More and more teams at financial institutions are exploring the idea of banking the cannabis industry as it flourishes in their communities. In banking the industry, community-based financial institutions are not only being responsive to the community, but also finding a new profit center and a loyal clientele that is going to be hungry for whatever products and services the financial institution is willing to provide.
Of course, this is all contingent upon the financial institution putting in place a thoughtful and well researched program. As a subject matter expert in both the cannabis industry and banking, here are a few of the important considerations I would have in building that program:
- The Regulatory Rules Haven’t Been Written Yet! Some states have written regulatory guidance, but until FFIEC writes regulation regarding cannabis banking there is little regulatory apparatus for State and Local Regulators to enforce.
- How are you going to vet the cannabis related businesses? We all know the illegal cannabis trade exists right alongside the legal trade. This means the financial institution needs to have a process to determine that the cannabis business is legal and compliant with all state and local laws. As importantly, what audit processes are you going to put in place to ensure those businesses stay legal and compliant.
- Do you have the resources to monitor the deposit activity? Every legal and compliant cannabis business has to institute a seed-to-sale or track-and-trace program. Ensuring all deposits are consistent with the activities on that track and trace program is essential to prohibiting money laundering and illegal activity. Furthermore, the FinCEN guidance requires specific SAR and CTR filings, which can be an enormous amount of work.
- What are you going to do with the cash? How you are going to handle the cash in this nearly all cash business is important. Generally, it is not a very good idea to handle it through your normal retail deposit system.
- How do you price your banking services to the industry? A pricing structure based on a monthly fee may not be enough to cover the infrastructure cost that the FI may need to comply with future regulations. Pricing on a per deposit basis may not be competitive and restrict the FI from building critical mass and maintaining a profitable program.
- Do you build it entirely in house or outsource? The first question to ask is how many subject matter experts on cannabis do you have currently inside of the institution. How long will it take to build that subject matter expertise? What is the breakeven in manpower cost that can be saved by outsourcing elements of the program to Subject matter experts and technology?
- Pricing and Building A Profitable Program. Even if the financial institution enlists help to implement a safe cannabis banking program, pricing it correctly from the beginning can ensure long-term sustainability for the program and a loyal customer base.
We strongly encourage financial institutions to resist pulling a cannabis banking program together on an ad-hoc basis. When regulatory enforcement begins in earnest, meaning after the federal regulations have been written, makeshift programs could be hard to pivot to meet the required guidance. Whether a program uses all internal resources or relies on external resources, it should be put together very intentionally and with some consideration as to what federal regulation is likely to entail.
A Solution Created for Bankers by Bankers
At HDCS, one of the many things that separate us from our competitors is that we have an affordable solution for vetting your cannabis customers created by bankers for bankers.
We would be happy to meet with you to understand your objections and risk appetite and share our view of the best practices involved in establishing a safe and profitable cannabis banking program. Let us give you a tour of our data portal and demonstrate what a risk-focused and profitable cannabis banking program could look like for your financial institution.
CEO and Founds | HDCS, Inc.