Curious About Cannabis

As the smoke clears around banking the marijuana industry, more banks are exploring its potential to drive deposits and revenue, according to Bank Director’s 2023 Risk Survey.

While few banks actively count marijuana businesses as customers, 43% of the bank executives and board members responding to Bank Director’s survey in January indicated their bank had discussed working with those businesses. That interest represents an uptick compared to the survey in 2021, when 34% said their bank’s leadership had discussed potential opportunities or risks.

Though it is still illegal on a federal level, marijuana has been legalized for recreational and medical use in 22 states and Washington, D.C. and approved for medical use only in 16 states, according to an analysis by CNN. In Bank Director’s survey, 36% said their bank was headquartered in a state where marijuana was fully legal; another 35% said marijuana was approved for medicinal use only.

Expanding legalization plays a hand in banks’ growing interest in providing financial services to this industry, as does its growth outlook. The cannabis data firm BDSA projects legal cannabis sales in the U.S. to grow at a compound annual growth rate of roughly 11%, increasing from $26.2 billion in 2022 to $44.6 billion in 2027.

“You look at a typical community bank board, and you have lots of entrepreneurs and real estate developers,” says Tony Repanich, CEO of Shield Compliance, a compliance platform focused on helping financial institutions bank cannabis. “They are seeing what’s going on in the industry, and they’re asking management, ‘Should we be considering this?’”

As the cannabis industry matures and regulatory expectations become more clear, best practices have evolved around working with those and other high-risk businesses. Banks will need to invest more in staffing, expertise and technology, and enhance existing policies and procedures, says Joseph Silvia, an attorney at Dickinson Wright.

“A lot of the risk that banks are looking at is much less about cannabis and more about the fundamental compliance, BSA [Bank Secrecy Act] or risk management components,” Silvia says. “It’s less that cannabis is high risk and more that we need to have these systems, reporting, compliance staff expertise, and so forth. It doesn’t really matter whether it’s cannabis or money services businesses, money transmitters or virtual currency.”

In 2014, the Financial Crimes Enforcement Network (FinCEN) issued guidance intended to clarify customer due diligence and reporting requirements for banks interested in serving marijuana-related businesses. But as more financial institutions have begun banking cannabis businesses and successfully passing regulatory examination cycles, that’s provided an added level of assurance that bankers who are meeting all of their reporting requirements are not going to get dinged simply for banking a high-risk business, says Paul Dunford, cofounder and vice president of knowledge at Green Check Verified, a technology provider focused on the cannabis sector.

“In the world that we live in, cannabis banking is based on precedent,” Dunford says. “Every year you see more and more financial institutions willing to express an interest because it’s been happening for a while. We hear stories about people banking cannabis, and people are not getting their charters revoked. The horror stories are not coming true.”

Broadly speaking, banks serving the cannabis industry tend to stick to offering deposit products to those customers. Far fewer have gotten comfortable actually lending to cannabis businesses, in large part because the industry lacks accepted underwriting standards and banks cannot collateralize a controlled substance, Dunford says. But those banks that do lend to cannabis businesses can usually command higher interest rates on the loans.

“We see good fee income associated with these accounts,” Repanich says, noting that mortgage income has declined as interest rates have increased, and non-sufficient funds and overdraft fees are under pressure by regulators like the Consumer Financial Protection Bureau. “Some of our banks are providing loan facilities to the industry, and they’re usually getting a better than average yield.”

Directors and executives contemplating whether cannabis might complement their bank’s business model should weigh the risks and benefits, and clearly define the geographic area they’re willing to serve, Silvia says. They should also consider exactly what services their bank will and will not provide; some banks are not comfortable offering wire services, for example. It’s also important to get buy-in from the compliance staff who would be handling the day-to-day operations associated with those accounts.

“It’s very difficult to dip your toe in one of these higher risk areas,” says Silvia. “You either jump in head first, or you stay out because the cost of putting together the risk management is not insubstantial.”