Curious About Cannabis

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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.”  

The Cannabis Banking Outlook for 2023

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The U.S. cannabis market is expected to continue its growth in 2023, with projected sales of $72 billion a year by 2030. That’s more than double the current market estimation of $32 billion annually. Today, 21 states and the District of Columbia allow adult cannabis use. According to the Pew Research Center, 43% of U.S. adults now live in an area that has legalized cannabis use. While not every state that has legalized cannabis use saw growth last year, the market as a whole continues to expand.

Meanwhile, last fall, President Joe Biden announced pardons for simple cannabis possession at the federal level and ordered a review of federal cannabis scheduling under the Controlled Substances Act. According to a recent survey from Data for Progress, the majority of likely voters support legalizing cannabis at the federal level.

But as the market expands, access to banking continues to lag. Congress has failed to pass the SAFE Banking Act, a bill aimed at normalizing banking for licensed cannabis businesses. Despite the lack of legislative progress, a playbook exists for banks to serve the industry in compliance with FinCEN guidelines; bank examiners continue to recognize the work banks are doing to meet their compliance obligations. Bankers considering this line of business can have confidence that the cannabis use space will continue to grow and keep banking services in high demand.

Three Trends to Watch
As the industry expands and attitudes toward cannabis evolve, financial institutions are facing new competition and pressures on their business models. We are seeing three significant changes.

  1. Cannabis industry consolidation is creating businesses that need access to the balance sheets that bigger banks can provide. As a result, larger financial institutions are entering the space. There are more financial institutions in the $1 billion to $10 billion assets space actively serving the industry today, along with a few banks with over $50 billion in assets. Considering just a few years ago these institutions were predominantly less than $1 billion in assets, this is a significant shift that gives cannabis businesses greater choice.
  2. Early entrants that gained cannabis banking expertise in their home market are leveraging that proficiency to provide services across entire regions, or nationally in states with legal cannabis programs. Some of this is driven by consolidation, as bankers follow their customers into other states. Others are seeking new customers in underserved or newly minted cannabis markets.
  3. Lending, both directly to operators and indirectly to landlords or investors, has emerged as a critical component of the cannabis banking portfolio. Not only is this a competitive differentiator for banks, it is also as a prime source of earning assets and a way to gain additional yield. Like all lending, however, it is important to understand the unique credit risks in this industry, which can vary greatly from state to state.

Competition Demands a More Customer-Centric Approach
Competition is creating pressure on financial institutions to operate more efficiently while delivering more client-centric services. When it comes to meeting compliance obligations, banks that employ strategies that achieve greater efficiency can dramatically lessen the burden on both their bankers and their customers. There’s now more clarity about what information offers the most value for risk management teams; bankers can tailor their compliance requirements to reduce risk and avoid creating unnecessary work streams. Technology that automates compliance tasks and aids in ongoing monitoring can also contribute to a better customer experience. As cannabis operators face increased competition and tighter margins, financial institutions that take steps to minimize the compliance burden can gain a competitive advantage.

Financial institutions are also introducing new pricing strategies to attract customers. Historically, banks priced these services strictly to offset or monetize their compliance function. Now, bankers can use pricing tools to benefit customers while creating value for the institution. For example, offering account analysis can encourage customers to maintain higher balances while generating noninterest income on accounts with lower balances.

The past year brought about significant economic and policy changes in the cannabis industry. In 2023, bankers can act with even greater certainty in the industry’s stability, investing in the processes, services and technologies that will improve the customer experience while supporting the institution’s bottom line. As financial institutions and regulators gain a deeper understanding of the compliance requirements for this industry, it is increasingly clear that the industry is not going backward. States that have legalized cannabis and are issuing new licenses offer banks an ever-growing opportunity to tap into the industry’s financial rewards with the confidence that positive momentum is on their side.

Understanding the Cannabis Banking Opportunity

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The legal cannabis industry is growing exponentially each year, creating extraordinary opportunities for financial institutions to offer services to this largely underbanked, niche market.

