518 Gigantic Data Puzzles Open Banking US Cannabis Banking-Spicy Hot 

Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

This week on Breaking Banks, Alex Johnson and I spice things up talking about open banking and the CFPB’s proposed Rule 1033. I may have to eat my shoe with hot sauce, of course, because I’ve said for years that I think it is market pressures, not regulators, that will bring open banking to our shores. Alex has a very different take.

Whether the rule takes effect or not, I actually really don’t care because that’s not what has me hot. These are not the data I’m looking for. In the second half, J.P. has a healthy dose of cannabis, well, cannabis banking, to go with those wings.

Kevin Hart from Greencheck Verified joins him on the floor of Money 2020 to talk about the industry maturing as cannabis becomes legal in more states. Join us for more Breaking Banks. Well, Alex, I feel like when we set out to record this episode, it was like, hey, we should talk about open banking and where things are going.

Then boom, 1033 from the CFPB, and it basically, let’s rename Money 2020 as Money 1033 is, I think, you had been writing about. Then bam, on the heels of it, we get into Mint shutting down, one of the first, I think, what you’d call modern Fintechs that really broke ground for a lot of us. Then bam, you get into all sorts of other plays, including just today as we’re recording, the CFPB talking about their ability to get inside of these large financial institutions, or I should say, the Fintechs and tech companies that aren’t traditional FIs that have wallets and are processing payments, bam, all of it.

Where do you want to start? Well, let’s get spicy because it has been too long since I spiced it up, and I might actually just jump straight to the ghost pepper. This is going to be such a spicy episode. Let’s do it.

Yeah, let’s just crank this thing all the way up to 11. I think to your point, as soon as you reached out about doing the podcast, all Fintech news happened seemingly. Lots of things to talk about.

You want to start with Mint, because I feel a certain pang of nostalgia that Mint is now going to be finally sunset. Not that you couldn’t see this coming, but Intuit finally making it clear this was going to happen and kicking the remaining, what is it, like 3.6 million users off, making them go elsewhere. It’s closing a door in Fintech history, for sure.

I still remember the first time I met Aaron Patzer when we were starting PerkStreet. The original genesis of PerkStreet, Dan leaving Capital One, I was leaving First Marblehead. We had done very well at putting people in debt, and we had to go do our penance.

The idea was, hey, can you create a high reward debit card? The number one people pick their plastic is the reward attached to it, or the lowest rate they can revolve on. The second piece being, hey, people spend more responsibly if you spend on debit. We wanted to talk to Aaron about people’s behavior using Mint.

One of the things that surprised me, so keep in mind, this is circa 2008, 2009. I think it still holds true. Most people sign up well-intentioned, and then they don’t come back.

In fact, with Mint, part of the reason Aaron, I think, was induced to sell is the fact that people would create a Mint account to get a credit card offer, would move their balance, and then not go back. I’m curious what your take is on Mint closing down. Yeah, I think you hit the nail on the head.

It’s a business model problem. I was talking to someone else in the PFM space, and they pointed out, I think, very astutely that the problem with Mint was that you had bad LTV, you had declining LTV. The problem is all of the profitable behavior was come in, connect all your accounts, get a credit card offer, and then boom, go move your transactions over to this new card.

Then you’d go dormant on Mint, or you’d close that down. That’s where you’d make all your money. But then all of the customers that stuck around, and there is, I’ve written about it in my newsletter before, is calling it the 15% problem, where it’s like there’s 15% of the population, roughly, that really likes to categorize their transactions and manage a budget very closely.

They’ll use QuickBooks, or Mint, or a spreadsheet that they built themselves, or maybe now it’s Copilot, but it’s that same 15%. Those are the ones that hang on. The problem is, and this is something I don’t think people really appreciate, data aggregation is really expensive.

It’s really, really expensive. It breaks all the time. Its coverage isn’t great, and it’s really expensive.

If you’re doing a PFM, and all of the profitable behavior is happening at the beginning, all of the customers that hang on, usually in banking, it’s the reverse. A long relationship with customers means better unit economics over time as you’re able to cross-sell them more products. But in the case of Mint, that was the opposite.

And so, yeah, it didn’t surprise me that they ended up selling when they did to Intuit. I guess the thing I was maybe a little more surprised by was that Intuit never really did much with Mint. I don’t think they necessarily solved that problem.

I think the idea at the time was, hey, we’ll have TurboTax, and so we can push people over from Mint to TurboTax, and that’s kind of our cash cow. But seemingly, that just was never the case. And it feels like once they acquired Credit Karma, it was kind of game over for Mint.

ED HARRISON Yeah. Game over for Mint. But let’s talk about PFMs broadly and Credit Karma.

As part of this, now Credit Karma actually offering a credit card on top of it, their own card, which is an interesting mix. Historically, the revenue has been on product recommendations. What do you make of them coming in with their own horse in the race? Yeah, I mean, I think the interesting thing is if you look at Credit Karma, NerdWallet, and Experian, all who play kind of a similar game in terms of we’re going to aggregate volume, and then we’re going to make money on leads, all of them are trying to build deeper sort of stickier relationships with their customers.

So I think Credit Karma has the bank account. Experian is starting their own bank account as well. And then NerdWallet just announced their credit builder card.

And I think in all of those cases, what they’re doing is trying to sort of tiptoe around, we want to be a stickier hub for people, because I think what they’re finding is there is kind of a upper limit to how good SEO can be in terms of keeping customers engaged and sticking around. And even Credit Karma, like getting your credit score is a lot easier today than it was when they started. And so I think a lot of those initial wedges they had for attracting customers and keeping them have lost a bit of their fastball, so to speak.

And so products are a way to try to get people to stick around. Obviously, if you were to make like Credit Karma’s bank account or Experian’s bank account, your primary account that your paycheck went to, that would put them right in the middle of driving a lot of financial decisions. And in the case of NerdWallet with their credit builder card, and I promise I won’t rant unless you put me down that path on credit builder cards, because it suffers from many of the same flaws.

But the logic, I think, is we serve mostly today high FICO prime and super prime customers who are looking for a better credit card. This credit builder card will work for a different segment of customers that we don’t have, and that won’t really be competitive with any of our advertisers. And if it works the way we think it will, it’ll be a good on-ramp for us to serve more qualified customers to our advertisers.

