2020 is right around the corner. Now is the time to evaluate what success in 2020 looks like for you and your institution. Don’t be shortsighted when it comes to cannabis banking. Cannabis banking has proven to be a significant positive financial impact for financial institutions that have decided to take on cannabis-related business accounts.
Read on and learn what cannabis banking can mean for your 2020 strategy and plans.
Have you explored the positive financial impact of cannabis banking?
There isn’t a financial institution in the country that hasn’t held a series of conversations and meetings with lively discussions around cannabis banking. Raise your hand, we know you have too. Have you ever truly mapped out the potential positive impact that this industry can have on your institution's financial future?
It seems that most of the conversations steer towards - and get stuck on - the perceived increase expense associated with any form of cannabis banking. We aren’t downplaying the risks and expenses associated with a high-risk program, they are real, but expense is only half of the equation. Without the knowledge and visibility into the revenue possibilities within this growing market sector, you’re not able to see the bigger picture. Did you know that while cannabis sales are increasing there is a corresponding decrease in overall alcohol sales? The winds of commerce are changing and 2020 will see that trend shift even more as adult-use comes to market in more states.
This presents a big opportunity for you and next year's budget but how can you get your arms around the numbers?
It is easier than you think when you have industry knowledge and experience to help. When it comes to creating your budget, properly planning for the income possibilities that offset the expense of managing a high-risk program should be a factor in your decision process.
Understand The Possibilities
Big picture stories and headlines are interesting, but when it comes down to the details, and your institution, the conversation has to hit closer to home. Whatever is happening in the next state or across the country are data points, but they don’t translate to empirical entries in your budget creation. Your team needs to be able to study and discuss the overall financial impact, revenue and expense, via a strategically defined method.
Understanding the possibilities starts by answering some foundational questions:
- What is the true cannabis market size for your institution?
- How will it fit with your current operations?
- What would a 10% increase in low-cost deposit activity mean?
- How is this local industry structured and operated?
- How does your team look at high-risk businesses, or businesses that are operated very differently than any other commercial account you’ve ever worked with before?
These questions seem daunting and this again is why many conversations end with “this is going to cost too much” frustration.
There is a method to look at the total opportunity “picture”, so you are basing your budget models on facts, not guesswork or conjecture. Give this new industry opportunity the same level of thinking you have for every other new program you’ve implemented within your institution.
Balance: Insight Into a Presentable & Sustainable Plan
Of course, you want a budget that isn’t balanced, you want to - need to - show profitability. This means going into this new line of business requires the detailed knowledge and business model that has budget planning and detailed tracking built into the program for consideration.
This requires a strategic well thought starting point for this new opportunity. New accounts, new deposit dollars – how are they ramped up over a period of time? We have seen the most successful programs phase the number of accounts/dollars they open new accounts for, do so over a period of months, sometimes quarters. The deposit dollars associated with these accounts are consistent, but the retained deposits can be fluid depending on the maturity of the business. You also have to consider the concentration ratio you want to have for these new accounts.
The number of variables we have helped financial institutions model for their programs has given us an unmatched perspective on how to help your organization define your specific budget opportunity.
Do Your Homework
Quick fact - No two cannabis banking programs are the same. If someone tells you they are, walk away quickly as you are being led down a wrong path. This emerging industry is full of half-baked solutions; franchise models (spreadsheets aren’t technology), alternative payment solutions (only tracking payments made through the payment solution), intermediate bank processing solutions (trust us, we know what we are doing) are not going to help you put together a full financial and associated operating plan to make the right decision for your financial institution. You need a holistic approach and visibility of the cannabis businesses you might bank. You need full visibility into their operations and how they make their money. This means you that you should explore how well-run cannabis banking programs have been structured and also learn from past mistakes of the earlier entrants into this market opportunity.
A New Line of Business, Plan Accordingly
With a fresh 2020 budget, you’ve decided that cannabis banking is something to include then make sure your plan can succeed, not wonder how it might turn out. There isn’t any need for guesswork here. The financial impact should have a level of visibility on an account by account basis, daily, and at the dollar level. You need to compare actual results to forecasted plans so you can report to your board the progress of your program. The mechanics of the program, the operations and expenses, will easily be offset by the positive financial growth these new businesses will bring to your doors. Plan for the success, effectively measure the results.
You should also be developing your 3-5 year business projections for this new line of businesses. This has to be an integral component. The 2020 impact is now, but this industry has a CAGR of 30% nationally so your budget thinking starts with the first dollar but the opportunity scales rapidly if that is the course you choose.
What does 2020 Look Like for You?
Back to the beginning. You’ve been thinking about it, conversations are being held right down the street at your competitor’s location. If you want to learn how 2020 can be the year your institution makes sure it has the best vision for the future then contact us. We will be glad to walk you through the financial modeling process in time for 2020.
Want to learn more about how Green Check can help? Contact us for more information.