While historically viewed as “strange bedfellows,” more financial institutions are offering services to cannabis businesses across the country. Though their worlds may seemingly look quite different, both are highly regulated, cash-intensive industries that can solve challenges for each other.
From the cannabis operator perspective, the benefits of a strong banking partner are straightforward. This relationship offers a safe place to store the intake from cash-heavy sales, a way to make tax and other payments electronically and the ability to facilitate direct deposits for employees. Additionally, other opportunities for banks include loan opportunities and additional benefits such as partnerships with human resources/payroll, payments and insurance are becoming more common.
The benefits for financial institutions, however, are ever-evolving. Up until this year, banks primarily looked at cannabis customers as a service relationship. “I’ll take care of your business needs, and you’ll pay me service fees for doing that.” But what we at Green Check have seen over the past several months is that these relationships are starting to look far more traditional. That means financial institutions that are willing to bank, and truly work with, the cannabis businesses in their market will encounter a far bigger opportunity.
Let’s start with low cost deposits. The federal funds rate is up. Many financial institutions are staving off the certificate of deposit pricing wars by paying higher annual percentage yields (APYs), and the overall cost of funds is inching up daily. The standard play here is often to seek out commercial customers. When we look at cannabis deposits in that light, the cost of funds is most often less than 1%. That could certainly help in those asset-liability committee meetings.
Next we have fee revenue. We’ve all had that conversation around the boardroom table about replacing overdraft fee income with other options to keep noninterest income from plummeting. Opening up the traditional suite of commercial services to the cannabis industry gives a financial institution a fresh new market segment to approach, along with the additional business service fees from those new opportunities.
And what about lending? An increasing amount of our financial institution clients have begun lending to the cannabis industry. It’s often one of the first questions that cannabis operators ask when seeking out a new banking relationship, making it quickly a table stakes option. One way for banks to step lightly into lending is to begin with the smaller lending opportunities such as unsecured line of credit facilities, or even equipment financing: loans that are less than $1 million, with less complex collateralization. Other financial institutions that aren’t able to take on the larger real estate loans and build-out financing can be a participant with a lead bank who has more experience in this area.
Far from strange bedfellows, these two industries can work together synergistically. In this current high rate environment, they need each other now more than ever. However, it’s essential that any bank wanting to offer services to this complex, rapidly expanding industry seeks proper guidance. Seeking experienced help from a reliable cannabis banking firm should be your bank’s first step in reaping the benefits of working with legal cannabis.