So I think they’re viewing it as a more stable base to then drive more volume through this lead generation machine that they’ve built. So you said credit builder, and my mouth is on fire because it turns out like the top of the ghost pepper fell off in the top, right? So I doused the kid’s leftover Rice Krispie chicken last night. So as long as I’m on fire, let’s go with fire.

Let’s rant about credit builder. And I think you’re onto something about why this on-ramp might work better than traditional credit builder products that people are out marketing. Yeah.

All right. So two things on credit builder products. One, we absolutely need better credit builder products in the US because, and I’m sure you had this experience when you were 19.

I certainly did. But there’s just sort of an inherently super frustrating logic problem at the center of our credit system, which is you can’t have credit until you’ve gotten credit, but you’re not going to get credit until you’ve had credit. So this Catch-22 problem is real.

And I think the fact that everyone is launching credit builder products, even though the market is relatively saturated with them now, indicates that this problem is still very like unmet or unsolved. I think I talked to a neobank a while ago, and they said when they launched their credit builder product, it was the number one thing that their customers were asking them for. So, okay.

This is like a need that you have. Here’s my rant about it, though. Second thing.

If you don’t give your customers a chance to fail when using credit, you are not teaching them to use credit responsibly. And thus, any data that you report to the credit bureaus, that you furnish to the credit bureaus, no matter how positive it is, is not actually going to improve their credit worthiness. So their score will go up because you are reporting only positive data for this credit builder card that you have given them.

The problem is lenders, and I’m talking Capital One, Bank of America, Citi, JPMorgan Chase, they’re not idiots. They know that the design of these products is created specifically so that you’re only furnishing positive data, which means, and I know this is true, I know for a fact, they are screening out trade lines coming from these credit builder products when they are evaluating these consumers for loans, which is a problem because if you are telling your customer, hey, after using our credit builder product, you have increased your FICO score from 610 to 690, which should mean that you are now qualified for these products. If they go into the bank and apply for a loan, they might not get treated the way they think they would based on their score.

And that’s a problem that you created for them. So I get the temptation to take a shortcut with credit builder products and to build one that’s super customer friendly, and there’s no chance that they’re going to hurt themselves. My kids are learning to ride a bike right now, and watching them fall off a bike and skin their knee is super painful, and I don’t enjoy it as a parent.

But that’s your job. If they’re not going to learn how to ride a bike, they’re not going to learn. And so that’s my rant.

Yeah. Well, and let me expand on the rant that you may improve the score, but you have not improved their credit worthiness, is how I’d summarize what you just said, or access to credit. I’d also say the number of them that provide the data to the bureaus is alternative data that has not actually been proven to even move the scores, right? Like, yes, it’s being reported, and in theory, more data should move your score, right? It just further confounds the issue here that what they’re selling is not necessarily what you’re getting.

Well, and to that point, look at Chime. And I love Chime, generally speaking. I think they’re very good in terms of how they build their products.

I think they’re very customer friendly. I think they really are very driven by their mission to help this segment of the consumer population. However, a question I always keep in the back of my head is, why hasn’t Chime launched a lending product yet? Why have they not gotten deep into lending? That’s the obvious way to become more profitable and to diversify their balance sheet.

The answer, I think, is that they have this population of consumers who are using their credit builder card. And hey, you’ve increased your credit score. Chime should want to lend to those customers.

Like, hey, they’re your customers. Now they have a 720 FICO score. Go lend to them.

And what Chime knows, but they’re not saying out loud, is those aren’t actually 720 FICO scores. We don’t want to lend to them. And so they know they have this problem, and they’ve kind of trapped themselves in a corner a bit on that.

Yeah, this Alex Johnson guy I know, sometimes is fond of saying, the lending the money is easy. It’s getting paid back is the hard part. And if the closest to the problem who actually has the financial data is holding back, what does that tell you? Right? Yeah, it’s not good.

And I think the CFPB has expressed concerns about these products. The bureaus seemingly are asleep at the switch in terms of like, yeah, this is very much like, oh, yeah, we’re the forest service. And we have this lake that’s in the middle of the forest.

And we don’t mind if you just come dump chemicals. And it’s very weird that the bureaus are just allowing this data to get added willy nilly to all the files. And to your point, it comes in in different formats.

They’re adding it as different types of trade lines, depending on the product. So the bureaus are enabling FinTech to make a mess of credit files. And it’s not good for anyone, honestly.

But the bureaus have long kept the score as a black box, right? So I’m not surprised that more muck going into the black box is not allowable business model to them. Well, and they I think they want to be relevant in FinTech, right? So they want people to come back. They want to be the center of lending from a financial services perspective.

And so they’re not really in the business of turning data away when someone says they want to furnish. But I think to a degree, they were kind of caught off guard because you have one FinTech that comes to you and says, hey, we’re building this new credit card. It’s a secured card.

We’d love to report a revolving trade line to you. And the problem with the bureaus is one bureau says yes. And then the other two bureaus look at that and go, oh, well, they’re doing it.

So we should probably do it. And then all the bureaus are doing it. And then another FinTech comes to you and says, hey, we want to do it.

And you’re like, well, we let that other one do so. There’s kind of a precedent that’s been established. And it’s really hard to roll that back.

But I think we’re not too far away from the bureaus having to really pause all of this and rationalize how their data is being mingled together because it’s a mess. Well, I mean, as long as we’re on the topic of rationalizing data and making data accessible, why don’t we talk about open banking appears to have come to our shores. And I guess Jason needs to eat his shoe on this because as late as maybe three weeks ago, I was no, actually two weeks ago when I was on with Plaid’s open data team and Fiserv’s head of open banking and saying, I’m not sure it’s ever going to be mandated regulatorily in the US.

It’s going to be driven by markets. Well, now we have somebody attempting to mandate. So let’s talk about 1033.

Yeah. Rohit Chopra music coming on loud. Yeah.

