Determining your institutional fee strategy around Marijuana Banking accounts is not always a simple task. At Green Check, we’ve had a number of conversations around the right strategy with fees, and we thought it might be helpful to outline some of the common approaches and considerations that we see.
Before I dive in though, don’t let the fact that these are marijuana-related accounts derail you from the process you normally go through when building a new product line. Most institutions will go out into the market, look at what the competition is doing, have some conversations with potential customers to test the market, and then think about their overall strategy. This helps them determine if their goal is to be the low cost provider, a market participant, or a high end premium provider. All of those same thoughts and strategies apply. You’ve done this before, and you should be comfortable doing it here as well. It’s also important that an institution doesn’t get stuck in a place where they feel they have to, dollar for dollar, cover every expense of this program just with the fee structure.
Okay, now that we have that out of the way, what are the typical fees that we see around marijuana banking?
- Application Fee – much like a mortgage application fee, this one time fee is charged as part of the review and approval of an application and is intended to cover the expenses incurred with that process. This could be the team’s time, any external costs such as credit or identification checks, background checks, etc.
- Monthly Account Fee – this is a flat rate fee for the primary checking or share account, which is intended to reflect the high-risk nature of the account. This might be similar to a fee for an MSB or internet gambling account, and usually higher. It’s particularly challenging to see what competition is doing here as many institutions are offering these services discreetly.
- Deposit or Cash Verification Fee – this variable fee is typically basis points on incoming deposits into the institution. Some charge this on cash only, and some charge this on all deposits. We’ve also seen a number of variations around this fee. In some cases, the fee is only charged for the first x amount of deposits, and in others only for deposits above x amount. Sometimes this fee has a cap. This one definitely has the least amount of consistency from institution to institution.
Just like any other fee you charge today, you’ll want to think about your reason for charging the fee. Is it to compensate you for risk? Is it intended to change or encourage certain behaviors? Those questions are still valid.
Also, think about what you’re offering in exchange for the fee. There should be value added for the account holder. What are they getting for the fee? We often hear our clients say, “but the bank down the street only charges $100 per month.” Upon further investigation though, you may find that that bank only allows the marijuana business to put cash in the vault and does not offer any other small business services like ACH origination or wire transfers. Or maybe they’re the low cost provider, but then they charge $1,000 for a wire transaction. I’ve seen it. You and your potential clients should do homework around what the marijuana business is getting for the fees they’re paying. Conversely, if you’re up against a low cost provider, make sure you are providing a clear outline of the benefits your service package provides, and showing all your fees up front so that the business can do an apples-to-apples comparison.
Which leads me to another topic — really low fees.
We’ve seen this a few times and the results are not always good. In some cases being the low-cost provider creates a situation where you are inundated with applications, and your program grows too fast to keep proper control over it. By charging a rate more aligned with the overall market, you are better able to ensure your program grows at a steady and manageable rate.
There have also been conversations with examiners about low fees. We’ve seen examiners question how an institution can possibly compensate for the risk they’re taking — and the additional expenses of managing a program — if they’re charging the same as they would any other business. This was followed up with a strong suggestion to raise fees. For many bankers, this feels like a stark contrast to when they are asked to justify why they are charging higher fees, but examiners know this is an area where it’s justified.
As you investigate and build your pricing strategy, think about the overall strategic picture, and deploy some of the thinking you normally do as you build programs. You don’t have to be completely in line with your competitors, but you do have to show the value you are delivering, make sure your program is profitable and demonstrate to the examiners that you understand the risk.
If you’re interested in working with Green Check on a Financial Model that helps you frame this, please let us know. We go through this exercise as part of our services engagement, and not only do we share what we have for market data, we also leave you with a five year pro-forma tool that you can use to create different pricing and program pace models to help you with your planning.