The banks foot the bill for the platform, which keeps detailed eyes on a legal pot vendor’s financials to satisfy regulatory requirements. Bank customers involved in the legal cannabis business get access for free.
At this early stage of the game, it’s not easy being a legal pot dealer in the U.S. No matter how legal you may be in the state where you operate, to federal law enforcement you are a multiple felon — if they want to go after you.
Although the feds haven’t been going after these newly minted legal dealers (and have indicated they have no plans to do so), their legal status on the federal level has been somewhat problematic, both to them and to other companies that want to do business with them.
For example, the continuing federal moratorium on dream weed has put the financial industry in a bind, since financial institutions have a federal mandate to not touch money that’s been illegally earned. Early on, as states started legalizing cannabis, this led to complaints from the pot business community, including retailers, wholesales, and growers, that banks were refusing to deal with them, fearful of repercussions from the feds.
The Dealers and Growers Catch-22
This largely left the nascent pot business in the position of being a cash only business, forced to keep large amounts of cash on hand, which is a concern not only to people involved in the pot trade, but to law enforcement, who know that criminals quickly figured out that pot outlets are often, by necessity, a storehouse of cash.
The IRS is concerned as well, because cash transactions are notoriously easy to hide.
In an interview back in February, Mike Kennedy, co-founder and chief strategy officer at Connecticut-based Green Check, told me that big national banks like Chase, Wells Fargo, and Bank of America will likely not offer services to legal marijuana businesses for as long as the federal moratorium on cannabis stands. However, he added, it’s a different story when it comes to smaller regional banks and savings and loan associations. He said they’ve wanted to be able to offer their services to the legal pot trade almost since the beginning.
“The cannabis industry obviously is growing leaps and bounds, but the community banking industry here in the U.S. is somewhat on the decline,” he said. “These smaller community banks, credit unions, and regional banks — the tier below the the national and multinational banks — are actually very interested in working with new commercial customers, regardless of what industry they work in.”
He knows this because Green Check, now a six-year-old startup, has developed a proprietary software as a service platform that’s made it possible for regional banks and savings and loan associations to offer banking services to legitimate legal pot operations.
“There are two real hurdles that the financial institutions have to work through in order to engage with the cannabis industry,” Kennedy said, “but they’re very interested in bringing on new sources of deposits. They’re interested in finding an underserved market segment to which they can offer their products, whether they be depository or financing products.”
“A lot of these community banks want to do right by the businesses and individuals that are right there in their backyards,” he added. “They want to help get cash off the streets, increase community safety, help these business owners grow and thrive in a market that seems to be stacked up against them everywhere they look.”
Hurdles to Be Overcome
When Kennedy came to the table he brought with him a pedigree that included experience in both technology and regulatory compliance, having spent more than three years at a FinTech company, Continuity (now part of Mitratech), which offers cloud-based governance, risk management, and compliance solutions for banks, credit unions, and other financial services companies.
“My co-founders and I began looking at this space as an opportunity to bring two highly regulated industries together in a way that neither could understand how to do,” he said. “Even back in 2016, there were some financial institutions that were working with state legal cannabis businesses. They were forced to develop very manual and cumbersome compliance protocols that resulted in higher fees passed on to the cannabis operators, which made it sort of a losing proposition for both sides.”
Decades of the War on Drugs means that states are legalizing an industry that, especially on the supply side but also in the wholesale arena, has largely been in the hands of organized crime for nearly 50 years. Legalization has required law enforcement and regulators to focus on keeping these organizations from setting up shop under the legal umbrella legalization offers. The fear is that state sanctioned and licensed pot operations can be used by these operators as a way to launder money, either from their pot operations in states where weed remains illegal or from other illegal operations within that state.
The later would include growers who might distribute illicit non-tax paid cannabis products grown and brought to the U.S. by cartels from Mexico or further south, which offers two challenges to regulators. The reason why each and every state with legalized marijuana requires that cannabis products entering the supply chain be grown in-state and under regulated conditions isn’t only to protect tax revenues, it’s to address federal interstate commerce prohibitions as well.
“What this ultimately comes down to is, can you verify that the source of funds entering the financial system is legitimate, meaning can you say that the $20 that are being deposited to the bank came from a legal transaction that I conducted at a licensed cannabis business?” Kennedy said.
Software as a Service to the Rescue
Kennedy said that he and his partners saw this as a “data problem,” and that banking regulations would be easy to satisfy if you could track down all of the data .
“We took a step back,” he said. “We tried to ascertain where the data was being generated, where it was being collected and stored, and how it was being processed. What we landed on was there are state mandated reporting requirements in just about every state in the US, and an entire cottage industry of sales and inventory tracking systems that are bespoke to the cannabis industry. So, we set out to build a compliance and relationship management system that could be used by financial service providers to offer the products and services that cannabis businesses need to grow.”
“It’s a SaaS [Software as a Service] business model,” he added. “Financial institutions pay to use Green Check in order to support their cannabis line of business, then the software is offered for free to the cannabis industry.”
One appeal that this solution has to bankers is that the platform is pretty much hands off. Nobody at the bank needs to be inputting figures into it, nor do they have to rely on figures supplied by marijuana business customers.
“The beauty here is that you don’t have to enter anything,” Kennedy said. “We connect directly to the systems that you’re already using to manage your cannabis business and then report directly to the financial institutions only the information that they need in order to offer you the services that you need.”
Another appeal to the banks is that it monitors compliance, by throwing up flags when there’s a problem with the figures.
“Our mission is to connect every cannabis operator with those products and services that they need,” he said. “The way that we do that is by building an integration ecosystem to connect those sources of data and information, and provide that to the financial service provider in ways that are contextual and allow them to automate their regulatory overhead.”
Green Check is in a crowded market, however, with cloud-based platforms vying for a piece of the expanding cannabis pie not in short supply. Most are being offered by startups like Green Check, although some more mature companies have recently been making moves into the market. If the competition is a concern, Kennedy didn’t let it show when we talked, and never volunteered that Green Check even has any competition during our conversation.
“We’ve got about 100 banks and credit unions throughout the U.S. today, and about half of those did not have the cannabis portfolio before they started working with Green Check,” he said. “They decided they wanted to serve these businesses, but they didn’t know how — they didn’t have the staff and they didn’t have the expertise.
“Our software affords you an out-of-the-box banking program with which you can go to market on day one,” he added. “It’s everything from account opening and consumer onboarding to transaction monitoring — and then even the regulatory reporting that is required on the backend.”