Case Study: Building a New Cannabis Banking Program
In 2019, a community financial institution with roughly $500 million in assets, 70 employees and 9 locations in their home state began to consider offering services to cannabis-related businesses (CRBs). After attending an educational primer on cannabis banking, a senior executive from the financial institution decided to engage with Green Check Verified’s subject matter experts to better understand the financial opportunity of serving CRB accounts, as well as the risk considerations, examiner expectations and ongoing compliance monitoring requirements.
The Green Check team walked the financial institution through the initial steps all banks and credit unions should undertake when deciding to create a cannabis line of business. This included a guided discussion with key members of the financial institution’s growth and compliance teams to align on both the scope and the strategic goals of the program. Once aligned, Green Check began a services engagement with the institution. Below is a brief summary of this engagement:
Services Kickoff
Green Check presented a detailed Cannabis Banking Action Plan catered to the financial institution, which covered project outlines and milestones, the fundamentals of cannabis banking and detailed examiner guidance. The Kickoff allowed the financial institution to develop an understanding of their market potential for banking CRBs, as well as the fundamentals of how to grow the program safely and compliantly.
Risk Assessment Workshop
The financial institution’s risk assessment involved a comprehensive examination of the credit, operations, regulatory, financial and reputational risks — which were measured both on likelihood and potential impact for the financial institution. The team also considered both manual controls and automated controls should they move forward with a software solution. (Green Check’s software offers tools to effectively control potential vulnerabilities associated with cannabis banking while removing the tedious, error-prone processes associated with maintaining compliance. You can read more about the benefits of automation here.)
Financial Model Workshop
Utilizing proprietary data on CRB sales and current cannabis banking market offerings and rates, Green Check designed a financial model customized to explore the financial impact and opportunity to bank cannabis businesses. The financial model took into consideration the revenue associated with an estimated number of CRB business accounts, potential market share based on the financial institution’s current reach and future goals for the program, as well as other key factors that gave the financial institution a full, multi-year picture of the opportunities and costs associated with offering different products and services.
For this financial institution, the model predicted over $7 million in revenue through the first five years of the program, based on a modest pace of 6 new CRB account openings per year.
Operations and Strategy
Following the risk assessment and financial model, Green Check collaborated with the financial institution to provide an overview of the products and services that would be offered in addition to competitive pricing strategies. Guided by the forecasts projected in the financial model, Green Check worked with the financial institution to determine banking services such as online and mobile banking along with ACH and domestic wire transfers that would be offered to CRBs. These services were incorporated into the pricing structure to understand their potential revenue impact. An analysis of cash logistics was performed in order to control how the institution would handle cash deposits from CRB customers. Additionally, Green Check provided detailed workflows to outline how the CRB would prepare deposits to the financial institution in addition to information on armored vehicles and courier services that the financial institution or CRB customer could hire.
Board & Examiner Prep
Leading up to the financial institution’s board meeting, Green Check reviewed any outstanding issues relevant to the materials previously prepared. Starting with the Risk Assessment, Green Check addressed any remaining questions and feedback that the financial institution had regarding the controls and procedures that the organization put in place. Next, Green Check conducted an overview of the Financial Model to highlight any areas that the financial institution wanted to change over the course of its cannabis banking process. Lastly, Green Check worked with the financial institution to build the package of board presentation materials for their meeting. This included a high-level analysis of key program details pertaining to regional market opportunity, state CRB sales, FinCEN regulatory guidance and Green Check’s automated service that would streamline the entire program. Additionally, the board was prepped on how to present their initial program to examiners and support options for doing so.
The board of directors ultimately approved the financial institution’s Cannabis Banking Action Plan, and software implementation and customer outreach began.
Fast-forward to today
Using the Green Check Software to automate the initial and ongoing due diligence, transaction monitoring, account monitoring, and reporting requirements of running a cannabis line of business, the institution has now scaled to 18 CRB accounts that are administered via one full time employee.
Close to two years into the program, the institution is tracking near the original financial model prepared for them prior to implementation. Financials from Year 2 show that with 18 total CRB accounts, the institution has a 9% share of their total available market, with further projections to reach 14.5% in the next year.
Total revenue earned in Year 2 from the CRB accounts alone was $1.6 million. This amount is tracking to more than double in Year 3. The deposit fee revenue in the 2nd year was $1.1 million at 100 basis points, and earnings from lending totaled $329,000 at 375 basis points. CRB account setup and monthly account fees totaled $6,000 and $75,000 respectively.
With the program running smoothly, surpassing examiner expectations and growing at the pace that aligned with the strategic goals of the institution, they plan to continue to expand their market share for this high-potential line of business.
Disclaimer: This document is for informational purposes only. Case study based on a current Green Verified Client that started a cannabis banking line of business using Green Check’s software and services. Key information has been changed to protect client confidentiality.
