Fincann Pitch Deck Q&A
It all sounds great, but what happens to Fincann when the federal government deschedules cannabis? It seems your whole cannabis banking business model is short-lived and will become obsolete once this occurs?
Early on, many assumed that immediately following federal de-scheduling normal banking would open up and this industry challenge would be over.
However, contrary to prevailing misunderstanding, bankers’ unwillingness to support the industry is shaped primarily by their own prejudice and lack of knowledge. Providing service to new industry sectors, as well as offering new products, is the decision of the financial institution’s board of directors. These boards are typically composed of individuals whose views are most politely described as “mainstream conservative.” They consider marijuana as in the same category as heroin, methamphetamine, and LSD, or at least a gateway to these “harder” drugs. They visualize hippies, schoolyards, their own kids, pushers and refuse to learn more about it. This attitude has evolved some over the past few years as general awareness and acceptance has seeped in. Additionally, the sky hasn’t fallen in for several years now in states with legal programs. There remains, however, significant resistance to recreational sales and usage.
Federal illegality, and the theoretical risk of both civil and criminal penalties, loss of depository insurance, failed examinations and reputational risk, are convenient pretexts for covering their aversion, based upon how a particular board feels about the industry.
Case in point is federal de-scheduling of hemp and hemp-derived products, notably consumable CBD. It remains a regulated agricultural crop without a regulatory framework in place, especially for CBD. And as such, the FDA considers it largely unapproved for human or animal consumption and therefore a federally prohibited product. Even after the 2018 Farm Bill descheduled hemp extracts, it’s still difficult to find banks willing to support this industry without a regulatory framework and guidelines in place they can depend upon. We hoped for at least an initial framework in place by the end of this year, but now with the FDA’s hands full with COVID-19, the wait may be longer.
So even if Washington deschedules marijuana as early as mid 2021, which is in the realm of possibility, it will likely follow the same track as hemp/CBD as a regulated agricultural product without an adequate regulatory framework yet to be worked out. This will then have to be reconciled with whatever framework is in place for hemp/CBD. For example, the arbitrary line of THC content between hemp and marijuana (0.3%) won’t matter anymore if marijuana is rescheduled.Except for current THC licensees anxious to defend their expensively won turf. What’s going to happen to dispensaries when 7-11s are quickly going to jump on selling pre-rolls and other related mass-market products? And what’s going to happen to licensed cultivators in New Jersey when it’s much cheaper to grow in the Caribbean? Or processors when it’s cheaper to produce in China?
By far the largest of its kind, the Cannabis Banking Financial Network™ works with about 125 of more than 10,000 banks in the U.S. By the time of federal descheduling, general industry acceptance will have substantially matured and a tsunami of these institutions will be interested in banking the industry and its related cannabis businesses. And both bankers and cannabis-related businesses will need experienced seasoned advisory and products to help them navigate this jungle. Even if Fincann captures only 10% of the market, it will increase its banking network relationships tenfold.
Another of Fincann’s major lines of business is B2C and B2B merchant processing, which yields both initial and monthly recurring income averaging about 1% of merchant sale volume. In a $40B industry, 1% of 10% market share equals $40M. Fincann is conservatively projecting achieving less than half that within 18 months post-money. And by deploying rigorous multi-touch point customer acquisition and retention, this figure will continue to grow irrespective of federal de-scheduling and future regulatory frameworks.
Your financial projections seem ambitious, especially for an early stage company currently only posting low-6 figures annually. How do you justify them?
In addition to the just highlighted merchant processing component, Fincann has beta-tested and will enjoy a number of other complementary revenue streams summarized in formulaic detail in the Financial Plan section of our formal business plan under Key Assumptions. These include:
- Banking & merchant processing advisory services across all industry sectors, from whom we collect modest application, consultation and account setup fees
- Legacy banking advisory, though less frequent, entails substantial commissions and advisory fees
- Revenue share from depository institutions of deposit processing and compliance fees charged to THC licensees and large Tier 2 depositors
Not included in the formal financial plan is provision for referral fees and revenue share for outside complementary services, such as financing, insurance and professional services.
