A Solution for Banking Cash-Intensive Businesses: Lose the Cash

If anyone can figure out how banks can serve marijuana and other cash-intensive businesses and stay out of trouble, it should be John Vardaman.

Until recently, Vardaman was an assistant deputy chief for policy in the asset forfeiture and money laundering division of the Department of Justice. He is now the general counsel of Hypur, a startup that offers technology to banks looking to work with marijuana dispensaries, check cashers, pawnshops and other industries that the mainstream financial system has treated as lepers.

"We've seen large financial institutions exiting what have been deemed high-risk areas categorically. The effect is that whole swaths of legitimate businesses have been frozen out of banking," Vardaman said in a recent interview. "That is creating an opportunity for an institution that is willing to take on those customers — the key is to be able to have a sufficient level of transparency in those businesses. You can bank them if you have sufficient knowledge to be compliant."

While the company is broadly offering services for financial institutions that want to bank businesses handling large amounts of cash — a category that also includes restaurants — marijuana businesses are one of the areas in the most need for solutions. Since the drug is illegal at the federal level, but sanctioned to various degrees for medical and/or recreational use in several states, it is a particularly difficult industry to bank.

In the bigger picture, following the cleanup of safety-and-soundness concerns in the industry after the 2008 financial crisis, regulators began looking more intensely at compliance. The increased scrutiny of Bank Secrecy Act and anti-money-laundering compliance has delayed acquisitions and spurred banks to sever relationships with industries and geographic regions, a global phenomenon known as de-risking.

Vardaman said his role at the Phoenix-based Hypur will likely be a mix of traditional general counsel duties and working on the business strategy — meeting with regulators and banks and using his background to inform the business.

In 2014, government agencies including the DOJ laid a foundation that allows banks to work with these businesses under tight guidelines. Vardaman says he was part of the group who wrote the Feb. 14, 2014, memo describing that department's expectations for banks. (The Justice Department didn't respond to requests to verify Vardaman's role in the drafting of the guidance.)

In the years since, marijuana businesses have had an easier time getting banked, but industry experts say it is still tough. Although most pot businesses have deposit accounts now, the options are still limited both in the number of institutions and the range of services — for instance, loans are still tough to get.

"The majority of licensed cannabis businesses have a bank account. It was one of the biggest concerns our members had, but more recently I haven't heard many people talking about it," said Mike Elliott, the executive director of the Marijuana Industry Group, which is based in Denver. "They are making it work, but it is not a perfect solution. There are very few options and it is unstable."

Hypur offers a suite of products designed to help banks vet marijuana businesses and other cash-intensive companies for anti-money-laundering and know-your-customer compliance. Its signature product, which is being beta tested, is an electronic payments solution that would take the cash out of the equation.

Called Hypur Commerce, the solution would allow individuals to download an app and create an account that is linked with their bank account. With their Hypur account, customers could buy goods from merchants on the Hypur network. The bank would have real-time access to transaction data, such as purchase details and location information. The idea is that such high-level information would allow a bank to have granular data about its customers' customers.

While the marijuana industry could be the practical place for Hypur Commerce, the solution or its underlying technology could be used for other businesses, such as check cashers and online retailers.

Vardaman says that bringing cash-intensive businesses into — or back into — the banking world is important because their essential exile has the potential to breed crimes like tax fraud.

"Some of the high-risk, cash-intensive businesses play an important role, and if they can't get banking services, there are all sorts of policy repercussions that can arise," Vardaman said.