I mean, I think that in a lot of ways, the rules that were proposed by the CFPB really just kind of clarified where we already are. So to your point about like the market driving, like I think the market drove us to this place and the bureau essentially wrapped a set of rules and sort of statements around sort of just clarifying where we are today. So it’s the consumer’s data.

Data providers must provide access to it. They can’t play around with that. The authorization ultimately comes from the customer.

It’s given to the authorized third party to define what the use case is and what data they need. The data providers are not allowed to charge for the data. So I think in a lot of ways, it’s not necessarily a huge change from where we were, but it does bring a lot of clarity to the market.

So I think, you know, at a 30,000 foot level, everyone I’ve talked to who kind of exists within the open banking space, and this is, you know, the plaids and MXs and finicities of the world, they’re pretty happy that like, at least now we have more clarity around how this is supposed to work. I think my kind of counterintuitive take, I’d be curious for your take on this, since you’ve been sort of in the middle of a lot of these fights over many, many years. But I kind of wonder if we’re headed into a next, what, two to four years where now that we have specific rules, it’ll become more obvious, like where the loopholes are.

Like I always sort of think about like, and this is why regulators don’t like to give specific requirements, right? Because as soon as you tell people what they’re allowed to do and what they’re not allowed to do, they figure out a way to game it. And there are very expensive lawyers who make a living doing that. I kind of wonder if, like from a bank perspective, just to pick on them for a second, I wonder if the big banks will find all of the loopholes, at least in the short term, to make this transition to open banking kind of suck for everyone.

And the reason I think that is, we saw something very similar in the UK play out where like, hey, this API, yes, technically you have it, but it doesn’t perform very well. It’s down all the time. And, oh, actually that’s because when we said our uptime is defined as X amount of percentage per year, we can take a whole chunk of time through the year, do it all at one time and still meet our SLA for being up here.

And so, you know, I think the Bureau in the US has learned some of those lessons. Like the uptime is going to be mandated on a month by month basis. So it’ll be a little harder to play those games.

But as soon as you write stuff down, people find a way to kind of exploit loopholes. And, you know, we saw this already with the data aggregators and some of the fights that go on with the plaids and the MXs of the world where if too many requests are coming in against their API, they just shut it down and they say, oops, overwhelmed us, go reauthenticate. We don’t like our data flowing out.

We kind of like to own that. I worry not only about the loopholes, but how long the fight is going to be with the big banks dragging it out. And then just the fact that it curtails so quickly in terms of, you know, where’s the cutoff for banks to actually supply this.

So while maybe I need to eat the left shoe because a regulator came out and said we need to do it, I still think it’s going to be driven by at some point, one of the banks is going to realize access to the data and providing the data puts me in a better position. I’m going to figure out a way to monetize it that all the dominoes begin to fall. Yeah, I think that’s right.

I mean, the thing that drives me absolutely crazy about open banking is banks are just screaming until they’re blue in the face about we don’t want to provide data. And it’s like, OK, look, the reality is you don’t use the data you have on customers today anyway. Like it just sits in a vault.

You don’t do anything with it. It’s just in this massive data lake like you don’t use the data. So like chill out about that.

If it was really valuable, you’d be using it. And B, I think the other thing about it is I do think that we’re going to run into a scenario where banks and this might just start small, but I think banks are going to start to see, again, to your point about market pressure, a competitive advantage to being friendly on open banking. And I think that’s going to come in two different forms.

So one form is if you make it hard for customers to share their data, if you play games with the API, if you make it difficult, whatever, customers are going to switch banks. They’re going to leave. And so one is you don’t want to take the risk of pissing off your customers.

And then I think the other one is on the positive side, the whole game now, and I’ll be curious to see which banks figure this out first is, can you give your customers a valid, compelling reason to want to share all of their other data with you? And if you give them those hooks, if you build those hooks into your product, if you give them value-added experiences, I think banks will be blown away by just what they’re able to get their customers to bring to them. And then you really can start to create an advantage around data and data-driven products. But banks have been so busy fighting it that I don’t think they’ve spent any time building those hooks.

And that’s where FinTech has a big advantage. Well, and this is the crux of the problem, right, is I’m not doing anything with it, right? I own the data. You know, you and I love that quote that we will never let die.

It’s my data. It’s like, well, no, not exactly. It is your customers’ data that they have loaned to you because it went on your rails.

But just because you’re not doing anything with it doesn’t mean you can’t let anyone else do with it. I think, Alex, the genius of what you just said is if you think back to when Yodlee actually kind of broke open the aggregation market was when they moved from screen scraping to as part of the product of agreement was a quid pro quo that you get access to the data stream, but you have to provide yours as a direct connect, right? And so that really opened the door for, you know, not just the Yodlees, but the Plaids and the MXs of the world, right? That there has to be a mutual relationship here. And I think those banks that realize, hey, if we are the bank of openness and you can better utilize your data to make a better financial decision, whether you’re a consumer or a business, but the quid pro quo is you need to link the other things for it to really be useful for the tools I build, then I think you actually see that those are the banks, I think, that are really, or fintechs, that are going to be the big winners.

Yeah, no, I totally agree. I mean, you need to build tools and products and experiences that get better the more data that your customers plug into them. And if you build them, they will be magnets that suck data to you, which is what you want.

Well, and I think a key part of this, and this is where, you know, historically, why does PFM fail and broadly all of financial literacy fails is the point of integration is the actual human, right? We’re still requiring humans to go make decisions. You know, 27% of people say the reason they don’t budget is they don’t think it’ll make a difference because they don’t know what to do with it, right? Another substantial population says they don’t do it out of fear. And so I think this is where the eve of embedded finance and tools that actually make it easier to go do these things that drive real value for customers that are driven by data.

But again, you also, you need the data is the fuel, but you still need an engine, right? That is really easy to go work. Well, like to that point. So I’ll just use myself as an example.

I tend to treat deposit products and then lending products very differently. And so on the deposit side, I’m looking for safety. I’m looking for convenience.

I’m looking for trust, right? I’m looking for help sort of getting an overall picture of what I’m doing. And so I’ll pick my providers based on that. On the lending side, outside of credit cards, all the loans I get, it’s mostly a pricing thing, right? Because I want a loan that has the best possible price.

