May 03, 2021 at 01:00PM

Cannabis has a banking problem.

As regulation evolves and fluctuates, legal marijuana businesses continue to struggle to find financial service providers to fill their needs, often forcing businesses to drown in physical cash.

As legalization spreads, new avenues emerge to connect these businesses to banking services and providers willing to take on the risk of cash-intensive markets like legal cannabis. But those financial institutions (FIs) are facing their own struggles, said MRB Direct President Patrick Chung.

Amid the compliance headaches and risk burdens, banks are not finding cannabis as a high-risk, high-reward opportunity. But as Chung told PYMNTS, using FinTech as a middleman between the business and the bank can tackle the compliance headache before it ever hits the FI, de-risking operations for everyone involved.

The Cash Of Cannabis

Legal marijuana businesses unable to find a banking partner are too often forced to rely on cash. This brings up the obvious concern of security, as rising sales volumes in B2C retail, and the large transaction values of B2B payments, mean literal duffel bags of cash carried to and fro.

But the headaches of cash go much deeper. Chung noted that cannabis firms will typically allocate 10 percent of their overhead just to counting cash, according to conversations with various CFOs in the industry. There are also plenty of knock-on consequences, ranging from the inability to digitally account for these funds or gain real-time visibility into cash positions, or even having to pay taxes in cash.

There is hope on the horizon, however.

More FIs are exploring the business of banking cannabis and other cash-intensive firms, and more FinTechs are emerging to step in to connect the two partners. Yet as Chung noted, all too often, a bank will drop a marijuana client after a year or so.

“It comes down to the overhead and burden of the compliance team,” he explained. “What ends up happening — especially with cannabis in California — there’s a pretty big black market. So, it becomes more difficult for the bank to do the proper compliance review.”

This can be a frustrating dilemma for legal cannabis businesses that are not only bending over backward to remain compliant, but are actually quite high-growth and in strong financial standing. Unfortunately, said Chung, the surging expansion of legal cannabis can actually work against the favor of businesses in the industry seeking a banking partner.

“Banks in general like to see 10, 20 percent growth,” he said. “They don’t like to see 100 percent, 200 percent growth. That’s a big red flag for banks.”

Boosting Banks’ Business Opportunity

Failing to find a bank, or getting dropped by one, is a devastating blow to any business. But these challenges can be harmful for the financial services industry, too. The accelerating growth of legal marijuana can present a lucrative opportunity for FIs, but one that can be quickly buried underneath such compliance challenges.

“It’s a tug-of-war between the business side of the bank and the compliance side,” noted Chung.

What’s missing in this space is the ability for a third-party FinTech partner to tackle the majority of those compliance needs for the FI before any funds ever hit an account. That’s the gap that MRB Direct aims to address, by providing B2B and B2C payment processing services that can allow a cannabis company to get banked, while underwriting those transactions for the FI ahead of time.

It’s a paradigm that can expand to other cash-intensive, high-risk industries as well, like casinos. The strategy is an effort to address what Chung said is likely to be a long-lasting challenge for many sectors, especially cannabis, even if cannabis banking legislation — or full legalization — emerge.

“Just because it’s legal doesn’t mean there’s going to suddenly be a flood of banking services coming after the industry,” he said.

High Growth, And High Risk: Solving The Compliance Challenge Of Cannabis Banking …

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