The Money Pot

PotEraseThanks in part to Scotts Miracle-Gro, the payments industry might—might—soon be able to play ball with locally legal cannabis industries.

It’s that part about “locally legal” that until now has proved the problem. Thirty-three states and Washington D.C. have decriminalized cannabis for medical or recreational purposes, but the federal government hasn’t.

CreditCards.com summed up the dilemma this way:

Marijuana may be legal in your state. Does that mean you can pay for it with a credit card? … there are two answers to this question. The first one is, maybe—some marijuana dispensaries claim to accept credit cards. The second answer, though, contradicts the first one. According to numerous experts, the major credit card networks do not allow merchants to use their cards for marijuana purchases—they do not even have a merchant code for such purposes—and will shut down any account they find out of compliance with this policy.

The result is a burgeoning, profitable industry that has a difficult time getting banks and payment systems to take them on as clients. This represents a huge lost opportunity cost for the financial services industry. As Forbes reported,

Imagine an industry with $9 billion in sales—equivalent to the entire snack market —where only 30% of businesses had a bank account. That’s the situation we face today in the legal marijuana business. Hardworking commercial operators are struggling to find banks that will work with them, forcing these entrepreneurs to conduct most business with cash.

Not just financial institutions tread lightly around the cannabis patch. According to FindLaw,

You can run into problems with the CSA even if you’re not directly involved with the marijuana industry. If you provide services to a business that operates under state marijuana laws, you may also be violating federal law and thus subject to prosecution. So if you run a janitorial service and have a client that operates a dispensary, you may be profiting from illegal drug trafficking. The CSA also makes it unlawful to “knowingly open, lease, rent, maintain, or use property for the manufacturing, storing, or distribution of controlled substances.” So landlords that have tenants involved in state-permitted marijuana industry may risk federal asset forfeiture or other criminal fines.

Forcing cannabis dispensaries to a cash-only basis ironically creates potential for the very money laundering that federal law seeks to prevent. It also hangs “Mug me—I’m carrying cash” signs on the backs of merchants and customers.

The federal government has done an excellent job of confusing matters. In 2014 the Obama administration provided guidelines for financial institutions doing business with legal cannabis industries. But banks were slow to jump on the weedwagon and, it turned out, wisely so: four years later, the Trump administration re-tightened the rules

Enough is enough, says the American Bankers Association in so many words. “While ABA takes no position on the moral issues raised by legalizing marijuana,” its policy position states,

… the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where marijuana has been legalized for medical or adult use. Those banks, including institutions that have no interest in directly banking marijuana-related businesses, face rising legal and regulatory risks as the marijuana industry grows. Current proposals in both the Senate and the House that seek to provide greater clarity and bridge the gap between state and federal law provide a solid starting point for discussion. We look forward to working with policymakers of both parties to find solutions that provide the legal and regulatory certainty banks need to best serve their communities.

As for Scotts Miracle-Gro, the company states unabashedly:

… we believe—at a minimum—Congress should honor the principles of federalism and states’ rights by passing legislation that respects the will of voters and state legislatures that have elected to adopt their own approach to authorizing the use of cannabis within their boundaries … state-licensed cannabis businesses should have access to banking and other financial services, operate with the same tax structure as other businesses and not be threatened by federal prosecution if they comply with state laws.

Scotts’s interest lies more in hydroponics than in fertilizer, which would have been my first guess. Last month, The Wall Street Journal reported,

Jim King, senior vice president of corporate affairs at Scotts, which owns the largest distributor of hydroponics equipment in the U.S., said his company doesn’t currently sell its U.S. products directly to marijuana companies. “If we tried to do that today, our banks would tell us, ‘No that’s crossing a line that we’re not comfortable with,’” Mr. King said of selling directly to the industry.

Meanwhile, the situation has spawned a host of work-around payments businesses such as NaturePayInstabillDama Financial, PayQwick, Evergreen Gateway, ZodakaCannabis CardPay, and others. 

It’s high time, no pun intended for decriminalization. (Okay, yeah, pun intended.) A $9 billion industry isn’t going away. Let’s make it safe for all participants, financial institutions and payments systems included.

Posted in Uncategorized by Matt. No Comments

Creatively repurposed bank buildings

MarbleRoom

Photos from Marble Room website and Instagram page.
Used without permission. I doubt they’ll mind.