I want it to be convenient. And I want to get the loan to get whatever the other thing is that I’m looking for. It would be very nice if the bank that I worked with on the deposit side, which quite frankly is never, it’s a community bank.

They’re never going to be able to afford the best possible pricing for me to win me on the lending side. It’s just not going to happen. They make their money in commercial lending.

So you’re fine. Yeah. Well, then do this for me.

Make yourself stickier to me as a customer. If you come to me and say, we built this service where if you plug in all of your credentials for all of the loans that you have, we will constantly go out and just shop on your behalf passively. And when we find a place to refi your loans, we’ll just refi them.

And like, we’ll check with you, but we’ll make it really easy. And we’ll just refi your loans and you don’t have to care about it. You don’t have to think about it.

You don’t even really have to do anything. It just happens automatically. We’ll constantly be refining for you.

That would be an amazing value add. It would be bad for all of the lenders that are providing those loans, but it’d be great for me and be great for my depository institution is trying to keep my loyalty. I have no idea why that doesn’t exist, but it should.

And maybe with this open banking rule, we’re getting one step closer to that. Well, I think part of the reason, first and foremost, when you talk to a lot of the banks, it goes one of two ways. Large banks talk about convenience.

I’ve got a branch on every corner. If I’m Chase, B of A, Wells and all the tools I have, then I shove you into products. I forget about you.

I’m delivering a large scale commodity product. But when you get to this, from regionals down, they talk about the relationship and being part of the community. That’s all well and good until you actually have rates that are greater than 50 bps to 250 bps.

And it is now easy to move your accounts because of digital account opening and transferability. I can start to make these choices. Relationship is not about the human and the fact that our kids play t-ball together.

Let’s face it, I forget which guest once said this. It’s not like Chase puts all of the tellers on a bus from New York every day to show up in Topeka, Kansas. No, that teller at Chase also goes to your kids preschool and plays baseball with your son or daughter.

Relationship to me is more around one of value that you just described. So you can either compete on tangible value of dollars, which is rate, or tangible value, which is not my human interaction or even the dog bones in the lobby, or a cafe, capital one picking on you again. It is the fact that you’re giving me something I can’t get elsewhere and you’re buying my loyalty with value and entering a relationship that is value-based.

Absolutely, yeah. And I think I was talking to Scott Sanborn at Lending Club about this because he’s big on, you know, like, we need to always do the thing that’s right for the member, even if it means sort of taking a hit in revenue for us on the short term. And I was kind of pushing on him a little bit and asking him like, well, okay, but like, like, just break that down to me.

If I was an investor in Lending Club, and you told me that what I might hear cynically is, okay, we’re turning away short-term revenue opportunities. That’s like not great as a message to investors. And he had a really good specific answer, which he’s like, look, customer acquisition is really expensive.

It’s really expensive. And so his sort of philosophy and what they try to measure is, you know, everything we do that’s a value to our members, we want that to drive down our customer acquisition costs. And if it’s not, we would look at it differently and we would, you know, potentially have a different model.

But if customer acquisition is really expensive, particularly in a digital environment where everyone’s competing with everyone all the time, the value of holding on to customers, even if it means sacrificing a little short-term revenue, is so much more valuable. To say nothing of the things that are harder to measure, like how many referrals did they make? How are they talking about you in their communities and with their families and friends? Even if you said all that sort of hard-to-measure, word-of-mouth stuff aside, the tangible things you can measure about the value of that relationship over time and cutting down your customer acquisition costs, that by itself pays for a lot of goodwill in these product decisions. And I think that’s a lens that’s missing in a lot of banking.

Well, I mean, let’s talk about buying goodwill and data hoarding and things go wrong that I really wish if the CFPB really wanted to improve financial health, let’s go after the big e-tailers. Up until May of this year, 2023, Amazon would allow you to export your order history as a CSV and look at it. It may be unexpectedly just pulled the plug, no real warning.

You can still go to your order history just in a non-useful HTML fashion that for those of us who do the majority of our shopping online, now budgeting, here’s the reason post-mint I don’t plan on transferring anything. Jason’s budget looks like this. Amazon, mortgage, kids’ school costs.

I have three categories. It is a pie chart, and I hate pie charts. That does not change very much, but also non-useful.

When I have the conversation with my wife about we need to rein in spending, she says, what spending should I do less of? I’m like, less spending on Amazon. What shouldn’t I be spending on Amazon? The kids needed boots. I’m like, OK, but I’m pretty sure all of these expenses are not necessities.

No, 100%. I could not agree more with this. I joke with my wife that our house could just be an Amazon Fulfillment Center with the number of boxes that we have.

I mean, it’s insane. I think that Amazon has a long history of doing this. Do you remember what was the company called or the product called that Capital One launched? It was the guys who created RAMP when they were at Capital.

I think bought a little fintech company, Paribus, maybe. Am I getting the name right? But it basically would allow you to look at your e-commerce transactions and then find opportunities to save money. And Amazon was one of the big use cases for it because we could connect your Amazon account, it would look at your history, or you could connect your inbox, and it would look at all your receipts from Amazon, and it would find opportunities for you to save money.

Well, what happened as soon as they introduced that in a large scale at Capital One? Amazon basically took all the relevant information out of those emails. So now when you order something on Amazon, they’re like, thank you so much for your order. Here’s how much it costs with no details about what was in it.

No details. You have to click through. It’s crazy.

And then you go to their website. I was trying to do this to get reimbursed for something for an Amazon purchase. And it was insane.

You’re going in, you’re like, OK, I just ordered a bunch of stuff. And they’re like, well, which thing? Because they break all your orders up into weird chunks, so you can’t see how much stuff is. The level to which they go to obfuscate what you’re trying to do is crazy.

And obviously, I think Amazon is a really good example of, we know how valuable our data is. If we’re on one end of the spectrum of like, what do you mean we could use data? Amazon is on the other end of the spectrum going, over our dead bodies, will you get any access to our proprietary first party data? We will not allow that to happen. In fact, they built a massive advertising business.

It’s one of the biggest and most profitable parts of Amazon, specifically on top of their first party data. So they know how valuable it is. And they won’t give it away for free, even to customers.

