How Innovative Banks Manage Cannabis-Related Businesses

Written by

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

Written by

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.

Industry Moves Closer to Cannabis Banking

Written by

In September 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement (SAFE) Banking Act to address the emerging and increasingly urgent issue of whether banks can legally serve legitimate, state-legal cannabis-related businesses.

The bill would prohibit federal banking regulators from penalizing or criticizing banks for providing financial services to cannabis-related businesses, creating a safe harbor for institutions that serve the cannabis industry. It addresses the growing safety concerns of the industry for its employees and owners that operate cash-only businesses.

The U.S. Senate received the bill later that month and referred it to the Senate Committee on Banking, Housing and Urban Affairs. While the bill was a hot topic when it was introduced in the Senate, other matters and priorities may delay the measure’s progress. Once through the Senate, the bill would reach the president’s desk for final approval.

Regardless of the actions taken by the Senate and president, it is clear that addressing a depository institution’s ability to provide financial services to cannabis-related businesses without penalty or regulatory criticism is an important matter for the banking industry and for the government to address.

A Closer Look at the Bill
The bill provides safety to individuals associated with cannabis-related businesses by allowing them to use the U.S. banking system, which currently is inaccessible due to federal regulation. It would grant cannabis-related businesses access to financial services that most companies use daily, such as business checking accounts, electronic payment processing, employer-sponsored retirement accounts and small business loans.

According to the bill, a depository institution shall not, under federal law, be liable or subject to penalty for providing a loan or other financial services to a cannabis-related business. It prohibits federal banking regulators from:

  • Terminating or limiting deposit insurance solely because the institution provides services to cannabis-related businesses.
  • Prohibiting or penalizing banks from providing services to cannabis-related businesses.
  • Recommending, encouraging or incentivizing banks not to offer financial services to an account holder, solely due to their relationship with a cannabis-related business.
  • Taking any adverse or corrective supervisory action on a loan made to a person solely because the person either owns such a business or owns real estate or equipment leased or sold to such a business.

The bill also states that a depository institution may not be held liable, pursuant to any federal law or regulation, solely for providing a financial service or from investing any income derived from providing a financial service to a legitimate, state-legal cannabis-related business.

Looking Ahead
Banks should begin assessing their risk appetite as it relates to the growing cannabis industry in preparation for legislation that allows them to serve cannabis-related businesses without penalty or regulatory criticism at some point in the future.

Once the legal aspects are resolved, we expect that many banks will take the opportunity to serve cannabis-related businesses as a way to grow loans and noninterest income and obtain lower-cost deposit relationships. At the same time, we anticipate other banks will be cautious about serving the industry, given the stigma and reputational concerns.

Banks should follow their normal risk management practices when considering services to the cannabis industry:

  • Conduct research to understand the cannabis industry and related operations.
  • Consider your institution’s risk appetite and if you are willing to serve the cannabis industry.
  • Tailor policies to address cannabis-related business specific matters, such as underwriting requirements, collateral considerations, customer due diligence and suspicious activity monitoring.
  • Provide training to employees within the institution who will serve customers in the cannabis industry.
  • Monitor developments in the regulatory and governmental space as it relates to cannabis.

We also expect the Federal Financial Institutions Examination Council will develop and issue guidance and examination procedures soon for those depository institutions serving state-legal cannabis-related businesses.

Your Bank’s Answer to the Cannabis Conundrum

Written by


strategy-5-30-19.pngBanks should not wait on lawmakers taking action on the myriad of proposed cannabis banking bills to make important strategic decisions about servicing marijuana-related business.

It is unclear if any of the proposed cannabis banking bills will gain enough traction and support in Washington to pass through Congress. Despite the inaction, a growing number of financial institutions are choosing to provide banking services to the cannabis industry. Banks considering doing business with cannabis companies need to determine if it fits within the institution’s overall strategy and risk appetite. To determine whether the business fits, a board should ask and answer the following four questions:

To be or not to be a cannabis bank? Every board needs to ask itself this question. Even if your bank does not actively seek out cannabis business customers, it is likely your bank has been or will be approached by a customer in the business who is seeking banking services.

The vast majority of banks in the U.S. have marijuana-related or hemp businesses in their market areas, now that more than three-fifths of the country permit some sort of legal cannabis production and use–medical, recreational or industrial hemp. It is quite possible your bank is unwittingly providing banking services to a customer who is at least tangentially related to the business. It is important for your board to definitively establish where your institution stands on this business line and communicate that to the business development, sales and other customer-facing personnel. Are you in or out? Not having a stance risks being flat-footed when an opportunity or a threat arises.

What is a marijuana-related business? The Financial Crimes Enforcement Network, or FinCEN, issued guidance in 2014 on how financial institutions can provide services to marijuana-related businesses in a manner consistent with their Bank Secrecy Act obligations. But neither FinCEN nor any bank regulator has defined the term “marijuana-related business,” or MRBs.

As a result, it is not always clear if your bank is doing business with an MRB. Certainly, those firms that physically handle the plant are MRBs: cultivators, processors, testing facilities, packagers, transporters and dispensaries. If they are required to have a state license, they are an MRB. Your bank should follow the FinCEN guidance regarding suspicious activity report filings when transacting with these companies.

But what about other individuals or companies that are indirectly connected to marijuana-related businesses, such as equipment suppliers, payment processors, consultants, landlords and advisors? There is no simple answer. If a significant portion of the customer’s revenue is dependent on the industry, it could be considered an MRB.

If your bank decides to offer banking services to cannabis businesses, the board and executives must establish a method to determine which indirectly related businesses are MRBs and prepare for revisions to the method if regulators provide further guidance.

Develop in-house compliance programs or engage a consultant? FinCEN is clear that a bank working with marijuana-related businesses must have a robust customer due diligence process. Shortcomings in the diligence process could lead to mistakes and missteps when it comes to compliance with the Bank Secrecy Act and anti-money laundering laws and lead to serious adverse outcomes.

Bank boards must determine whether their institutions have sufficient internal staff to develop and implement customer diligence and other compliance programs, or if they will outsource these functions. Any compliance function will require the board and management to provide appropriate oversight and monitoring of the cannabis-related compliance program.

Will your institution bank marijuana, hemp, or both? Recent changes in the Farm Bill made this a legitimate and important question for bank boards. Before the new Farm Bill was signed into law, the processes and procedures for dealing with hemp businesses were the same as cannabis businesses, because they were treated the same under the Controlled Substance Act.

The 2018 Farm Bill amended the Controlled Substance Act, including removing hemp from the definition of marijuana as long as it contains not more than 0.3% tetrahydrocannabinol, or THC. The bill also allowed states to establish programs for the licensure and regulation of cultivation, production, processing and sale of hemp products.

The Farm Bill changes mean it might become less difficult for banks to work with hemp-related customers from an operational and compliance standpoint. But neither the FinCEN nor federal bank regulators have issued updated guidance on working with hemp businesses following this change.

As federal policy on cannabis continues to evolve, banks will be well-served by internal evaluations and aligning their positions toward this industry sooner rather than later. Those four questions should assist any bank board in establishing their strategy for cannabis-related business.