Last week nostalgia swept over me as I stepped inside an architectural masterpiece. An elegant survivor from banking’s bygone era of marble and polished brass, the entire building suggested strength, security, and longevity, all needful symbols for the early 20th century when people weren’t too sure about their banks. I pulled open the massive double doors suspended between towering marble columns, strolled across a checkerboard of brightly polished marble floor tiles, pulled up a chair to a marble-top check-writing stand …

… and ordered from the wine list.

The place was Cleveland’s fabulous, aptly named Marble Room restaurant. It occupies the lobby that once housed National City Bank and, before that, Guardian Savings and Trust. The 126-year-old building, downtown Cleveland’s first steel-frame skyscraper, rose under the direction of Harry Augustus Garfield, son of none other than President Andrew Garfield.

Digital banking fan that I am, even I must admit there is one thing a digital bank cannot do when it moves or ceases operations: It can’t turn into a knock-your-socks-off restaurant.

I have gone on the record as to the continued relevance—for now, anyway—of brick and mortar bank buildings. Still, it’s a fact that branches have closed with the growth of mobile banking. It’s nice to see the buildings not demolished but repurposed.

Vingtage buildings

Vintage bank buildings are a natural fit for restaurants and hotels. In a delightful piece for Bankrate, Mitch Storm lists five bank properties repurposed for the hospitality industry: the Bedford Restaurant (Chicago), CityFlatsHotel (Grand Rapids), Renaissance Denver Downtown City Center Hotel, Bank Brewing Company (Hendricks, MN), and events center Gotham Hall (NYC). Respectively, these buildings now house Home Bank & Trust, Michigan National Bank, Colorado National Bank, Bank of Hedricks, and Greenwich Savings Bank.

Not far from where I live, Salt Lake City’s Continental Bank Building went through a series of financial institution mergers and acquisitions until Kimpton acquired and transformed it into Hotel Monaco. The lobby houses Bambara Restaurant (recommended appetizer: the Blue Cheese House Cut Potato Chips), while the vault houses a bar named, appropriately enough, The Vault.

Classic bank buildings needn’t morph only into upscale restaurants. The restaurant chain that took over an Old National Bank office in Muncie, Indiana, reasoned that to raze the building with its gorgeous canopy would constitute a crime against aesthetics and history. The result is what just might be the most unique Taco Bell you’ll ever see. Not to be outdone, a McDonald’s restaurant has taken up residence in the lobby of Brooklyn’s old Lincoln Savings Bank.

The hospitality industry aside, Storm’s list of repurposed bank buildings also includes: Keystone Trust Co. (Harrisburg), First National Bank (Kansas City), National Bank of Spring City (PA), Bank of Manhattan Trust (NYC), and First National Bank (Columbia, PA). These have yielded their places to, respectively: an art museum, a public library, a private home, a Duane Reade drug store, and an Apple Store. I guess you could sort-of count the Apple Store as a digital bank. But only sort-of.

David Haas, writing for Storycuse, reports that erst bank buildings of Syracuse, New York, house everything from churches to stores. The Central Penn Business Journal points out repurposed bank buildings sporting the likes of petting zoos, bakeries, arcades, video game stores, and an escape room. That last makes uncommon sense: What harder to escape than a bank vault?

You’ll find a Walgreens Pharmacy in an old vault in Chicago. A few years ago, you would have found a porn shop in what began life as New York’s Corn Exchange Bank building. On the flipside and contending for Most Mundane Repurposing Award is a vault in Ventura, California, that now serves as a retail clothing store dressing room.

My nomination for Most Poetic Repurposing Award goes to the space once occupied by Manhattan’s Italian Savings Bank. Today it houses the R.G. Ortiz Funeral Home. I hope the new occupant gave the bank a dignified sendoff.

Posted in Uncategorized by Matt. No Comments

FinTech lending on the rise

Digital LoanThere was a time when applying for a loan meant sitting on a hard, wooden chair across the desk from a stern-faced banker, nervously clutching your derby, kneading the brim with your fists, and trying to look like a good risk.

Not much has changed except for, well, all of the above. You can apply for a loan perched comfortably in your living room. Digital data, not your appearance, establish your ability to repay. And, really, does anyone wear a derby anymore?

And in the world of digital lending, FinTech is making its mark. The latest numbers from Transunion suggest that an increasing number of borrowers are bypassing traditional financial institutions and going straight to FinTech:

The FinTech revolution has propelled unsecured personal loans to another record-breaking quarter … personal loan balances increased $21 billion in the last year to close 2018 at a record high of $138 billion. Much of this growth was driven by online loans originated by FinTechs.