Revenue from direct marijuana businesses alone is expected to exceed $48 billion by 2025, part of a larger $125 billion cannabis opportunity that includes hemp, CBD and other support businesses, according to information from Arcview and BDS Analytics.

In the last few years, the number of banks providing services to cannabis businesses has increased, along with an expansion of the products they are offering. Financial institutions are moving far beyond being “a place to park cash’ which defined the pioneer era of cannabis banking. Today, our bank clients are approaching the industry as a new market to deploy all of their existing products and services, including online cash management, ACH origination, wire transfers, lending, insurance, payments and wealth management. Additionally, a contingent of banks are trailblazing bespoke solutions.

For banks wanting to better understand what the current cannabis banking opportunity looks like, we recommend starting by:

Exploring the Entire Cannabis Ecosystem
A common pitfall for banks considering a cannabis line of business is failing to grasp the true market opportunity. It’s important that bankers explore the entire supply chain: growers, cultivators, manufacturers, distributors and delivery operations and public-facing retail and medical dispensaries that make up the direct cannabis ecosystem.

Beyond that, there is a supporting cast of businesses that service the industry: armored couriers, security firms, consultants, accountants, lighting companies, packaging companies, doctors who prescribe medical cannabis, and many more. These are not plant-touching businesses, but they require additional scrutiny and often struggle with non-cannabis-friendly institutions. All this is in addition to the significant hemp market, which represents an additional $40 billion opportunity by 2025.

Thinking Beyond Fees
Aside from low-cost deposits, many financial institutions initially entered this niche line of business for additional fee income. While the industry still provides strong fee opportunities, including account opening fees, monthly account fees per license, deposit fees and fees for services such as ACH and cash pickup, these can vary greatly from market to market and will decrease as more financial institutions build programs.

Instead of limiting their focus to fees and deposits, banks should understand the full breadth of the services and solutions they can offer these underserved businesses. Most services that a bank provides their average business customer can be offered to legal cannabis businesses — and there is a significant opportunity to create additional services. We believe there are products this industry needs that haven’t been created by banks yet.

Banks thinking about where to start and what products to add should consider common challenges that legal cannabis businesses face: electronic payment products, cash logistics, fair lending and the numerous difficulties around providing opportunities to new business owners and social equity entrepreneurs. Bankers should become familiar with the industry; find out what it’s most similar to — namely agriculture, food processing and manufacturing — as well as how it is unique. That’s where the real opportunity lies.

Building a Scalable Program
To safely service this industry and meet examiner expectations, banks need to demonstrate they understand the risks and institutional impact of banking cannabis and have the capabilities to accomplish the following, at a minimum:

  • Consistent, transparent and thorough monitoring of their cannabis business clients and their activity, to demonstrate that only state legal activity and the associated funds are entering the financial system.
  • Timely and thorough filing of currency transaction reports (CTRs) and suspicious activity reports (SARs).
  • Ability to gracefully exit the line of business, should the bank’s strategy or the industry’s legality change.
  • An understanding of the beneficial ownership structures, particularly when working with multi-state operators.

Performing these tasks manually is time consuming, prone to error and not suitable for scale. Technology allows banks to automate the most tedious and complicated aspects of cannabis banking compliance and effectively grow their programs. Look for technology that offers advanced due diligence during onboarding, detailed transaction monitoring, automated SAR/CTR reporting and account monitoring to ensure full transparency and portfolio management in your program.

Finding a Trusted Partner
When it comes to partners, banks must consider whether their partner can quickly adapt to changes in rules and regulations. Do their tools support visibility into transaction level sales data, peer comparisons and historical performance? Have they worked with your examiners? What do they offer to help banks service both direct and indirect businesses? Can they help their institutions offer new and innovative products to this line of business?

Banks weighing which partners they should take on this journey need to consider their viability for the long run.