And Jason, here’s the thing I’m really interested in, which is open banking applies to big tech companies, right? So from a 1033 perspective, if you offer a digital wallet, and it depends on how you define digital wallet, or you offer a credit card, you are subject to 1033. By the way, if you’re not a bank, but you make more than $10 billion a year in annual revenue, you must comply with the final rules six months after they are on the books. And so theoretically, what that means is once 1033 goes into effect, assuming it doesn’t change substantially, and it’s on the books, Amazon, Apple, Block, all of these non-bank companies that are over $10 billion in revenue, they theoretically only have six months before they have to start sharing at least some of their data associated with these wallets, or debit cards, or credit cards.

And while that’s not everything I would want from an Amazon, or an Apple, or whomever, it is a little bit more than we’ve ever been able to get. And I would not be shocked at all if those big tech companies fought absolutely tooth and nail to not be included and to drag out whatever requirements there are as long as they possibly can. Absolutely.

Because the amount of overspend, we know Federal Reserve Bank out of Atlanta had done a study of people spend more on credit than they do on debit, because from a psychological perspective, individual transactions hurt more than a single big payment. If Amazon allows you to see where you’re spending in an increment by increment basis, I think people would rein in their spending. Totally.

Totally. Well, that’s the point, right? It’s a third of your budget, but it’s just one big thing. And what Amazon wants you to think is like, well, the mortgage costs a lot, but it’s our house.

Amazon costs a lot, but it’s Amazon. It’s our groceries. It’s kids’ boots.

It’s, yeah. Actually, what it is, is it’s those things plus all of the other things that its algorithm serves up to you. And yeah, no, I think it would be really bad.

It’s kind of the same reason, I think, by the way, that buy now, pay later companies have not been wild about sharing their data, right? They’ve really dragged their feet on open banking. I actually don’t know the answer to this question as to whether buy now, pay later for the purposes of open banking is being considered a payment product or a lending product. I would think it’s probably for the purposes of 1033, a payment product.

So I’m guessing that buy now, pay later will end up needing to make their data available. But that’s another one where it’s like, oh, you know, I spend X amount on Karna every six weeks, you know, but it really is just like essentials. No, it’s not.

Because their whole business model is getting you to buy stuff that you don’t actually need. Yeah. Well, we’ve talked about this in the past.

One of the biggest problems with buy now, pay later is it makes it nearly impossible to aggregate amount, what it was spent on, and even due dates, right? It becomes an even slipperier, slippery slope than a credit card in that regard. At least with a credit card, you get a consolidated statement. Right.

Yeah, it takes your household cash flow and your understanding of that and basically hits it with a sledgehammer. So you have no idea what’s happening, when things are due, how much money you’re actually spending. Because it’s all just like in the moment.

So no, I think, and there are some companies working on this to sort of re-aggregate all of the disaggregated spending and cash flow into more useful insights. But it’s a tough problem, especially when these companies won’t share data. Well, we come full circle.

The idea first around, hey, PFM better spend our money, which brings us to the data and the access to it. And then actually, what is the ultimate goal? Are we really trying to improve financial lives? And who owns the data? It absolutely should be the customer and the consumer in a useful format. That’s ultimately what we’re all striving for.

No, I could not agree more. I mean, it’s all connected to one thing. And I think that the challenge is, OK, we’re going to take all of these things.

This has been fintech for the last, what, 12 years, 15 years. And we’re going to disaggregate it all. We’re going to unbundle it all.

We’re going to create tons more value for customers. But the tricky thing in financial services is creating value for customers isn’t always what you think it is, right? And it’s like physical health. It’s the same thing, right? Like the large sort of junk food manufacturers and gyms are both roughly in the same business, which is giving you physical pleasure.

The challenge is one of them is doing it in a way that takes shortcuts. And you can do it a little bit. But if you do it a lot, you’re going to be really unhealthy.

The other one is you have to take on a lot of pain. But at the end, you feel a lot better. They’re both roughly in the same business.

And I think financial services is similar. And so much of what we’ve done in fintech over the last 15 years has been better junk food. And we haven’t built a lot of better gyms yet.

And banks have not really built really good gyms either. But to me, as we talk about 1033 and PFM and weaving all these things back together, it’s about building better gyms. And the thing that’s nice, going to your point earlier, is unlike physical health, you actually can push buttons to get some shortcuts to better financial outcomes and financial services.

And so there is automation you can use. You can have apps that save money on your behalf without you having to do everything. It’s not quite as strenuous as building great physical health, but it’s just as imperative.

Well, and we can’t mandate people go to the gym. But we also shouldn’t make it that thing that is being sold as healthy, that salad actually has over 1,200 calories, and make it obfuscated into the path to financial health. But that brings us, I think, to close here, where it’s been a spicy one.

Really appreciate it, Alex. No, my pleasure. Love bringing the spice, and can’t wait to do it next time.

I think next time we talk, we’ll probably manifest 1,000 more headlines in fintech. So looking forward to it. Love it.

Become a disruptor in the emerging fintech space through NYU Stern’s Master of Science in Fintech program. This is a one-year part-time program divided into one online and six on-site modules that take place in New York and in rotating global locations. The MSFT program is designed for experienced working professionals who want to strengthen their fintech skills or transition to fintech leadership positions.

The final application deadline for Stern’s Master of Science in Fintech program, class of 2025, beginning May 2024, is March the 1st. GMAT and GRE scores are generally not required. To learn more about the program, submit your resume for a candidacy review at stern.nyu.edu slash msft-breakingbanks.

Welcome to the show now, Kevin Hart, founder and CEO of Greencheck Verified. Pleasure. Thank you.

You’re an interesting business. Tell us what Greencheck Verified does. The core premise of Greencheck is how do you enable financial institutions, be it a banker, credit union, state, chartered, federal, doesn’t matter, doesn’t matter what core system they have, what regulatory agency they’re under, how do you enable them to serve the cannabis industry that are in their community or in their field of membership or even on a national level? And that is at its sum and substance is what we do.

It’s much more complex than that because of all the rules and regulations that we have to account for. But at its core premise, that’s been our intent and focus from the beginning and we’ve been quite successful to date so far. Cannabis has been an industry that has received a lot of interest from banks in the past several years, yet also one full of trepidation.