FinTech loans now comprise 38% of all unsecured personal loan balances, the largest market share compared to banks, credit unions and traditional finance companies. Five years ago, FinTechs accounted for just 5% of outstanding balances. As a result of FinTech entry to the market, bank balance share decreased to 28% from 40% in 2013, while credit union share has declined from 31% to 21% during this time.

The rapid rise of FinTech lending shouldn’t surprise. Data is their business, and data drive lending and approvals. The very nature of FinTechs allows for unprecedented nimbleness. As finance reporter John Detrixhe, writing for Quartz, notes:

Fintechs have reinvented personal loans. Their digital platforms can quickly analyze and make a decision on whether to lend money. The lack of collateral means less paperwork, which speeds up the borrowing process. 

Transunion blogger John Wirth puts it more bluntly:

FinTechs are unencumbered by legacy technology systems, more conservative corporate cultures and the layers of approvals that can be present in traditional lending organizations. FinTech lenders’ ability to start from scratch and make quick decisions enables rapid iteration, refinement and aggressive adoption of the latest solutions.

Yet the “traditional” in “traditional lending organizations” is an unfairly loaded term. To be sure, some “traditional” banks exhibit sluggishness when it comes to adapting to the digital world. But the likes of Wells, Citi, Bank of America, Chase, and Capital One have shown themselves to be blazingly fast in seizing and running with the digital ball. 

One could equally argue that “traditional” banks bring everything to the party that FinTechs bring plus a few things that FinTechs cannot, such as physical facilities and face-to-face meetings. Such features are not de facto encumbrances, and they still matter to clients. Writing for Consumerist, Kate Cox reported that small business owners still seem to like visiting the bank in person:

Sure, a trendy new salon or boutique might operate almost entirely off an iPad in the front running Square, but there are still plenty of small businesses that need to deposit cash or make change runs frequently. The proprietors of those small businesses may also want to negotiate business loans or talk money matters face-to-face.

“Proximity to their business is a very, very important factor to their bank selection and their continuing relationship with a bank,” a U.S. Bancorp executive told Reuters.

Moreover, CNBC’s Kate Rooney raised a note of concern concerning the volume of unsecured loans figuring in the growing Fintech portfolio:

Fintech firms like SoFi, LendingClub, Prosper, Avant and GreenSky offer digital or mobile-first options that often use data points aside from FICO scores when assessing creditworthiness. Square and PayPal use similar metrics. But they tend to reach further down the credit curve, raising questions about how many would fare in their first-ever economic downturn. In 2018, most of the growth was at the lower end of the risk spectrum.

Nor did remarks by Transunion’s Jason Laky, senior vice president, consumer lending business leader, reassure in his remarks quoted by CNBC: 

“Subprime borrowers are the ones that, if the economy turns and growth slows, are likely to be at risk of losing their jobs or hours, that creates financial stress,” Laky said. “As long as we believe [the] economy is still on solid path of growth, there shouldn’t be an issue.”

Wirth would parry concerns by pointing out that finance companies’ portfolios are even riskier:

… when we compared the FinTechs’ risk appetite to other lenders, FinTechs were actually somewhere in the middle. FinTechs are more conservative than traditional finance companies, but have a higher risk appetite than banks.  

Wirth’s argument indulges the Privation Fallacy, the notion that if you’re in a wheelchair when you could be in a body cast, you have nothing to complain about. Whose portfolio is riskiest isn’t the issue. The issue is whether FinTechs operate with an acceptable level of risk. 

It may be premature to dismiss “traditional” financial institutions as too stodgy, and likewise premature to dismiss emergent models as too reckless. As tends to happen in market economies, the best finance companies, FinTechs, and “traditional” financial institutions will likely borrow one another’s strengths, in time blurring the distinctions.

Posted in Uncategorized by Matt. No Comments

Kroger: VISA credit card
now welcome in even
fewer places

VIsa-Kroger divorceIf you tried using a Visa credit card at one of Foods Co.’s 19 California grocery stores lately, you’ll recall being told, politely I hope, “We don’t take that any more.” 

But that’s old news. What’s new news is that the Visa credit card ban has just been extended to an additional 142 food stores and 108 fuel centers across seven states.