Disability and Opportunity in Banking

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Keri Cain didn’t set out to become a marijuana banker. But after her muscular dystrophy led her to give up her dream career in apparel merchandising, she moved back to Oklahoma and stumbled into the massive opportunity to support businesses operating in the newly legalized marijuana space with legitimate banking services. She currently serves as Bank Secrecy Act director of special programs at Tulsa, Oklahoma-based Regent Bank, and created the institution’s cannabis banking program. 

Her interest in this sector is informed by her curiosity as well as her disability. She shares with Bank Director her thoughts on including disability in conversations about diversity and inclusion, how banks can make their workplaces more accessible for all employees and how therapeutic cannabis may figure in her future.

This episode, and all past episodes of The Slant Podcast, are available on Bank Director, Spotify and Apple Music.

The Cannabis Banking Opportunity

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Legalized cannabis continues to gain momentum across the United States, but banks may be left out of the opportunity if they lack a strategy to service the space. As this demand grows, banks can leverage their risk and compliance teams to build new revenue opportunities. In this video, Kevin Hart, the founder and CEO of Green Check Verified, explains how banks can formulate a cannabis banking program that fits into their overall strategy and risk management appetite.

  • Outlook for Future Growth
  • Direct and Indirect Cannabis Banking
  • Crafting a Scalable Program

How One Midsized Regional Bank Separates Itself From the Competition

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When Ira Robbins took over in 2018 as CEO of Valley National Bancorp, one of his highest priorities was to broaden the bank’s strategic focus into new product and customer segments where it could be a meaningful player.

“When we started changing the organization’s direction five years ago, we said we weren’t going to be everything to everyone,” Robbins says. “We were going to be everything to someone and understand who that someone was and what the overall relationship looked like.”

Diversification and differentiation is a two-pronged strategy that should be on the minds of all bank CEOs and their boards of directors today. Continued pressure on the industry’s net interest margin is a threat to the banking industry’s long-term profitability that’s not going to ease anytime soon. Unless banks are able to develop new sources of revenue to counteract that pressure, “We’re left to think about cost reductions as opposed to building things because as the revenue side of the balance sheet comes down, all you’re able to do is focus on contracting expenses,” Robbins says.

And cutting costs is never as much fun as building a new business.

Robbins offered his views on the importance of diversification and differentiation to Bank Director Editor-at-Large Jack Milligan in advance of a panel discussion session Monday at Bank Director’s Acquire or Be Acquired Conference. The conference runs Jan. 30 to Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

The core niche at Valley National, a $41 billion asset regional bank headquartered in Wayne, New Jersey, is commercial real estate. “That’s who we are,” says Robbins. “And I think as an organization, most of the balance sheets that we understand are from a relationship perspective. People aren’t coming to us because we’re the cheapest in town. We have an ability to execute unlike any other organization that’s embedded in who we are from a credit perspective.” In other words, borrowers go to Valley National because they know their deals will get done.

Robbins wanted to replicate this approach in other customer segments, and in recent years the bank has diversified into auto lending, as well as banking for homeowners’ associations and cannabis businesses. But moving into a new customer segment or product line isn’t enough. Banks also have to find ways of differentiating themselves from their competitors in that niche. Increasingly, that is through the customer experience — with technology as the point of the spear.

A good example is Valley National’s push into cannabis banking, an initiative that began about three years ago. The bank spent the first year and a half studying the market from a strategic and operational risk perspective before it finally launched a treasury platform solution focused on marijuana-related businesses including dispensaries, cultivators, wholesalers and testing labs. The program is currently available in 13 states, and Valley National worked closely with several regtech companies to understand — from “seed to sale,” as Robbins puts it — the regulatory compliance requirements in each jurisdiction.

“We’ve been in the business for about a year and a half,” Robbins says. “It’s getting to be a decent-sized business for us. And it’s one that we think aligns with our risk appetite. It’s an opportunity in an industry that really isn’t being served today.”

