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.

Managing Risk When Buying Technology for Engagement

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No bank leader wants to buy an engagement platform, but they do want to grow customer relationships. 

Many, though, risk buying engagement platforms that won’t grow relationships for a sustained period of time. Most platforms are not ready-made for quality, digital experience that serve depositors and borrowers well, which means they threaten much more than a bank’s growth. They are a risk to the entire relationship with each customer.  

Consumers are increasingly expressing a need for help from their financial providers. Less than half of Americans can afford a surprise $1,000 expense, according to a survey from Bankrate; about 60% say they do not have $1,000 in savings. One in 5 adults would put a surprise expenditure on a credit card, one of the most expensive forms of debt. More than half of consumers polled want more help than they’re getting from their financial provider. However, the 66% of those  who say they have received communication from their provider were unhappy about the generic advice they received. 

This engagement gap offers banks a competitive opportunity. Consumers want more and better engagement, and they are willing to give their business those providers who deliver. About 83% of households polled said they would consider their institution for their next product or service when they are both “satisfied and fully engaged,” according to Gallup. The number drops to 45% if the household is only satisfied. 

Banks seeking to use engagement for growth should be wary of not losing customer satisfaction as they pursue full engagement. As noted earlier, about 66% of those engaged aren’t satisfied with the financial provider’s generic approach. What does that mean for financial institutions? The challenge is quality of engagement, not just quantity or the lack thereof. If they deliver quantity instead of quality, they risk both unsatisfied customers as well as customers who ignore their engagement. 

According to Gallup, only 19% of households said they would grow their relationship when they are neither satisfied nor fully engaged. This is a major risk banks miss when buying engagement platforms: That the institution is buying a technology not made for quality, digital experiences and won’t be able to serve depositors and borrowers well any time soon. 

But aren’t all engagement platforms made for engagement? Yes — but not all are made for banking engagement, and even fewer are made with return on investment in mind. Banking is unique; the tech that powers it should be as well. Buyers need to vet platforms for what’s included in terms of know-how. What expertise does the platform contain and provide for growing a bank? Is that built into the software itself?

A purpose-built platform can show bankers which contact fields are of value to banking engagement, for example, and which integrations can be used to populate those fields. It can also show how that data can become insights for banks when it overlaps with customers’ desired outcomes. And it offers the engagement workflows across staff actions, emails, print marketing and text messaging that result in loan applications, originations, opened accounts or activated cards.   

Previously, the only options available were generic engagement platforms made for any business; banks had to take on the work of customizing platforms. Executives just bought a platform and placed a bet that they could develop it into a banking growth tool. They’d find out if they were right only after paying consultants, writers, designers, and marketing technologists for years.  

Financial services providers no longer need to take these risks. A much better experience awaits them and their current and prospective customers clamoring for a relationship upgrade.

Why There Is No ‘Back to Normal’ for Banks

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In the past few weeks, I’ve started to go back into the office more frequently. Despite any inconveniences, it’s refreshing and invigorating to see colleagues and clients in person again. It’s clear that most of us are ready for things to go back to normal.

Except, they most likely won’t.

Last year was largely favorable for banks, with industry ETFs outperforming the broader market and rebounding from 2020’s contractions. Larger banks with diversified revenue sources — including mortgage lending and banks with active capital markets or wealth management businesses — did particularly well.

Now, with rising inflation and a rapidly shifting geopolitical landscape, there may be different winners and losers. But after two years of the global pandemic, we have learned what the future of work could look like, and how much the environment will continue to evolve. The recent challenges in Eastern Europe remind us that ongoing change is the only certainty.

In PwC’s latest look at the banking environment, Next In Banking and Capital Markets, we see investors being far more interested in growth than in saving a few dollars. And we see potential for that growth across the banking industry — regardless of size, geography or customer segment. In particular, we see five opportunities for institutions that focus on digital transformation, build trust — with a particular emphasis on environmental, social and governance (ESG) issues, win deals, review and respond to regulation, and adopt cloud technology.

Digital Transformation: My colleagues researched how consumer behavior has changed over the past two years. We found that the pandemic significantly accelerated the trend toward digital banking — and many banks weren’t prepared. The implications go far beyond adding a peer-to-peer payment tool to your consumer app. In fact, nearly every bank should be thinking about developing a growth strategy based on a customer focus that is much sharper than “They live near our branches” or “Businesses need access to capital.” Digital transformation is here to stay; aligning to a disciplined growth strategy can help make technology investments successful.

