Data firm looking to bring security to pot-industry banking
One of the hottest-developing industries in the U.S. — marijuana-related businesses — is still practically shut out of the modern financial system. The result is that the cash, banking, and financing parts of this business are stunted and twisted into strange shapes.
The root of weird regulations and patchwork solutions is that federal law classifies marijuana as a Schedule 1 substance, the same as heroin, ecstasy and LSD.
Even though marijuana is legal for recreational use in nine states and for medical use in another 31, regulated financial institutions really, really don’t like dealing with businesses that make money from a Schedule 1 substance.
Banks can’t afford to run afoul of federal laws and regulations. Even in states where marijuana is legal, sometimes only one bank, and never more than a handful, offer traditional deposit-taking banking services to pot-related businesses.
In addition, major credit card companies like Visa, MasterCard and American Express consistently refuse to process payments from any company that touches the product. That means retail customers can’t pay with credit or debit cards. Bank-based lending to the industry essentially does not exist either.
And, remember, the industry is not just retail stores but everything or everyone that touches a marijuana plant, including growers, cultivators, processors, cartridge makers and transporters. It all operates at the fringes of the traditional banking, payments and finance sector.
Morris Denton, CEO of Austin-area medical cannabis dispensary Compassionate Cultivation, the first licensed dispensary in Texas, confirmed that the banking and finance side of running his business remains “a big pain in the butt.”
Out of necessity comes invention. For example, a Scottsdale, Ariz.-based fintech and regtech company called Hypur offers a suite of products for the few banks and credit unions willing to serve the industry. As a finance nerd, Hypur sounds kind of radical and awesome.
As the vice president of Hypur, Tyler Beuerlein, describes it, the firm’s data and software feed allows a bank to monitor, in real time, every single transaction of their marijuana-based business customers. According to Beuerlein, this superintrusive data feed is necessary to lower the risk that banks face when dealing with the industry. From a compliance perspective, the marijuana-industry serving banks know the source, size and timing of every customer transaction. According to Beuerlein, if a marijuana business made exactly $23,750.22 in sales today, its bank (via Hypur’s data feed) can know that precise amount in real time.
To understand both why that’s cool and different, you have to picture some of the tremendous complications that come from a nearly all-cash industry.
Cash-based transactions — far less traceable than electronic payments — create a whole series of risk for banks, already superanxious about federal regulations. How do you prove to the feds the source of a business’s cash is legitimate? How do you comply with anti-terrorism laws? A successful marijuana business typically manages big piles of cash that can’t be dealt with easily.
Folks in the marijuana industry describe the strange problems in an all-cash business. Like, vaults full of paper money that require powerful fans to keep it from getting wet and rotting. Over time that cash literally tends to stink like marijuana.
One industry veteran described a man who dug a hole for a shipping container, which he filled with currency, in his backyard. As every bar manager knows, cash has a nasty habit of walking out the door at the end of the night in the pockets of employees. Big piles of cash also attract thieves who can target it at the business location or when the money is in transport.
U.S. banks generally will not let customers initiate large deposits of cash if they cannot account for exactly where it all comes from. Even if the bank agrees to work with you, you can’t simply show up with your previously earned $40,000 in cash and expect the bank to open a business checking account for you.
When I listen to Beuerlein’s description of Hypur’s data feed, it’s interesting to think about how every bank that serves small businesses would, in theory, want this, even those outside the marijuana industry.
Typically, banks that make loans to small businesses get very sketchy, partial and intermittent data. If a loan is paid on time, a bank might request a copy of annual tax filings. If a problem arises, maybe the bank demands quarterly or even monthly accounting statements from the business.
Those statements are going to be voluntary, prepped by the businesses and, frankly, leave a huge amount of discretion to the business owner on what gets reported. It’s interesting — OK, maybe just to finance nerds like me — to think about the banking possibilities of seeing real-time transactions of a borrower. To a banker, that’s like the holy grail of lending.