Generating profit & revenue in emerging cash intensive businesses (Part 1)

Financial institutions for years have been seeking ways to supplement traditional revenue by increasing their profits through non-interest income. More challenging verticals such as cash intensive businesses are becoming more attractive as profitable clients. When discussing the various sub categories of cash intensive businesses (check cashers, payday lenders, MSB’s, etc.), the emerging vertical obtaining the most attention is that of state legal Marijuana Related Businesses (MRB’s). Whereas the profits may be significant, these monies are not without risk and hard work. In this vertical, you do not have the option to be non-compliant. The goal is to generate significant profits while avoiding CMP’s, enforcement actions, and criminal prosecution.I receive calls every week from bankers wishing to use our company’s compliance management, and payment technologies to assist with the banking of MRB’s as well those wishing to establish a de novo for the purpose of serving MRB clients. This will be the first in a series of articles to assist in the process of due diligence, risk mitigation, and regulatory compliance of the banking of MRB’s.

I would like to begin this discussion with the concept of “Permissible vs Appropriate”. Although the banking of MRB clients is a permissible activity, the appropriateness of this activity for a particular institution may only be determined through a regulatory onsite examination on that activity. Given the discrepancy between state and federal laws on MRB’s, this only complicates the due diligence process. Just because your institution can do this, does not mean that it should.

You should evaluate your institution on the following:

  • CAMELS Composite Rating: I recommend a composite rating of 2 or better. If you are currently rated a 3 or below, it is doubtful that your primary regulator will be enthusiastic about your involvement in this vertical.
  • Board of Director Support: This critical component is key in the due diligence process prior to entering in the banking of MRB’s. All aspects of the program must be thoroughly reviewed and approved by the Board and the minutes carefully documented. Examiners have even queried institutions as to the tone and tenor of the Board discussions regarding MRB’s. The questions and responses from each board member should be duly noted in the minutes.
  • Enforcement Actions: Although best to have none, many of the financial institutions currently banking MRB’s by my research have been under a Consent Order within the past five years.
  • Staffing Expertise: You must have a strong Chief Compliance Officer with significant BSA/AML experience. Expect that a strong performance will be required pre, post, and during examinations.
  • Training: Anticipate additional training for staff involved in the MRB process. Both Federal and State laws must be studied.
  • Third Party Auditors: Know that engaging a third party auditor with MRB experience may be difficult. As this is an emerging vertical, there are fewer individuals with this specific type of experience.
  • Sufficient Allocation of Resources: This includes both human and financial resources. It is also best to have senior management supportive of this endeavor. You may receive pushback should you have employees that object to the product.
  • Proper Technology: There is little to no room for error banking this vertical. You must have the proper technology in place before you enter this market. Automation is key and manual processes are sure to produce mistakes.

In conclusion of this first segment, take your current processes of compliance and due diligence and raise them several degrees. Embrace transparency and set the bar to supervisory expectation, and not just regulatory compliance. With proper planning, policies and procedures, you can make your program a success.

Andre Herrera

Andre Herrera

André G. Herrera is Chief Compliance Officer at Hypur, Inc. where he leads Hypur’s collaboration with financial institutions on compliance and regulatory issues. Andre’s broad experience in payment ... Web: Details

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