But merely entering an underserved market doesn’t guarantee success if you’re not providing a differentiated customer experience. The cannabis business tends to be cash intensive. Producers and sellers need ways to get that cash to their bank, so Valley National set up a separate armored car service to handle collection. The bank also developed a mobile app called “ValleyPay” that is linked to a Valley National debit card and can be used to make purchases in a dispensary or retail store. “It’s the first ability to have a digital payment come in,” Robbins says. “And we’re the only bank in the country that’s beginning to offer it, so that’s pretty neat.”

Providing a differentiated customer experience is very much at the heart of Valley National’s diversification effort.

“To be honest with you, it’s…understanding what the customer experience looks like,” Robbins says. “What was the customer challenge? And what was the experience that we wanted to create?” While other banks are in the cannabis space as well, “ours is a specific niche [that is] focused on an experience that really isn’t being delivered.”

[You can read more about Valley National Bancorp and cannabis banking in the Q3 2021 issue of Bank Director magazine, available to subscribers.]

What to Know About Cannabis Banking in 2022

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The cannabis industry is growing exponentially, and nationwide sales are estimated to exceed $30 billion in 2022.

This growth comes with extraordinary opportunities for banks to offer services to the still largely unbanked and underbanked cannabis industry. Board members and C-suite executives cannot afford to ignore the potential impact of cannabis on their bank in 2022, whether they are banking it or not. Here’s some trends that the industry should be on the lookout for.

More states will legalize marijuana in 2022
The website Ballotopedia is tracking over a dozen proposed marijuana legalization initiatives as of September. These include attempts to legalize marijuana for medical purposes in Wyoming, Idaho and Mississippi, medical and adult uses in Nebraska and adult recreational uses in Arkansas and Ohio. Any kind of legalization in Nebraska would be significant; it is currently the only state with no loosened legal restrictions on marijuana possession or use. Banks located in states without a legal marijuana program, including adult or medical, may see that change by the end of 2022 and need to start planning now for how this could affect your bank.

Marijuana licensing and sales will begin in states that legalized or expanded their programs in 2021.
Marijuana-related business (MRB) licensing and sales don’t begin the day after it’s legalized. A governor’s signature is just the first step. Legalization requires months of work by a newly appointed marijuana regulatory authority to develop the actual regulations — the infrastructure — that make licensing and sales possible. 2022 can expect to finally see sales in states that legalized marijuana in 2021.

There’s no guarantee that any federal marijuana legislation will pass in 2022.
There are currently two major proposed bills that would loosen federal policy towards marijuana: the Secure and Fair Enforcement Banking Act (SAFE Banking Act) and the Cannabis Administration and Opportunity Act (CAO Act).

The most attractive to banks is the SAFE Banking Act, which would ensure federal regulators could not take adverse action against banks that provide services to state-legal MRBs. It would also require the Federal Financial Institutions Examination Council to establish uniform exam guidelines for evaluating marijuana banking programs. This legislation passed the House of Representatives by a comfortable margin in 2020 and again in 2021, but has yet to make it to the Senate floor for a vote.

Senate leadership has made it clear that passage of the CAO Act is their priority, with Sen. Cory Booker (D-NJ) going so far as to say, “I will lay myself down to do everything I can to stop an easy banking bill […] as opposed to focusing on the restorative justice aspects.” There’s been another attempt in the House to push through the SAFE Banking Act as an amendment to the National Defense Authorization Act but there’s no guarantee this will be included in the final version of the bill. As a result, banks shouldn’t count on the SAFE Banking Act passing in 2022, with Senate leadership focused on the CAO Act.

In 2022, cannabis banking will move from “nice to have” to “unavoidable.”
Something new we’ve seen this year is that an increasing number of institutions are building cannabis banking programs because they risk losing high-worth customers if they don’t. For instance, a bank in the Midwest was approached by a member of a prominent farming family that had decided to start growing marijuana. They were upfront about their plans and made it clear that, despite a multi-generational relationship with the bank, they were prepared to go elsewhere if necessary.

