Marijuana banking

Banking MRBs – Should Your Institution Do It? (part 1)

By January 22, 2016 No Comments

This is the first in a five-part series of articles on Banking Marijuana Related Businesses (MRBs).

Hypur’s bank compliance software was built specifically to fill in the gaps between financial institution’s existing systems and the regulatory requirements of banking cash intensive businesses.

Many banks and credit unions have found our technology to be a great solution to banking MRBs so we have worked with financial institutions every step along the way – from early-stage exploration through Board and regulator approval to policy development and boarding their first MRB account.

The goal of this series of articles is to help financial institutions interested, or just curious, about banking MRBs with what to consider entering the space. This installment focuses on determining if banking MRBs is right for your bank or credit union.

Non-Interest Income Opportunities

Financial institutions are constantly seeking ways to supplement traditional revenue by increasing their non-interest income.

As competition from non-traditional banking players increases, financial institutions are forced to seek new and different revenue sources and serving challenging and emerging verticals is becoming a more attractive opportunity.

The verticals getting the most attention are state legal Marijuana Related Businesses (MRBs) and other cash intensive businesses (money service businesses such as check cashers, payday lenders and money transmitters).

This series of articles focuses on banking MRBs but we also have lots of articles on banking money service businesses.

Why Consider Banking MRBs?

There are many factors to consider when considering serving regulatory intensive markets but common reasons we hear why banks and credit unions choose to serve state legal cannabis businesses: the revenue opportunity and market conditions.

Revenue Opportunities

Most MRBs have struggled to get, or keep, a bank account so they happily pay higher fees and provide considerably more information during initial due diligence and on-going monitoring. Activity-based pricing structures, where larger accounts pay higher fees, is common. There is also the opportunity to earn transaction based revenue.

The revenue opportunities are significant but they are not without risk and hard work.

Market Environment

In most markets there is little no competition serving MRBs and even in mature markets, the industry is experience tremendous growth which is expected to continue for many years. Financial institutions who are early adopters, and develop a reputation and an understanding of the market can be market leaders.

Between the cooperativeness of MRBs and purpose built MRB bank compliance software, these accounts can be not only your most profitable but also you most compliant.

Before getting into how to bank MRB customers we need to discuss the due diligence, risk mitigation, and regulatory compliance side of banking cannabis businesses.

Done properly, banking MRBs can generate significant profits while avoiding CMP’s, enforcement actions, and criminal prosecution.

Banking MRBs: A Fit for Your Financial Institution?

We receive calls every week from banks and credit unions interested in using Hypur’s compliance software to bank MRB’s. We also here from a surprising number of groups thinking of establishing a de novo financial institution for the purpose of serving MRB clients.

This is usually when I bring of the concept of “Permissible vs Appropriate”.

Although banking MRB clients 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 do this, does not mean that it should.

Banking MRBs: What to Consider Before Entering the Market

Before banking an MRB customer you should evaluate your institution on the following:

CAMELS Composite Rating

I 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 critical component is key in the due diligence process prior to banking of MRBs. All aspects of the program must be thoroughly reviewed and approved by the Board and the minutes carefully documented. Examiners have even queried institutions as to the tone and tenor of the Board discussions regarding MRBs.

The questions and responses from each board member should be duly noted in the minutes.

Enforcement Actions

Although its best to have none, my research indicates many financial institutions banking MRBs have been under a consent rrder within the past five years.

Staffing Expertise

You must have a strong Chief Compliance Officer with significant BSA/AML experience. A strong performance will be required pre, post, and during regulatory examinations.

Training

Anticipate additional training for staff involved in handling MRB accounts. Both Federal and State laws must be studied. 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 all operate and know the difference between non-THC based CBD products.

Third-Party Auditors

Know that engaging a 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

This includes both human and financial resources. It’s also best to have senior management supportive of this endeavor. You may receive pushback should you have employees that object to the product.

Proper Technology

Banking MRBs involves significantly more documentation and ongoing monitoring and reporting requirements and there is little to no room for error when banking MRBs.

Your current systems weren’t designed to meet the demands of cannabis businesses so consider using technology designed specifically for serving cash intensive businesses.

In conclusion, take your current processes of compliance and due diligence and raise them several degrees. Embrace transparency and set the bar to supervisory expectation, and not just regulatory compliance. With proper planning, policies and procedures and systems you can make your program a success.

 

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

Part 2 – Banking MRBs – Regulatory Guidance for Banking

Part 3 – Banking MRBs – Policies and Procedures

Part 4 – Banking MRBs – Getting Started

Part 5 – Banking MRBs – Operational Standards

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