Given our extensive network, cross-industry relationships and excellent cannabis and banking industry reputation, achieving 10% market share within a year and a half post-money is conservative, achievable and fully supports our projections.
Bankers claim to reasonably avoid the cannabis industry in legitimate apprehension of civil or criminal penalties, aiding and abetting federal narcotics trafficking, losing their deposit insurance and/or banking license, risking fines and penalties, failed bank examinations, and other problems. What do you say to them?
It’s first important to educate financial institutions on the real history of cannabis in the U.S. over the last century. Notably, we highlight its broad utility as a remarkable source of innumerable industrial products, in addition to its popular use as a mild and relaxing recreational intoxicant.
Next we point out that over the past 6 years or more, no financial institution in the U.S. who made or makes a reasonable effort at proper compliance and reporting has ever suffered any of the listed consequences and with good reason. Chief among them is that federal bodies and examiners want the industry’s proceeds banked, accounted for, taxes paid and cash off the street to de-risk violence and criminal activity.
We then take a close look at the profusion of sectors and verticals within the cannabis economy, which includes dozens of businesses beyond THC licensees. Examples are:
- Test Labs
- Business & Capital Advisory
- Finance, leasing and asset management
- Licensing, Regulatory and Compliance
- Banking & payment solutions
- Hedge funds & private equity
- Landlords & real estate brokers
- Marketing, advertising & branding
- Websites & social media
- Public relations
- Plumbers, electricians and general contractors
- Personnel & human resources
- Payroll services
- Manufacturers, distributors and retailers of vapes, dabs, glassware, clothing, non-plant derived merchandise & other smoking accessories
- Automobile & truck dealers
- Capital equipment
- Greenhouses, lighting, irrigation & cultivation systems
- Soil, nutrients & hydroponics
- Investment advisory
- Venture capital and angel investors
- Printing & publishing
- Trade shows and conferences
- Trade show exhibits
- Data & reporting services
- Trade associations
- Trade media
- Advocacy & campaigns
- Medical practitioners
- Tour operators Directories and information services
At this point, it becomes apparent that they are already banking a number of these sectors, and we can then help them decide which to bring into transparency and compliance and those they’d prefer to prune from their portfolio, at least for the present.
We also work more directly, at least initially, with the bank’s senior compliance, risk and business development people, since they are often younger, more ambitious, better informed and less prejudiced than their board.
How has the COVID-19 pandemic impacted cannabis-related banking and payment processing?
First, we see further evidence of cannabis as a recession-proof industry. Even in times of economic stress and uncertainty, people will still seek out their cost-effective health and medical remedies. Like we saw during the Great Depression, when alcohol sales boomed, cannabis as a way to unwind has boosted sales as well.
Here’s an example of an immediate and possibly long-term effect and benefit to an industry vertical:
A currently promoted compliant, sustainable alternative to credit card payments is app-based checking account debit platforms whose fatal weakness has been abysmal buyer adoption. Picture it: a customer enters a dispensary and is told they can pay electronically by downloading an app and connecting their bank account. They prefer to go to a nearby ATM and draw cash instead of giving up sensitive information to an unfamiliar app. There is generally no appetite to do all this and risk their private information just to buy cannabis.
However, with dispensaries closed to in-person sales due to COVID-19 and instead utilizing delivery, contactless electronic payment can be mandated, and the only way to get the delivery is to agree to use the app. That solution has therefore experienced a boost that will carry forward beyond the current crises, since the primary obstacle to adoption is resistance to the initial intrusive process. Once the payment solution is adopted and used a few times, buyers tend to be satisfied with it and customer retention is easier.
This is good news since otherwise the solution is a good interim approach to consumer electronic payments in anticipation of whenever MasterCard, Visa, American Express and Discover open up to cannabis transactions following federal de-scheduling.Contact Fincann if you are interested in investor information