And as I’m sure you’re going to talk about, it’s also been full of misconceptions. Well, there have been a lot of challenges. And one of the things that we’ve learned is education is key.

What exactly is the cannabis industry? What is the difference between cannabis, hemp, CBD, marijuana? What are the licensing requirements? What are the state guidelines that say these businesses are legal to be operating in the state because these are all state-specific programs? It is federally illegal to sell marijuana, but it’s not federally illegal to service them from a banking or financial services perspective. But knowing those words and hearing that, that doesn’t bring solace and comfort to a chief risk officer or chief compliance officer or the board of directors to say, hey, wait a minute, it’s federally illegal, but we can handle these accounts. Oh, here’s a loophole we can drive a truck right through.

Yeah, well, you know, and so we never tried to drive the truck through, but we did try to, you know, push our way through. But, you know, when you put it that way, it’s interesting, you know, in the early days when we would first talk about this, we called it the Heisman. You know, we would go into a financial institution and say, hey, we’d like to talk to you about cannabis.

Bap, stop, there comes the, stop right there. We never even got to banking. And so we learned that you really had to spend a lot of time educating them how to do it, but not just educating the banks, the regulators, the agencies that oversee them, etc.

So we spend a lot of time on that education front. And over time, we won more clients over, more businesses over, more dollars through the system. The word got out.

It got out to the regulatory agencies as well. They’ll never endorse Greencheck, but they’ll say, hey, if you’re looking at this, here’s a company you might want to consider because we’ve actually done training for a lot of those agencies on best practices. And so it’s continued to progress in a steady way.

The waterfall moment has not begun yet. Everybody’s still waiting for SAFE or SAFER Banking Act because they think that’s going to be a silver bullet. Well, we can get into that one too.

It’s not, but more and more are coming off the sideline, especially because you look at the cannabis industry and the scale of which it’s growing and the dollars associated with it. Financial institutions are looking for deposit dollars. This industry is right outside your door with millions of dollars looking for a home.

And don’t worry about getting Nana to up her CD for $50,000 when there’s a business literally across the sidewalk that does a million dollars a week in sales. So what are some of those best practices you talked about that maybe aren’t exactly top of mind for the average banker? I think, you know, one of the big challenges, aside from that emotional reputational risk, they really want to understand from a policies and procedures perspective, how do we actually serve this industry? How do we know not only who a compliant business is, but more importantly, what is a compliant dollar? And it really has to be at that single dollar level, especially when you look at the different rule sets that are applied to cannabis businesses. The rules and regulations of a retail operator are different than a cultivator or a grower or an extractor.

And so you can’t expect a bank, whether it’s their compliance team or otherwise, to understand all the rules and regulations. And so, you know, automating that is key. But then the other piece that they really have to look at is, how does it fit into their overall risk assessment? Because they might have some other risk businesses that are part of their current portfolio.

And how does this fit in? And then how does it tie into their concentration ratio and their liquidity strategy? And so because the industry grows so much and compound annual growth rate at 30%, you open a business, you take a couple accounts, and before you know it, when that increases 30 plus percent year over year, and you add more accounts, all of a sudden that becomes unwieldy. So don’t look at cannabis as a project. You really have to look at it as a line of business and develop that entire program that covers, from a comprehensive perspective, everything that you need to do to manage a high-risk business within your portfolio of products and services and in the bank in totality.

How much of that is on the upfront, like KYC and AML, and how much is ongoing at the account or transactional level? So the initial part, obviously, is the starting point. Account identification, account enablement, and account onboarding. And you can’t solely rely on the states too, because for them to say, hey, this is a compliant cannabis business, because they may say, you only have to disclose beneficial ownership of 10%.

We have a lot of FIs that say, no, we wanna know 5%, because they have to worry about OFAC and PEP, et cetera. And so when you start looking at all those parameters, just because the state said you’re compliant doesn’t mean you’re gonna fit into my bank profile, and they will not take that on. So account opening is the first step.

But as you just pointed out, then it gets into the transaction monitoring, that dollar, day in and day out. Where does all that money come from? Did it come from the legal sale of product? How do you know that if I say I sold $100,000 out of my dispensary this week, but I only bought $1,000 worth of product from manufacturers and suppliers, the markup’s not that big in this industry. So I’m selling my buddy’s weed that came through the back door and its money’s going out the front door.

That’s illegal. But a bank won’t be able to know that. So it’s that triangulation of the sale, the inventory, the financial activity, but then that also can’t be just at the transaction monitoring.

It’s gotta be at the account monitoring level and then the portfolio management, again, from that line of business. And so all of that has to sit inside of one program. All of that has to sit inside of one easily accessible platform because you have so many different people within the financial institution that have to oversee it.

Risk, compliance, legal, business development. They’re out there trying to sell more business and you’re going slow down, slow down. So integrated visibility data is the key to all of this.

Does this require the seller or dispensary to cooperate with you to opt in or do you handle it as more of an arm’s length monitoring? No, it’s a direct connection on behalf of the FIs. So the FIs require that if we’re gonna open that account for you, use this platform. And so this is where all the beneficial ownership and your license and your insurance information, your lease information, prior tax return, all of that is all integrated on the platform and available.

But then the ability to take the sales data and the transaction data to run through the verification because the rules and regulations change all the time and they continually change. That’s where, through an API key, we’re a data company, a technology company first, through the API that the financial institution sends to the cannabis business. They click the link, we get the API key and then we ingest that information.

And that’s what makes banking so much easier and also drives the cost down dramatically for the CRB. One, easy for them to operate. Every day, this just happens automatically.

At the end of every day, they see what their sales were. They see what was compliant from the sales. They can identify problem areas, problem products, problem employees.

But then they know where their money is and they rely on visibility of their cash flow. They look at green check more than they look at the bank because you still have the whole cash in transit model to deal with. And just because the deposit was affected doesn’t mean the funds are available.

And so there’s that aspect of it. So the CRBs, you don’t onboard them directly. You do it through the FIs? We onboard them directly onto GreenCheck, the platform.

