'Our Banking Partners Disapprove of What You're Doing'

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Cody Wilson is probably not a name that banks like to see on an application.

Famous — or, more accurately, infamous — as the inventor of the world's first 3D-printed handgun, Wilson is an avowed crypto-anarchist who has committed himself to pushing the First and Second Amendments to extremes.

His company, Defense Distributed, began as a nonprofit supposedly conducting firearms research. It dropped this fig leaf after making millions of dollars selling a product it calls the Ghost Gunner, a $1,500 computerized milling machine designed to turn partially finished AR-15 lower receivers into finished parts. (While the sale of finished lower receivers is regulated, it is generally legal in the United States to buy one that is 80% finished and complete the job yourself. After that, it is fairly easy to acquire the other parts necessary to make a working, and unregistered, rifle.)

Wilson's reputation has complicated his relationships with banks and payments companies, to say the least. In a recent conversation with American Banker he described, in unusual detail for such situations, his struggles to open and keep the accounts necessary to run a business.

While an edge case, his story provides a fascinating window onto the dynamics of de-risking. Financial institutions around the world, under pressure from policymakers to detect and choke off illicit activity, are cutting ties with legitimate businesses and pulling out of whole markets where they feel unsure of their ability to present an effective bulwark against financial crime.

The trend, though arising from a rational response on the part of banks to the rising cost of regulatory compliance — to say nothing of the massive penalties they now face for violations — threatens to reverse decades of progress in financial inclusion. American businesses that seem to skirt the border of acceptability, meanwhile, such as those in the marijuana industry, or Wilson's, can find themselves without a banking partner.

Far from trying to clean up his image, however, Wilson, who dropped out of the University of Texas School of Law to run Defense Distributed full time, is planning a new venture: a crowdfunding site for guns. It has been ready to go for six months, he said, but he needs to get more merchant processors on board before he can launch. That has proven difficult.

"It wouldn't be successful without me," he said, "but at the same time, because I'm me, I can't get it done."

Wilson has been called an "American insurrectionist" — though the design for his Liberator pistol has been exhibited at the Museum of Modern Art and was added to the permanent collection of the Victoria and Albert Museum in London as an example of cutting-edge technology that crosses over into being art. While running his company, he is fighting a costly legal battle with the State Department over his posting of the Liberator blueprints, which were downloaded more than 100,000 before the feds ordered him to take them down. They remain available on file-sharing sites.

What follows is the transcript of our conversation, which has been edited for length, content and clarity.

When did Defense Distributed first start having trouble with banks, and what happened exactly?

My very first run-in with a bank was [JPMorgan] Chase in [July] of 2013, right after the Liberator was released. I got a letter in the mail saying, "We're going to have to shut down your account," and not really giving any explanation. I was bringing in significant money at the time. When I rattled their cage, they said, "We did a review, and we feel that your business is risky. We don't quite understand it. It's internet-based, and we don't like it."

They saw the money coming in from the internet and they thought it could be connected to gambling. They wanted me to sign an affidavit or something. The letter said that I had 30 days to move all my money because my account was being closed. So I was just offended, and I moved out all my money from the Liberator days. This could have been maybe $10,000 or $20,000. At the time, we were making maybe $20,000 a month, and I think that's what got them nervous. In the first few months of 2013, I was making noticeably more money than I had been before.

So I left. I was done. I posted about this on my blog, and a friend of mine who was also a friend of the Liberator project personally sent a letter to Chase saying, "What you're doing offends me as a gun owner," and so on. Apparently that worked, because I got a letter [from Chase] saying, "Upon review, we have decided to keep your account open." So I kept going with it.

[JPMorgan Chase did not respond to a request for comment.]

Does Defense Distributed have a good banking relationship today?

It's never been great with Chase for me, but at the same time I feel like I can't bitch too much about them. I've never been approved for any kind of credit line with them at all. I ask about twice a year. When I started Ghost Gunner, I asked for a $15,000 business line. "No." Even though I have great credit, and Ghost Gunner at the time had already brought in $700,000 or $800,000. I was declined again for credit a couple of months ago. I was simultaneously declined for merchant services with Chase. I've been declined for merchant services three or four times now. It would be easier for me to use Chase to bring the money in from customers; then I could have single-day deposit times, rather than going through an intermediary bank. But Chase won't do it. They consider Ghost Gunner too risky.