We saw something similar in the South: a major customer decided to pivot from growing flowers in their greenhouses to marijuana, and the bank decided to release their marijuana restrictions only after they lost a good part of their customer’s business to a cannabis-friendly competing financial institution. Banks risk losing valuable customers in 2022 if they do not establish cannabis banking programs.

Due to a combination of widespread destigmatization, a steady march of state-by-state legalization and the immense business opportunity of this industry, an increasing number of banks are building lines of business to benefit from this market — or at the least, avoid losing customers to it.

To learn more about what this industry will look like in 2022, and the financial modeling and risk assessment behind successful programs, click HERE.

How Innovative Banks Manage Cannabis-Related Businesses

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The number of banks providing financial services to cannabis-related businesses (CRBs) has doubled in the last two years according to filings from the Financial Crimes Enforcement Network.

But, once a bank answers the philosophical question of whether it wants to participate in the cannabis industry, it must consider the more difficult question of how. Technology firms have sprung up to help banks fill this need, but assessing the value propositions of these solutions in such a nascent, complex industry can be a challenge.

Alan Hanson helped establish one of the first cannabis banking programs in the nation as the general counsel of Salem, Oregon-based Maps Credit Union back in 2014. In his experience, software “can gather the data, but really can’t evaluate the data” needed to manage CRB risk.

Many new compliance solutions gather data by tying into the point-of-sale systems used by CRBs and the seed-to-sale tracking systems run by the states. Hanson, now a Portland, Oregon-based attorney at Gleam Law, says these tools can typically match CRB sales to the deposits that come into the bank. However, they can’t always assess vital information, like where that money goes when it leaves a CRB account. For that, it’s important to have compliance staff that has a handle on their cannabis clients’ operations and vendor networks.

For example, if a CRB client misallocated funds from their dispensary to their grow operation, a well-trained banker could spot the discrepancy based on the use of funds to purchase special lights or tubing that aren’t required for a dispensary operation. Those types of distinctions can be harder for technology platforms to detect.

Technology is most helpful for managing the processes associated with onboarding, ongoing document collection, case management and reporting.

Some institutions, like Narragansett Financial Corp. bank unit BayCoast Bank, leverage their existing Bank Secrecy Act (BSA) solution — Verafin — for reviewing suspicious, flagged activities. The Swansea, Massachusetts-based bank supplements the BSA process with quarterly audits and support from employees with experience in both compliance and customer service. For more specialized monitoring tasks, the $1.9 billion bank uses spreadsheets and other traditional methods. As BayCoast’s number of CRB clients grows, so does its team. Chief Risk Officer Gary Vierra oversees the CRB program and estimates the bank needs one full-time employee for every eight to 10 CRB clients.

Other banks are looking to CRB-specific tools to help them get into cannabis banking without materially growing headcount. That was one of the goals for Marlborough, Massachusetts-based Main Street Bank, which has just over $1 billion in assets. It selected technology from Shield Compliance to help manage its CRB program.

Potential clients told the bank they needed a simple, single place to manage documentation requests and other communication with the bank. This led Main Street to select Shield, which provides automated compliance and document collection workflows in addition to BSA functions. Main Street’s team liked that the Shield interface mirrored Verafin, which the BSA team was already using, and estimated that the platform enabled it to launch its CRB program with about a third of the staff they would have needed otherwise.

CRB-specific compliance tools are gaining traction within banks, but there are other “silver bullet” solutions financial institutions should be wary of. The biggest one is companies that claim to help CRBs accept credit and debit card payments.

Currently major card brands do not allow CRBs to participate in their networks; forcing them to rely on cash causes significant, practical issues for these businesses and their banks. To address that pain point, some companies circumvent the prohibition by coding transactions in such a way that the networks do not recognize them as being linked to cannabis purchases — essentially masking the transactions as something else. “That’s not the way we do business,” Vierra says, “and most of the cannabis companies don’t want to do business that way either.”

