Data firm look­ing to bring se­cu­rity to pot-in­dus­try bank­ing

Houston Chronicle Sunday - - MONEY - MICHAEL TAYLOR Taylor is a colum­nist for the San An­to­nio Ex­press-News and au­thor of “The Fi­nan­cial Rules For New Col­lege Grad­u­ates.” michael@michaelthes­mart­money.com twit­ter.com/michael_­tay­lor

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.

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