But I've brought in millions to that bank. I did $1.4 million in revenue in 2014, Ghost Gunner's first year, then I did $2.5 million the next year, and I'm on pace to do close to $3 million in 2016 if the year finishes strong. I bring them hundreds of thousands of dollars a month, and they don't perform any extra services for me. And I know how big a deal I am, because sometimes I visit a branch that I don't normally go to, like in New York, and the teller, when she brings up my account, will send me upstairs or whatever and they will try to sell me Chase private client services. The people who don't know will try to sell me [stuff]. But back in Austin, my business banker and the lady in charge of credit card processing, they're miserable. I don't get anything. And it's not like I just accept no when I get a no. I appealed the most recent rejection all the way up to the VP of merchant services, and I was told, "You're not profitable enough." And I'm like, "Well goddamn, how profitable do I have to be?" They said, "You're too risky."

And that's their choice to make. Look, it sounds like I'm talking [trash]. But I have much bigger problems with everybody else. At least Chase still gives me banking.

Initially you tried to raise $20,000 on the crowdfunding site Indiegogo. But the site took down your campaign before it had raised more than a couple thousand dollars, so you started accepting bitcoin donations as an alternative way to get funds, right? What was that experience like? How much did you raise?

I ended up getting 40 or 50 bitcoins pretty quick, but they were only worth $9 to $12 in those days, so it wasn't a ton of money. The bitcoin was always coming in, but most of the real money that came in, came in through PayPal for the first two years. PayPal partnered with me while I was still in law school. I took donations through PayPal for years and had a business account. I had a good relationship with them.

The Indiegogo thing is basically how everything happens to me. When I started Ghost Gunner, it was on Kickstarter, and Kickstarter canceled the project before we went live. So I had to do a self-funded thing. I started with Stripe, because I'd had an account there for years, and I'd had a good relationship. But after the first two weeks of Ghost Gunner, Stripe froze my account and conducted a review. And they said, "Our banking partners disapprove of what you're doing." Thankfully, Stripe did not reverse more than a little bit of the payments that came through. So I went ahead and processed a little over $700,000 and Stripe froze the rest of it. They froze about $50,000 for months. This was November 2014. It wasn't until February 2015 that they finally released it to me. By that point, I'd had other ways of bringing money in for months. You can't count on 50 grand several months from now. Forget about it.

[Stripe did not respond to a request for comment by deadline.]

How about PayPal? What is your relationship like now?

Once I began losing processors for Ghost Gunner, PayPal was my fallback. For almost a year, it was literally the only way money was coming in online. We had a ton of trouble. We had supplier problems, we had to re-prototype a couple of things, we had design problems. I was going through money doing hardware prototyping, and I had to start fulfilling orders in January 2015. So I had to come up with a payments solution, even though I had no credit card processing, for a product that didn't quite exist yet. For many months, all I had was PayPal.

I was doing a pre-sale: I would take $250 deposits on Ghost Gunners as a way that people could commit to buying one. That's how I would provisionally set up a list of people who had skin in the game. I wouldn't have to worry about advertising; I would sell to an in-house list. That has worked really well for us. The business still runs that way. But eventually PayPal figured out what I was doing. When I finally started taking balances in early 2015, everything looked fine and I was like, "OK, we're going to make it," and then on Monday I got the call that they were conducting a review of my account for violating company policies. The worst thing is, PayPal decided not to refund the money, or give me terms by which to get the money; they just decided to freeze all the money that I'd processed and keep it for themselves. We're talking $200,000.

So I'm like, "Look. I've got to bring this money in so I can make these machines and get them to these people." This was one of the most stressful moments I've ever had in my life. I'd never lost that much money in one moment before. I was like, "Oh my God, they've ruined me. I've lost so much … money. I'm such a fool." So they said, "OK, we'll unfreeze it, but you need a reserve with us." And I was like, "Well how much is a reserve?" Their capital-reserve requirement was $10 million for them to continue to do processing for me. And I was like, "OK, uh, no. We're done, then. Reverse all the money." They agreed. But they didn't reverse all of it. They reversed most of it, but to this day my Defense Distributed PayPal account is still frozen; they've still got [more than $6,000] of my money there. And they won't unfreeze it unless I submit all these documents, do a reserve with them. I'm not going to. That's my relationship with PayPal right now: a big, hearty "[Screw] you, guys." I haven't been able to use PayPal for deposits or Ghost Gunner or donations ever since.