Cannabis banking presents opportunities for banks to increase fee income and broaden their deposit base among a profitable niche. But with those opportunities comes the challenge of creating a compliant program for serving complex businesses. Technology can help, but banks need a solid understanding of the industry to succeed.

Potential Technology Partners:

Shield Compliance

Built by a former banker, Shield Compliance helps financial institutions manage CRB operations in a format that’s familiar to compliance officers.

Abaca

This company’s compliance specialists follow up on suspicious activity for the bank, and assist with identifying and vetting potential CRB clients.

Green Check Verified

This compliance platform provides a wealth of information to help banks understand the cannabis banking landscape nationally and within local markets.

Learn more about the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connect platform.

Five Reasons to Consider Banking Cannabis

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Like nearly every industry, the banking sector is facing major economic disruption caused by the coronavirus pandemic.

Operational strategies designed to capitalize on a booming economy have been rendered obsolete. With the Federal Open Markets Committee slashing interest rates to near zero, financial institutions have needed to redirect their focus from growth to protecting existing customers, defending or increasing earnings and minimizing losses.

While this will likely be the status quo for the time being, bank executives and their boards have a responsibility to plan ahead. What will financial markets look like after absorbing this shock? And, when rates begin to rise again — as they will, eventually — how will you position your financial institution to take advantage of future growth?

The booming legal cannabis industry is one sector banks have been eyeballing as a source for low-cost deposits and non-interest income. While ongoing conflict between state and federal law has kept many financial institutions on the sidelines, others have made serving this industry part of their growth strategy. According to new market research, the U.S. legal cannabis market will be worth $34 billion by 2025. While we don’t claim that sales will be immune to the financial shock caused by the pandemic, they have remained somewhat steady — due in large part to being deemed essential in most states with legal medical cannabis programs. With much of this revenue unbanked, it’s worth taking a closer look at how this industry can be part of your bank’s long-term strategy. Here are five reasons why.

  1. Cannabis banking can provide reliable non-interest income. As net interest margins compress, financial institutions should look to non-interest income business lines to support overall profitability. Cannabis companies are in dire need of quality banking solutions and are willing to pay upwards of 10 times the amount of traditional business service charges. Assessing substantially higher base account charges, often without the benefit of an earnings credit to offset those charges, means there are untapped cash management fee opportunities. Together, these fees can fully offset the operational cost of providing a cannabis banking program.
  2. New compliance technologies can reduce costs and support remote banking. Many banks serving cannabis customers are using valuable human capital to manage their compliance. However, new technologies make it possible to automate these processes, significantly reducing the labor and expense required to conduct the systematic due diligence this industry requires. New cannabis banking technologies can also enable contactless payments, and handle client applications, account underwriting and risk assessment — all via remote, online processes.
  3. Longer-term, cannabis banking can provide a source of low-cost deposits. The pressure to grow and attract low-cost deposits may wane momentarily but will continue to be a driver of bank profitability long-term. Increasing those deposits today will protect future profitability as the economy improves.
  4. Comprehensive federal legalization is on the back burner — for now. While your bank may want to wait for federal legalization before providing financial services to this industry, there’s a significant first-mover advantage for institutions that elect to serve this industry today. The ability to build new customer relationships, earn enhanced fee income and gain access to new sources of low-cost deposits early on could be a game-changer when legalization eventually occurs.
  5. You don’t need to be a pioneer. Having spent most of my career leading retail operations at a community bank, I know financial institutions don’t want to be the first to take on something new. Although it is still a nascent industry, there are financial institutions that have served cannabis businesses for several years and are passing compliance exams. Banks entering the industry now won’t have to write the playbook from scratch.