Now, Visa, Inc. isn’t exactly a small company. Each year, Visa processes more than 100 billion transactions, about $6.8 trillion worth. When you’re that size, the opting out of 19 stores might not so much hurt as tickle. But when the ban grows to another 142 stores with 108 fuel centers, it might at least begin to itch. Especially if the 19, 142, and 108 belong to the largest supermarket chain in the United States, which owns and could extend the ban to some 3,000 more stores.

By “largest supermarket chain in the United States,” I refer to The Kroger Co. Itself no small player, Kroger operates across 35 states with 2,764 retail food centers under various banners—KrogerSmith’sRalph’sFood 4 LessFred MeyerDillonsFry’s, and 18 others, give or take, as of this writing. 2,270 of these properties sport a Kroger-owned pharmacy, and 1,537 sit adjacent to a fuel station. Kroger also owns 253 fine jewelry stores and 38 food manufacturing and production companies.

The above-referenced 142 stores and 108 fuel centers operate under Kroger’s Smith’s Food and Drug banner. In fact, it was Kroger’s 1999 acquisition of the by-then merged Smith’s and Fred Meyer stores that rocketed the company to the top of the U.S. retail grocery heap. 

All of which is to say that The Kroger Co. is of sufficient size that the ban must surely have gained Visa’s attention. And Visa must surely have considered that if Kroger prospers without the card, other large retail chains might be tempted to follow suit.

Kroger’s press release announcing the ban minced no words:

“Visa has been misusing its position and charging retailers excessive fees for a long time,” said Mike Schlotman, Kroger’s executive vice president and CFO. “They conceal from customers what Visa and its banks charge retailers to accept Visa credit cards. At Smith’s, Visa’s credit card fees are higher than any other credit card brand that we accept. Visa’s excessive fees and unfairness cannot continue to go unchecked. That’s why, starting April 3, Smith’s will accept all forms of payment except Visa credit cards.”

Note the “all forms of payment except Visa credit cards” part. Smith’s and Foods Co. stores will continue accepting other credit cards, including Kroger’s own cobranded Kroger REWARDS World Mastercard, and Visa debit cards. Whether that proves confusing to consumers remains to be seen.

Business Insider reported Visa’s response:

… Visa released a statement saying, “It is unfair and disappointing that Kroger is putting shoppers in the middle of a business dispute.”

“We have put forward a number of solutions to allow our cardholders to continue using their preferred Visa credit cards at Foods Co. and Smith’s without Kroger-imposed restrictions, and we continue to work toward a resolution. Visa debit and prepaid cards continue to be accepted across all Kroger Stores, including Foods Co. and Smith’s.”

The suggestion that Kroger may be shooting itself in the foot was inevitable. Reporter Adam Shell wrote in USA Today:

Not having the option of using a Visa credit card could be viewed as a big enough inconvenience to drive shoppers away, analysts say. The trend in the industry, of course, is a shift away from cash payments to electronic transactions. 

“Consumers want choices, and they end up losing if they don’t have the option of using their Visa credit cards to buy items,” says NerdWallet’s[credit card expert Kimberly] Palmer. “Some consumers might even decide not to go to Kroger as a result of that inconvenience.”

But, come on. It would be naïve to think that the possibility of a self-inflicted podiatric gunshot wound hadn’t occurred to Kroger. The company has been around a block or two, or, if you prefer another metaphor, it has been in more than one rodeo. As co-director of Tuft University’s Center for Cognitive Studies Daniel Dennett quipped in his paper in his paper “Reflections on Free Will”:

As I tell my undergraduate students, whenever they encounter in their required reading a claim or argument that seems just plain stupid, they should probably double check to make sure they are not misreading the “preposterous” passage in question. It is possible that they have uncovered a howling error that has somehow gone unnoticed by the profession for generations, but not very likely.

Kroger does not lack for skilled analysts who would have considered whether the Visa credit card ban would backfire. It’s not unlikely that the Foods Co. ban was a test foray. If so, then the extension of the ban to Smith’s would seem to indicate that results have been encouraging.

Playing musical credit cards isn’t new. For years, Costco managed just fine taking American Express credit cards, Visa debit cards—but not Visa credit cards. Then, in 2016, Costco traded the American Express for the Visa credit card after all. And, as MarketWatch’s Maria Lamagna points out, Citigroup purchased BestBuy’s cobranded credit card from Capital One in 2013, and Walmart dumped its cobranded Discover card for a cobranded Mastercard in 2014.

