Cash As Budding Problem And Pot-Hole (For Banks)

Money flows. In the best scenarios, money flows unimpeded, well tracked, well traced, and banks, consumers and regulators can see, with transparency, who is holding how much, when they got it and where it is going.

This is not so easy if money is tangible in its purest form — that would be dollars and cents — and can be hidden in the not-so-proverbial mattress. You may not think of cash as a problem, but it may just be so, for banks at least.

In the latest installment of Data Drivers, Hypur President and COO Michael Sinnwell, who works with financial institutions on cash-based policies and procedures, stated that this story needs to be told: There is an ongoing and growing need to protect banks from financial crime when dealing with cash-intensive businesses.

“It’s kind of a misnomer that cash is going to the wayside and that everything is electronic,” said Sinnwell.  When you are dealing with industries such as the marijuana industry or the gun and ammunition players, he said, cash can be 50 percent of that retailers’ transactions — or maybe even 100 percent.

Data Point One: $7.9 Billion

This is the annual projected marijuana sales volume — which is all in cash. That presents risk on several different levels, said Webster, across businesses paying businesses, in each step of the process that goes from bud for the toking, to, well, bud who is toking.

Sinnwell noted that his own firm observes transactions “at the counter” and at the point of interaction between financial institution and merchant to see how cash is being handled. Webster observed that within the cannabis industry, there are several federal and state issues that move transactions toward cash.

When dealing with deposits made by these types of businesses, said the executive, “it’s permissible in the states where they are transacting.” These businesses must be aware of issues such as payroll. If they pay their employees in cash, said Sinnwell, their FIs start asking questions. A business suspected of dealing with a marijuana-related business will be immediately asked to leave that FI, bringing about what Sinnwell termed a “trickledown effect to doctors and other parties that might be supporting these dispensaries or legal businesses within their states … One of the things that we try to help with is a true understanding of how that dispensary is working in that state and all the guidelines that they are supposed to be following.”  Hypur helps with payments that need to be done to, say, a lighting company or even a marketing company.

Those payments may have once been the provenance of checks taken out at the post office or even via cashier’s checks. Hypur has been working to understand those payment needs to do them as wires or electronic payments. And through “Hypur commerce” transactions, said the COO, money is moved electronically from account to account, which keeps firms within the banking system.

Data Point Two: $53 billion

This is the big business in cash that check cashers do, with some differences in place than might be seen with cannabis enterprises. “It really comes down to provenance,” mused Sinnwell, “and understanding the business that is at hand.” In this case, and in others, Hypur works with integrated software venders that might manage systems for small- and medium-sized convenience stores that in turn might be doing the check cashing. That data goes into the Hypur system “so that we can show the provenance of every transaction,” said Sinnwell — all the way to where the country is located where the funds ended up and the FI with which it settled.

The difference here is that these companies have to deal with cash that is deposited through their systems and also have to have cash on hand. That cash needs to be used to pay for those checks and to make sure the checks are going to clear, he said. Hypur has to ensure that the businesses also have the documentation on hand needed to let them do what they are, in fact, doing — including licenses.

Data Point Three: $37 billion, Money Transmission

This is being done digitally on an increasing basis, said Webster, and money transmission remains a well-established business. The guidelines are varied and numerous here, Sinnwell explained, with hundreds of them in place to handle money movement. At the same time, he added, there has been a “widespread de-risking” by the large scale financial institutions away from cash intensive activities precisely because the regulatory interaction is so pervasive.

Hypur, he said, allows institutions to pull and analyze that information in real time, and, when the regulatory body “comes in and says [they’d] like to understand what this transaction was and where did it go, [the institution] can actually go and bring all that information up on a screen and … they can see the entire paper trail of what has happened with that transaction.” With such tools in place, he said, FIs that are close to being in the money services business or who are cash intensive can expand their portfolios quickly. “You’d be really surprised how many businesses are cash intensive,” surmised Sinnwell. The pantheon includes auto dealerships, pawn shops and jewelry stores.

And as for blockchain? It’s great for information flow, said Sinnwell, and for making sure that no single person has control over a single piece of information that could cause transactions to break down. “But it still doesn’t protect people from not having the information they need to have to make sure that the businesses they are working with — which are legal businesses within the United States — to make sure a transaction is 100 percent legitimate.”