The coronavirus pandemic requires banks to make many difficult decisions, both around managing the financial impact and the operational changes needed to protect the health of customers and employees. While adapting operating procedures to the current environment, banks should also begin planning for a future recovery and identifying new potential sources of growth. Cannabis banking can provide a lucrative new revenue stream and the opportunity for financial institutions to grow deposits with minimal competition — at least for now.

Seven Costs of Saying “No” to Cannabis Banking

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Ask the typical bank executive why their institution isn’t providing banking services to state-legal cannabis-related businesses (CRBs), and you will likely hear a speedy retort along these lines:

“We’re not allowed to — it’s still federally illegal.”

“We would love to, but we don’t know enough about that industry to manage the risk.”

“We don’t think our customers would want our name and reputation associated with that.”

On the surface, these prudent practices make perfect sense. A complex legal landscape, inability to assess regulatory risk and desire to protect the institution’s reputation are compelling reasons to stay far away from cannabis-related proceeds. But there are hidden costs to saying “no” to cannabis banking. These hidden costs accrue to CRBs, the communities in which they are located, the financial institutions that avoid them and potentially society at large.

Community Risks

Community risks stem from direct and indirect sources. The obvious risks, such as the increased potential for crime and the resulting challenges to law enforcement, are frequently cited. The indirect risks are less obvious, such as a community’s inability to identify or collect appropriate taxes on CRB proceeds.

Cash on hand invites crimes of opportunity. A retail location that is known to have large volumes of cash on hand produces a seductive temptation for the criminal element.

Cash is easy to conceal from revenue officials. Fewer dollars in the public coffers are the inevitable outcome when revenue goes uncollected. In its “Taxing Cannabis” report, the Institute on Taxation and Economic Policy indicates that tax evasion and ongoing competition from illicit marijuana operations remain an ongoing concern in legal use states.

Opportunity Costs

Early adopters have demonstrated that the cannabis industry is willing and able to accept higher price points from financial institutions in exchange for the safety and convenience of obtaining traditional banking services. Your bank’s avoidance means forfeiting both short-term and long-term opportunities to generate fee income while giving others a head start on future business opportunities.

Cost of lost fee income. It is not uncommon to hear of small financial institutions generating multimillion-dollar annual fee income from CRB accounts. In less-established markets, accounts yield monthly fees based on their average deposit balances.

Cost of missing out. Just like its social media counterpart — FOMO or fear of missing out — COMO is real. If 5% to 10% of your peers are already banking CRBs, imagine what will happen as the next 10% step in. And then the next 10% after that. Before the real race has even begun, you’ve ceded some portion of the addressable market simply by not being present in the market today.

Economic Costs

The suppression of legal cannabis businesses weakens their potential to inform decisions and progress. Anecdotal and scientific evidence supports that mental and physical health benefits can be derived from responsibly sourced and properly administered cannabis-based products. Data from countries that are moving quickly to align public policy with sentiment and science on these issues indicates that sustainable economic benefits are possible.

Cost of falling behind in medical and other scientific research and advances. In 2018, 420Intel identified six countries for their cannabis research: Spain, Canada, the Czech Republic, Uruguay, the Netherlands and Israel. This type of research cannot be conducted in the United States because of federal prohibitions that require clearing multiple regulatory hurdles, at great cost.

Costs of pain and suffering to those in need of relief. Even if your personal belief sets don’t allow you to explore cannabis topics with an open mind, you need look no further than your media feeds or internet searches to find immeasurable examples of individuals who claim that using cannabis or cannabinoids have provided them with physical and mental health benefits.

Cost of lost economic growth potential. While exact numbers are hard to come by, there more than 110 studies taking place in Israel alone, funded at rates in the six and seven figures apiece. BNN Bloomberg reported that Canada’s legalized cannabis sector contributed $8.26 billion to its gross domestic product in its first 10 months of national legalization.

So before your bank decides the risks of saying “yes” to banking CRBs is still too high, pause to consider the risks you’re allowing to affect your institution and local community when you say “no.” Perhaps it’s time to take a fresh look at whether CRB banking is for you.