This is the fourth in a series of articles covering the generation of non-interest income in cash-intensive businesses with an emphasis on Marijuana Related Businesses (MRB’s). The first article discussed evaluating if entering this vertical is appropriate for your specific institution. The second article focused on the regulatory guidance that surrounds providing financial services to MRB’s. The third article discussed establishing appropriate policies and procedures within the institution surrounding the banking of MRB’s. This installment will begin discussions on implementation and operations.
At Hypur, we are involved in regular and frequent conversations with both financial institutions and regulators at the state and federal level. Although this series of articles has an emphasis on the banking of state legal cannabis accounts, many of the concepts discussed also pertain to 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.
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.
From last year’s popular song “All About That Bass,” for bankers it’s all about that baseline. Establishing trends and baselines are critical to determine anticipated activity and to create 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 publically 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.
I divide activity into the following categories:
- Estimated Activity (Report by client via their application)
- Anticipated Activity (Derived by baseline analysis and Estimated Activity)
- Actual Activity
You will utilize all three of these categories in all phases of the banking of an MRB client.
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 next article in this series will continue to discuss baseline analysis and how to calculate and deal with the three categories of activity.