[PayPal would not discuss its relationship with Wilson, but a company representative said that since 2003 PayPal has made a conscious effort not to support the online sale of firearms, ammunition and certain firearm parts and accessories. The day after American Banker reached out to the company, however, Wilson said he received notice that his previously withheld balance of $6,365.28 was available for withdrawal.]

So what did you do for payments?

Three times with Ghost Gunner so far we've had to ask people on our list to literally just mail us checks, because I had no way of bringing payments in online. Over and over I found merchant processing through brokers, or unusual relationships, had those relationships for a month or two, and then lost those relationships. Ghost Gunner continues, and I get to do it, but on the payments side, the banking side, it is a huge mess.

Have you developed any strategies for overcoming these obstacles?

Half the [supplies] I buy, or try to buy, I have to use surrogates to get it done. For another company I'm trying to start, called Gunspring [a crowdfunding site for guns], I've really exhausted merchant processing partners. Pretty much every underwriting bank knows about this business that I haven't even launched yet. We canvassed the whole country, and I found out along the way through brokers and stuff that my name gets flagged in their little dashboards. I'm considered a person of interest in the payments community. I had to find this out the hard way after striking out for years. So I don't put my name on applications. I let other companies and the people who direct those companies sign as the principals, and we let their credit, and their names, get connected to it. And that's just merchant processing.

Has your bank ever tried to cut ties with you, personally, as a result of your activities?

No, my personal bank has always been Regions Bank. Regions has seen some of the money that I bring through, and they've tried to sell me on business accounts and other things. I have twice tried to take my business from Chase to other banks — one was Frost Bank in Austin, and the other was Regions. But I would always condition bringing all that business to them on their giving me something, like guaranteed merchant processing. Because I don't really have backup merchant processors. I can't tell you who my current processor is, because I'll lose them. They're all I've got, and once I lose them, it's back to the bricks again. I don't know that I'm going to get one again. I got lucky.

When I tried to move from Chase to the other banks, I would have sit-down meetings and lunches with these people. We're talking about bringing a few million to them a year, so they treated me like someone special at first. But a lot of these local banks, even Texas-chartered banks, they do their merchant processing with a national processor. So they don't really have local control over what they do. It ends up being the Elavons and First Datas of the world that control every little bank. So, Frost Bank goes, "OK, great, we've got a deal." They go to First Data and the First Data rep goes, "It's never going to happen." And then Frost Bank doesn't know what to do. And then I get all uppity. I go, "I think the public would be interested in knowing that a Texas bank with a Texas charter won't let a Texas corporation sell to Texans something that is their God-given right." So then the bank freaks out, and they want to try to mollify the situation. It's very ugly. And then they won't call you back. So it's bad. It's too much money for anybody, No. 1. They see a ton of chargeback risk. And two, because of who I am and because of what the business is. They see guns, they see who I am, and they go, "No, there's no way."

[When reached for comment, a Frost Bank representative said the bank does not publicly discuss customer information. A First Data representative said the same.]

How close are you to launching Gunspring?

I have two merchant processing relationships right now for Gunspring, but they're not enough. They're very meager. One is only giving me like $10,000 a month with a $40,000 reserve, and they're taking 10%, which is the whole margin and then some. That's not even a deal. That's like me paying them to run my business. And the other one I've got is weak; it's not even worth mentioning. So I'm trying to get a third one just so I can have, on day one, let's say $30,000 worth of processing a month — which won't even help me, because if we have our first home-run project, it's going to raise $500,000 and I won't be able to process it.

We finally found a broker for our third processor, and it looked like a good deal: It was going to be like $90,000 in processing. And the guy was real confident that he could get it done. And he did; he got the deal. We were actually approved for a full 24 hours. But then a story about me came out in Bloomberg, and the processor rescinded its approval. I now have to look at international processors. I'm trying to launch this business at some point. I don't know how I'm going to get it done. But I'm trying. I would not be surprised if one day I have to start my own bank and do all my own merchant processing.

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