Cash is king in business — or at least the maxim holds true for some businesses, where legal issues are works in progress and banks shy away from providing services.
Nowhere does that ring truer than in the nascent and growing legal cannabis industry, where billions of dollars flow the old-fashioned way — hand to hand, because of the clash between federal and state regulations over its legality.
To that end, the number of banking firms that actively provide services for marijuana firms has grown by 20 percent since the dawn of 2018. That’s according to data published at the end of last month, per data from the U.S. Treasury Department’s Financial Crimes Enforcement Network (or FinCEN for short).
That brings the tally of enterprises offering financial services to cannabis companies to 375 banks and 111 credit unions.
The upward trajectory, if not embrace, of financial services firms willing to work with cannabis companies comes against a backdrop where states have been legalizing marijuana. Sites such as marijuana moment have taken note of the “political ascendancy” of pot, and of the incoming House of Representatives class, where the majority is made up of Democrats, and where cannabis-related legislation is poised to have the floor at some point.
There will be some attention, of course, on how cannabis firms can access banks.
The American Bankers Association has stated that “we believe the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where cannabis has been legalized for medical or adult use.”
At present, the regulatory arena is one that is patch-quilt in nature, and where many states have legalized cannabis but it is still illegal at the federal level.
Separately, Treasury Secretary Steven Mnuchin, said earlier this year in Congressional testimony that “I assure you that we don’t want bags of cash. We do want to find a solution to make sure that businesses that have large access to cash have a way to get them into a depository institution for it to be safe.”
It’s fair to say, then, that cannabis and banking — and where the two can and should meet, so to speak — will get greater scrutiny in the months and years ahead. The rules will change, perhaps piecemeal, perhaps drastically.
To that end, said Kevin Hart, CEO of Green Check Verified (hereafter Green Check), spoke with PYMNTS about how cannabis firms, banking and compliance issues intersect, and how FinTech can help alleviate friction in the process of keeping track of it all.
“Amazingly there is still a large segment of the population, [financial institution’s (FI’s)] included, that think banking [cannabis firms] is illegal. That is simply not true,” he told PYMNTS. There are steps FIs can take to offer services to the industry while still maintaining compliance with their applicable regulatory requirements.
Another big misconception is centered, Hart said “around the time and effort required to develop, deploy, and maintain a compliant cannabis banking program. FIs believe the opportunity may not be worth the perceived cost, but that is largely based on the fact that they think they need to go after this industry alone … the cannabis and banking industries need to work together, but they don’t know how,” he said.
For the FI that seeks to serve the cannabis business, “many FIs are simply at a loss for how to stand up an ongoing monitoring program, since none of their legacy systems or processes were designed for the level of scrutiny applied to these relationships.”
Some Signposts — and Some Goalposts
To be sure, there are signposts already planted, as Hart maintained it is indeed “safe” to offer banking services to the cannabis industry. Federally there’s no guesswork here, as nearly five years ago FinCEN published clear guidance on how an FI can responsibly and confidently bank the industry. That guidance largely follows suggestions of Cole Memo and other red flags previously identified, he said.
On a state (potentially even county or municipality) level, each has their own set of statues and regulations that define the parameters of their medical and/or adult use (recreational) programs and these must also be followed to ensure that all sales adhere to those rules.
“In terms of what specific services a cannabis business needs, the reality is they need access to every banking resources needed by every other business in this country,” he said, noting that the relationship “starts with a basic business checking account so that cash can be deposited in a financial institution and payments can be made to suppliers, utilities, landlords, etc. without resorting to cash. It’s also about providing payroll services for employees. It’s about small business loans, mortgages for facilities, and funding for capital improvements. The growth of cannabis business is hobbled because of a lack of access to business banking services that every other business takes for granted.”
Thus, any number of new revenue opportunities open up for banks and credit unions, and Hart said community FIs need new deposits to survive — a goal common to any business.
The Benefits of Moving Beyond Cash
For the cannabis firms, the movement toward seeking out and embracing banking services can be helpful for margins. Cash is expensive for these smaller companies to handle, said Hart, “very expensive, and operationally very limiting.”
Cash transactions carry any number of surcharges, some hidden, some explicit. There are security costs, theft risk, tracking of how cash is used, vendor management, the lack of payroll infrastructure in place, the 10+ percent premium charged for paying taxes with cash, cash courier services and the sheer amount of time required day in and out to manage the flow of paper bills.
“At the end of the day you still end up with a record-keeping system that can’t pass audit for tax and regulatory purposes,” he said.
The government benefits, too. As noted in this space earlier in the year, roughly $5 billion in taxes was handled — via cash — last year. Here, too, automation, and a platform that connects all stakeholders, maintained Hart, helps. “One of the major challenges for states is the difficulty in effectively forecasting and capturing the tax revenue they are expecting with the cannabis programs,” said Hart.
The Benefits of Tech
Tech, then, and specifically cloud-based platforms and services such as those offered by Green Check — spanning onboarding and due diligence activities and transaction monitoring — connects these two highly-regulated industries.
“Keep in mind that this involves quite a lot of checking and confirming licenses, purchase limits, types of cannabis permitted for sale,” said Hart, “and without a dedicated software solution in place this work is done entirely in a non-systematic, ad hoc process of self-reporting and spreadsheets.” Manual processes means management of these programs is fundamentally onerous and time-consuming. These businesses are going to grow exponentially and only automated systems can be designed to scale and keep up, said Hart.
He said that Green Check offers a proprietary Compliance Rules Engine (CRE) that runs each transaction through a database of rules drawn from the existing federal guidance and state statutes and regulations that govern their cannabis programs. Earlier this month the company announced a partnership with the Credit Union League of Connecticut, focused on the deployment of the Green Check platform.
“We utilize the information from all the state databases in real time to make sure that at the time of sale the most up-to-date rules are applied, the facility license is valid, and no one with a significant involvement in the business is on any the financial crimes watchlists,” he said. Beyond that, transaction monitoring is keyed to industry-specific red flags such as the amount of product that can be purchased in a certain defined period (i.e. 2.5 grams in a 30-day window) which varies widely by state, or even whether the form of product being bought and used is permissible — say, gummi bears or smokable flowers.
Additionally, he said, the firm has partnered with what he termed “an industry-leading third-party identity verification partner” that not only confirms the identities of all beneficial owners of a business but also checks that they don’t appear on any of the financial crimes watchlists like OFAC. Data is encrypted both in transit (coming into databases from a POS) and at rest (in data centers), he said. “For the purposes of tracking cumulative consumption limits (how close is a patient to meeting their state-mandated consumption limit?) we strip out any personally identifiable information and assign a unique, randomized number to represent them,” he told PYMNTS.
As his firm heads for a national rollout, with a four-pronged strategy slated to be unveiled over the first two quarters of 2019, Hart maintained that a “culture of compliance” needs to exist at both at the FI and the cannabis business itself as they establish relationships.
“FIs need to ensure their cannabis business customers are complying with their own regulations, but this requires all parties work from the same set of information all the way down to the transaction level,” he said.