So there’s 8,000 plus unique cannabis businesses on the platform. Is that only once a bank is ready to deal with them? That’s the way we started, okay? But so we’ve evolved. Now we’re front-loading it through GreenCheck Connect which is our marketplace to the cannabis industry.

So cannabis industry has always struggled with different access to financial services, banking being the baseline. That’s table stakes today. But they’re really looking for access to capital.

How do I find a payroll provider that’s serving? How do I find a payroll provider that’s integrated to my bank so I don’t have to have another banking relationship? And so we created GreenCheck Connect, which is, it is the only, and I hate when people say that from a marketing perspective, but somebody out there proved me wrong. It’s the only integrated marketplace for the cannabis industry where they can look at curated and vetted providers of financial and business services that are connected to the banking network to enable this movement of funds and visibility and transaction capability. And again, for the cannabis businesses, they don’t have to enter this information over and over and over.

It’s there, it’s resident, it’s enabled. So you’re really all in on this vertical? Oh yeah. The entire company is built around this.

So when we first started looking at this back in late 2015, 2016, it was only legal in 13 states and it was a $3 billion industry. And the barn doors have been open. You could see what trajectory was it gonna hit.

Is it gonna hit all 50 states? No, there’s still dry counties in areas for alcohol. So you know cannabis isn’t gonna get there. But how the industry was believed, how it was going to grow.

And so now you’re in 38 states, we’re in Guam and Saipan, we’re in U.S. territories, we’re looking at other locations. And there are 40,000 plus cannabis businesses and there’s $100 billion of commerce being conducted through that. So you talk about community banks, access to deposit dollars, this becomes a very, very compelling market for them.

What about the cash handling needs, the CRBs? That’s another challenge. It’s a crazy challenge. So again, we’re a data company.

So we look at this. On average, when we look at the month of September and that $900 million that went to the platform, 76% of that was cash. Now, what we also know is 85% of that, 76% of the $900 million never actually hit a bank bridge directly.

It went through our armored car series, cash and transit, and it went to different county rooms for that accountability. But again, if you’re a multi-unit operator in the cannabis space, you have multiple stores or you’re a multi-state operator, you have multiple brands and multiple businesses all over the place, you can’t keep track of where your money is, okay? You’re like, I gotta look here, I gotta look here, I gotta look there. And is that a part of your platform? That’s all part of the platform.

And so, and one of the things that we did from the very early on is we don’t charge the cannabis businesses to be on the platform. It’s free for them to be on. They have to pay to bank, but even that has gone down to zero fees in a lot of instances because the financial institutions are more interested in the deposit dollars than the fee revenue.

What are the other challenges beyond the obvious ones? Well, the rules and regulations constantly change, okay? And so, at a state level, you have this, the industry started with medical only and it’s graduated into adult use. They don’t like it when you call it recreational, but adult use. But now you have mixed licenses too.

And so, I can walk into a dispensary and am I a medical or an adult purchaser? In a lot of states, you can’t buy, they’re not allowed to sell medical grade product to an adult consumer, but mistakes happen. And so, as you look at the potency and the efficacy and the modality of how the product can be delivered, certain products can only be sold to certain people, others can’t, and so there’s that challenge. And is that a part of your platform too? Yes, yeah.

We take every single transaction and we call it, we break it down to the atomic level. We know who bought it, what they bought, how they paid for it, what the concentration ratio was so you prevent looping, etc. Because that’s, again, part of the challenge for the bank.

You can’t, I can’t come to you all the time, wink, wink, you’re my buddy and just keep walking in and out the door and just keep buying my maximum daily quantity, but buy it 12 times. Now I’ve exceeded everybody’s maximum quantity and that’s different rule set. Those transactions will get flagged and that money will not be allowed to be deposited.

And that affects the operating compliance score of that cannabis business as well because again, the FIs, they want to deal with compliant businesses. And the vast majority of people in this industry run very effective compliant businesses. They put their heart and soul into getting that license.

They spent a lot of money to get that license. They don’t want to lose that license. But that doesn’t mean the people that they hired or the people that are shopping there have that same passion for that license.

Things will happen. Sometimes intentional, sometimes not. But somebody has to look for that.

There are a lot of moving parts. It’s a gigantic data puzzle. It’s just this endless stream of data.

What’s your interaction been like with the various regulators? Exceptional. Again, you’re not going to see a memo coming out of Washington or any of the agencies that said, we recommend that you ban cannabis and you go to green check verified. We came close to that with the NCUA.

And Rodney Hood was very public in his endorsement of us from, you know, this is a company that’s doing it right. If you’re interested, do your homework, but you could look at them. And we’ve done a lot of training for the alphabet soup of agencies as to here are the best practices for banking the cannabis industry.

We do every month, we do a cannabis banking bootcamp. The hows and whys of cannabis banking that’s evolved dramatically. But since we started that probably three, three plus years ago, we’ve had over 10,000 people attend those classes, which is a lot.

A thousand different named financial institutions. And today we have 152 that are active. So you see that gap, right? People are curious and they’re hovering around, but you know, who’s going to put the toe in the water? Who’s going to say, yeah, we want to, we want to serve this industry.

Right. The cannabis curious. Yeah, that’s exactly.

Yep. The canno curious. How did you get involved in this business? So I’ve been involved in enterprise software for 40 years.

I started out as an assembler programmer in the late seventies. So, you know, I’m dating myself for everybody that’s, this is obviously not TV. So now, you know how old I am.

But I’ve always worked for enterprise software companies. And I evolved, I evolved probably in the mid to late eighties from being, having my fingers on the keyboard for technology. I became much more fascinated with what technology could do versus how it did it.

So I’m still technically dangerous. I can tell when the engineering team says, we can’t do that. That’s the, oh no, you can.

You’re just being lazy. Let’s talk about that. But I was approached to build a point of sale for the cannabis industry.

And so I was flying around the country, large cannabis operators, specifically Harborside out in Oakland. They’re the OG of the cannabis industry. And they were already on their third point of sale.

So I’m like, ooh, opportunity. If you build a better one, that’ll be good. But it was also pretty evident to me at that point in time, that’s a race to the bottom at the price points of what they were talking about.

