional accounts.
With the cooperativeness of MRBs, favorable pricing and the efficiencies provided by purpose built MRB banking software, MRB accounts can be not only your most profitable but also your most compliant accounts.
Done properly, banking MRBs can generate significant profits and additional deposits while avoiding CMP’s, enforcement actions, and criminal prosecution.
Is Banking MRBs a Fit for Your Financial Institution?
We talk to a lot of banks and credit unions who are interested in banking MRBs and using Hypur’s compliance software to help. Some are much more further along in the process than others.
For those in the early “curiosity” stage we typically bring up of the concept of “Permissible vs Appropriate”.
Although banking MRB’s is a permissible activity, the appropriateness of this activity for a particular financial institution can only be determined through a regulatory onsite examination. Given the discrepancy between state and federal laws on state legal cannabis businesses, this definitely complicates the due diligence and evaluation process.
Just because your institution can bank MRBs, doesn’t mean that it should.
What to Consider Before Banking MRBs
Before banking an MRB customer you should evaluate your institution on the following:
CAMELS Composite Rating
We recommend a composite rating of 2 or better. If you are currently rated a 3 or below, it’s doubtful your primary regulator will be enthusiastic about your involvement in this vertical.
Board of Director Support
This is a critical component of the due diligence process prior to banking MRBs. All aspects of the program must be thoroughly reviewed and approved by your board and carefully documented in the minutes.
Questions and responses from each board member should be noted in the minutes. Examiners have even queried institutions as to the tone and tenor of the board discussions.
Although it’s best to have no enforcement actions, research shows many financial institutions banking MRBs have been under a consent rider within the past five years.
You must have a strong Chief Compliance Officer with significant BSA/AML experience. A strong compliance program must be in place before, during and after regulatory examinations.
Anticipate additional training for staff involved in handling MRB accounts. Both federal and state laws should be studied thoroughly. You also need to understand the industry – know how a dispensary (medical and recreational), a grow, a cultivator, a marijuana infused product (MIP) manufacturer, vape companies, etc. operate. You should also know the legal differentiation between THC products, non-THC based CBD products and hemp products.
Finding a qualified third-party auditor with MRB experience may be difficult. This is an emerging vertical so there are fewer qualified individuals with this specific type of experience.
Sufficient Allocation of Resources
Are you prepared to invest considerable human and financial resources in an MRB program? You will willing to invest in staff training, technology and allocate senior leadership time to developing and monitoring your program. It’s best if senior management are supportive of your MRB banking program because you may receive pushback from employees who object to the product.
Banking MRBs involves significantly more documentation, ongoing monitoring and reporting requirements and there is little to no room for error.
Traditional banking and AML/BSA systems weren’t designed to meet the demands of cannabis businesses so you should be prepared to supplement your current systems with technology designed specifically for banking marijuana businesses.
In short, if you want to bank MRBs be prepared to:
- take your current compliance and due diligence processes and raise them several degrees;
- embrace transparency; and
- set the bar to supervisory expectation – not just regulatory compliance.
With proper planning, policies and procedures and technology a successful MRB banking program is very possible.
The other articles in this 5-part series on banking MRBs are:
Part 2 – Banking MRBs – Regulatory Guidance
Part 5 – Banking MRBs – Technology Solutions