I see three possible outcomes to the Kroger-Visa stare-down: (1) Kroger capitulates and mends ties with Visa; (2) Visa capitulates and gives Kroger a better rate; or (3) Kroger and the Visa credit card carry on without each other. I know better than to make an attempt at predicting which it will be.

Posted in Uncategorized by Matt. No Comments

Banning Cashlessness

No no cashAs of July 1, cashless stores and restaurants in Philadelphia will be no more. Existing cashless businesses will not be grandfathered but required to revert. Outside of a few exceptions such as parking lots, hotels, and car rental agencies, the Philadelphia City Council has deemed cashless businesses discriminatory. 

If you have a bank account, as I suspect most readers of this blog have, the discriminatory thing may at first blush be hard to see. It make more sense when you consider that, as U.S. News and World Report estimates, about 6.5 percent of adults in the United States, or about 14 million people, are unbanked. Cashless stores exclude them. And, according to the Federal Reserve Bank of San Francisco, about 18 percent more have bank accounts but still prefer cash transactions.

Not just Philadelphia is sticking up for the cash-inclined. According to New York Times, the city of brotherly love is in good company:

The New Jersey Legislature and the Philadelphia City Council have passed measures this year that would ban cashless stores. New York City, Washington, San Francisco and Chicago are weighing similar bills.

Eager as people immersed in the digital payments business (like me) may be for the ultimate demise of cash, there’s little reason to believe it will happen anytime soon. An article by Fiserv strategic partner ATM Marketplace, cited before in this blog, pointed out that studies …

… consistently show the hype about the decline of cash to be inaccurate and wildly overstated … Despite continuing growth in alternative payment options, consumers still rely on cash as their primary form of payment for gifts, food, personal care, automotive, entertainment and transportation services.

Were cashlessness ever to come about, there are a few scenarios as to how it might happen. In what could be called a libertarian scenario, the market would cheerfully abandon cash of its own accord. In more of a push scenario, merchants would opt to accept only card and digital transactions, forcing the market to abandon cash. And in what me might call an edict model, cashlessness would come about by government fiat.

As it stands, the edict model doesn’t look workable. One would be hard-pressed to name a nation more motivated than India to move attain cashlessness, yet, as NPR reported, India is finding the task “easier said than done.” Not least among impediments is that only 17 percent of Indians own a smartphone and only 20 percent have Internet access.

In the U.S., Visa has put some effort into the “push” model. Take for instance, its “Cashless Challenge,” in which …

… Visa put a call out to small businesses across the U.S. to tell us how going cashless could benefit their business … 50 winners were selected to receive $10,000 each for envisioning less-cash solutions as a means to more convenient, secure and easy transactions.

While one could—correctly—accuse Visa of interfering with market forces by helping make cash increasingly unusable, laws like the Philadelphia ordinance likewise interfere with market forces by keeping cash viable.

The libertarian scenario may be taking hold in Sweden. Yet according to the New York Timesthe Swedish government appears more concerned than enthusiastic:

Consumer groups say the shift leaves many retirees—a third of all Swedes are 55 or older—as well as some immigrants and people with disabilities at a disadvantage. They cannot easily gain access to electronic means for some goods and transactions, and rely on banks and their customer service. And the progress toward a cashless society could upend the state’s centuries-old role as sovereign guarantor. If cash disappears, commercial banks would wield greater control.

A few straw-clutchers contend that in the United States refusing cash is illegal at the federal level. From Finextra:

The ATM Industry Association highlights that every US banknote states: “This note is legal tender for all debts, public and private.” Says the group’s CEO Mike Lee: ‘Why decrease freedom of choice for citizens in a free market democracy?’”

But straw-clutchers they are. The U.S. Department of the Treasury, arguably an authority on the subject of legal tender, has put speculation on the federally required acceptance of cash to rest:

There is … no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services.

Meanwhile, comedians are having fun with the concept of a cashless society. In the UK, hosts Steve Punt and Hugh Dennis offered this satirical take on the March 8 episode of the BBC’s “Now Show”:

… No one is really ready for a world with no notes and no coins. It will change so many things. For a start, what are thugs going to throw at footballers? … ‘The match at the Emirates this afternoon was held up after someone in the crowd threw an iTunes gift card at one of the goalkeepers. The card turned out to be worth 50 pounds, but was unused as no one could find 10p to scratch the silver strip off with.’”

As for American football, who knows? The day may not be far off when games start with a gift card toss.

Posted in Uncategorized by Matt. No Comments