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 increasingly attractive as profitable clients. When discussing the various sub categories of cash intensive businesses (check cashers, payday loan lenders, MSB’s, etc.), the emerging vertical acquiring the most attention is that of state legal Marijuana Related Businesses (MRB’s). Whereas the profits may be significant, these monies aren’t without risk and hard work. Within this vertical, you don’t have the choice to become non-compliant. The goal is to generate significant profits while avoiding CMP’s, enforcement actions, and justice.I receive calls each 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 set up a de novo with regards to serving MRB clients. This is the first inside a number of articles to assistance with the process of research, risk mitigation, and regulatory compliance from the banking of MRB’s.

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

You should evaluate your institution on the following:

  • CAMELS Composite Rating: I suggest a composite rating of 2 or better. If you are currently rated a 3 or below, it is doubtful that the primary regulator will be excited about your involvement within this vertical.
  • Board of Director Support: This critical component is key within the research process prior to entering in the banking of MRB’s. Every aspect of the program must be thoroughly reviewed and approved by the Board and the minutes carefully documented. Examiners have even queried institutions regarding the tone and tenor from the Board discussions regarding MRB’s. The questions and responses from each board member ought to be duly noted within the minutes.
  • Enforcement Actions: Although best to have none, most of the banking institutions currently banking MRB’s by my research happen to be under a Consent Order within the past 5 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 practicing staff active 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 might be difficult. As this is an emerging vertical, you will find fewer people with this specific type of experience.
  • Sufficient Allocation of Resources: Including both human and financial resources. It is also better to have senior management supportive of this endeavor. You might receive pushback in case you have employees that resist the product.
  • Proper Technology: There is little to no room for error banking this vertical. You must have the correct technology in position before you enter the forex market. Automation is key and manual processes are certain to produce mistakes.

In conclusion of the first segment, bring your current processes of compliance and due diligence and lift them several degrees. Embrace transparency and hang the bar to supervisory expectation, and not simply regulatory compliance. With proper planning, policies and operations, you may make your program successful.