Why? Because, no matter how you look at it, adding a cannabis banking line of business adds a material amount of risk to an institution. If an institution does not have a clear-eyed view as to how to scale a cannabis banking line of business and make a meaningful return on the program, why even add the risk at all?
Surprisingly, we have seen several institutions that have added the line of business but are implementing solutions that will either inhibit them from scaling from the outset or that will be problematic as more institutions enter the market. There are 3 approaches to cannabis banking that I think should carefully be reconsidered and remodeled:
- The long-term pilot program: Many of these programs are designed to test the risk and iron out the kinks before going larger. A potential problem with these programs is that they tend to be very manual and unprofitable for the institution. Thus, they lose visibility within an institution and eventually get abandoned.
- The all-manual scaled program: This is when an institution relies solely on human capital to build and scale a program. A comprehensive cannabis program requires ongoing subject matter expertise specific to cannabis, vetting and auditing of cannabis businesses, and monitoring of deposits to match the cannabis business’ “Seed to Sale” platform. We have seen virtually no 100% staff-based program outperform any of the technology platforms in ROI at scale.
- The model that places an undue cost on the cannabis related business: If the technology platform that a financial institution uses is free to the financial institution but shifts the cost unduly to the cannabis business (for example by charging per deposit transaction), it makes those businesses very vulnerable as more competition enters the market. Furthermore, charging your cannabis customer per transaction can discourage the cannabis businesses from depositing all of their cash inside of the institution, which was the whole reason to enter the line of business in the first place. We encourage institutions to seriously model what their third-party providers are making on the cannabis platform versus what the institution is making-after all, it is the institution that is taking all the risks.
Our Solution is Safe and Profitable for Financial Institutions
In our view, financial institutions should collectively evaluate the risks, returns and resources required before entering into cannabis banking. It can be a safe and profitable program for many financial institutions, but the return should justify the risk and the bulk of the return (or even a meaningful part of it) should not be going to a third-party provider that is not carrying any of that risk.
HDCS can help you evaluate the risks, rewards and resources especially if you are in the initial decision-making process of cannabis banking, and HDCS can assist you with implementing and maintaining a safe and profitable program from the beginning all the way through examinations. We are with you every step of the way.
Founder & CEO | HDCS, Inc.