And I heard about the banking problem and that became much more fascinating. Again, I’m a data nerd. I see data and I can see the connectivity.

And so it was like, okay, you have these two independent and highly, highly regulated industries that wanna work together, but they’re never gonna figure out how. It was never an aptitude problem. It was the rule sets and the regulations and the evolution of those, which are gonna constantly change and will keep changing with interstate and international commerce coming into play.

How do you solve that problem? So how do you collect that data? How do you analyze it? But then how do you enable it for all the constituencies that wanna be involved with it? And so that’s been the core of what we’ve built. It’s a data problem and it’s also an ecosystem problem because there really wasn’t one. And there still isn’t, candidly, despite what we’ve done.

What do you think has to happen to be able to say, now there is an ecosystem? I think more financial institutions openly serving the cannabis industry. With every new entry into this space and with every new set of cannabis businesses that have more normalized financial relationships and business services relationships, you’ll see more people willing to do that. And the interesting thing between SAFE and the SAFER Banking Act, same thing with that extra letter, the R, SAFE is an op.

We’ll back up a second and talk about those. So SAFE Banking Act was the first set. There has been a lot of different sets and it went through the House of Representatives seven or eight times.

So it was approved. Never made it into the Senate. Never voted on.

And what it basically said is, you will be able to serve the cannabis industry without fear of federal prosecution. But there wasn’t a period at the end of that sentence. It’s this big black bold comma that said, provided you’re following all the rules and regulations at a state and federal level, which may or may not exist, which didn’t exist and still don’t, right? They’re not codified anywhere, okay? But so, you know, people are like, oh, when they say it’s okay, then we’re gonna jump in.

Well, we’re jumping into what? And so we created the framework of how you can do it today. And we’ve proven that it can be done through all the regulatory agencies. SAFER is interesting in that instead of an opt-in, it’s an opt-out.

And it added payments and debit cards, and it added tribal coverage, et cetera, into it. So it’s much more comprehensive. SAFER is what SAFE should have been.

And so the fact that it got out of the Senate and the Senate Banking Committee is two big thumbs up. But with everything else that’s going on, let alone the dysfunctionality in the House, no political party intended, you know, we can’t do anything. And the bigger global problems that we’re wrestling with, it’s not gonna happen in 2023.

And I don’t think it happens before 2024 elections. It’s just too much of a hot button and not enough of an importance issue for it. You know, it’s $100 billion industry, but it’s not that big.

And then even once that does make it through and something happens, you’re gonna see the same thing you saw in every state that went from adult to mixed use, okay? There is going to be attacks associated with it. Everything in Congress, whether it’s descheduling or SAFER Banking Act, has an excise tax. And so now you’re gonna have a federal excise tax, a state excise tax, a state sales tax.

You’ll see an effective tax rate of 30% on a product. Now, if you’re looking to buy a bag of weed for the weekend and you could spend $100, you know, from where you used to always get it or $130 in a nice Planet 13 style dispensary, what are you gonna do? It’s a commodity purchase. People are gonna price shop this, et cetera.

So, and we’ve seen this happen time and time again in, you know, across every one of these states has gone through this. So it still is this massive, complex data puzzle, but they’re going to be compliant businesses and people wanna buy tested, curated product. Where do you think this industry ends up say 10 years from now? Well, I think the most fascinating thing to me when I look ahead is it still won’t be in all 50 states.

I think you’re gonna see a lot more in terms of how the product is packaged and sold. Big Pharma is gonna get involved. They’re on the sideline.

The cannabis industry lobbies hard to do certain things. There are other people lobbying against that. And those other people, they have a lot more money and they have a lot more sway, okay? So when you look at how that happens, and then I think you’re also going to see a lot of the bigger players, much to the chagrin of everybody in the cannabis space.

I understand why this bothers them so, but you know, here’s an interesting data point and I’ll come back to this. An average grocery store, pick your brand, pick your location nationwide has anywhere between 15 and 50,000 SKUs in it. You walk in the door and you go buy 15 to 50,000 product in a gigantic grocery store, okay? We all walk through them all the time.

We know what’s there. My wife always says, just shop the outer aisles. Don’t go in the middle.

That’s where the bad stuff is. I should list some more. To date, so far this year with the transactions that we’ve processed, we’ve seen 2.9 million unique SKUs.

Now what’s the average footprint of a retail cannabis outlet? 4,000, 5,000 square feet. You can’t put 2.9 million products in there, but that’s what we’re seeing, that variability. So rationalization of the product, rationalization of the modality, you’re gonna see bigger people getting involved.

And then you’re also gonna start running into how this gets distributed. So, you know, when you look at like schedule three where rescheduling, I hope nobody thinks that CVS, Walmart, Target, Amazon aren’t standing there on the sidelines going, ooh, now how do we get in? Okay. Because back to how’s this scheduled? How’s it packaged? How’s it delivered? Home delivery, interstate international commerce, it’s just gonna open the floodgates.

There is probably some analog to how the vitamin and supplement business is different from regulated pharmaceuticals. Right. You know what? I never thought about that.

That’s kind of cool. I wanna go back and look at that because on average, 10% of the US population, total gross population, 10% regularly uses cannabis on a monthly basis. I don’t think 10% of the population regularly uses vitamin supplements.

I wonder what that looks like. That’d be interesting. Data point.

Thank you. I’ll follow up with you. I’ll let you know what I discover.

Because again, that data nerd part of me just kicked in hard. Yeah. Next time on Breaking Banks.

Yep. Okay. I’ll send you the email.

All right. Thank you. Thanks for being here.

Kevin Hart from Greencheck Verified. That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks. This episode was produced by our US-based production team, including producer Elizabeth Severance, audio engineer Kevin Hirsham, with social media support from Carlo Navarro and Sylvie Johnson.

If you liked this episode, don’t forget to tweet it out or post it on your favorite social media, or leave us a five-star review on iTunes, Google Podcasts, Facebook, or wherever it is that you listen to our show. Those actions help other people find our podcast. And in return, that helps us build an audience that can be supported by sponsorship so we can continue to provide you with our award-winning content every week.

Thanks again for joining us. We’ll see you on Breaking Banks next week.