Environmental, Social and Governance (ESG) Frameworks: Community reinvestment, diversity initiatives and strong governance models are not new issues for banks. In fact, the industry has been laser-focused on building stakeholder trust since the 2008 financial crisis. But with a solid baseline of social and governance investments, banks have now shifted their focus to helping define and deliver commitments around the environment, namely climate change. Banking industry leaders are looking for more effective ways to integrate climate risk management throughout their operations. But the data we use to report on ESG issues is very different from typical financial metrics, and most firms struggle to tell their story. Leading firms can help enhance transparency with trustworthy data, while developing strategies to drive their climate agenda.

Deals: The industry experienced historic rates of bank mergers and acquisitions last year — everything from some foreign banks stepping away from the U.S. market, to regional bank consolidation, to banks of all sizes adding specialty businesses. But with valuations at current levels, corporate development teams should get far pickier to make the numbers work. Increasingly, this may require a greater emphasis on creating growth than on finding cost synergies. To do that, banks and their leaders need to have a very clear idea of whom they’re serving, and why.

Regulation: Evolving concerns over the global economy have resulted in a different approach to regulation. While this does not represent a 180° turn from where we had been, it is clear that banks have been attracting new attention from regulators and legislators, especially with respect to consumer protection, cybersecurity, climate risk, taxation and digital assets. Banks should be particularly diligent about control effectiveness, as well as identifying effective ways to collect, analyze and report data. But regulation isn’t just a matter of defense: The more banks understand and manage risk, the more they can take advantage of “new economy” opportunities like mitigating climate change and digital assets.

Cloud: Virtually every bank has moved some of its work to cloud-based systems. But with definitions of “cloud” as imprecise as they are, it is no wonder that many executives have not yet seen the value they had hoped for. If you set out to consolidate data centers by moving some background processing to the cloud, don’t expect major rewards. But emerging cloud capabilities can, for example, help banks improve the customer experience by being more agile when responding to client demands — and this could be a game changer. Today’s cloud technology can help institutions rethink their core business systems to be more efficient. It can even help solve new problems by more efficiently integrating services from a third party. This year, we’re likely to see some banks pull farther ahead of their peers — perhaps, even leapfrogging competitors — by making strategic choices about how to use cloud technology to jump-start digital transformation, rather than just as a way to manage costs.

Last year, I made the case that banks needed to stay agile, given economic uncertainty and the rapid pace of change. This is still the case. But bankers and boards should also keep their eyes on the prize: Whether you are a community bank, a large regional institution or a global powerhouse, you will have plenty of chances to grow this year. The five opportunities described above can offer significant value to banks that adopt them strategically.

How to Build a Bank From Scratch

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Corey LeBlanc is best known as the man behind the @InkedBanker Twitter handle, inspired by his affection for tattoos. He’s also co-founder, chief operating officer and chief technology officer of Locality Bank, a newly chartered digital bank based in Fort Lauderdale, Florida. In the interview below, which has been edited for length, clarity and flow, he talks about the value of standing out and the process of standing up a de novo digital bank.

BD: How did you become known as the InkedBanker?
CL: A few years ago, Jim Marous, co-publisher of The Financial Brand, told me that I had to get on Twitter. When my wife and I created the profile, we needed something that made sense. I’ve had tattoos since I was 18 – full sleeves on both arms, on my back and chest — so that’s what we picked. It’s turned out to be incredibly important for my career. People remember me. It gives me an edge and helps me stand out in an industry where it’s easy to get lost in the mix.

             Corey LeBlanc, Locality Bank

BD: What’s your vision for Locality Bank?
CL: The best way to think about Locality is as a digital bank that’s focused on the south Florida market. There’s a void left in a community after its locally owned banks are either bought by bigger, out-of-state rivals or grow so much that they no longer pay attention to their legacy markets. Our vision is to fill that void using digital distribution channels.

BD: Was it hard to raise capital?
CL: Not especially. Our CEO, Keith Costello, has been a banker for many years and was able to raise an initial $1.8 million in December 2020 from local investors to get us off the ground. We later went back to that same group to raise the actual capital for the bank, and they committed another $18 million. Altogether, including additional investors, we raised $35 million between October and November of 2021. Because that was more than the $28 million we had committed to raise, we had to go back to the regulators to make adjustments to our business plan, which delayed our opening.

BD: How long did it take to get your charter?
CL: It was about 10 months. We filed our charter application on St. Patrick’s Day of 2021. We received our conditional approvals from the state in mid-September, and then we had our conditional approval from the [Federal Deposit Insurance Corp.] in early November. Our full approval came on Jan. 11, 2022.

BD: What was it like working with the regulators?
CL: You hear bankers say that regulators make everything difficult and stop you from doing what you want to do. But we didn’t find that to be the case. Just the opposite. They served more like partners to us. They worked with us to fine-tune our business plan to better meet the needs of the customers and markets we’re targeting, while still trying to accomplish our original objectives.

BD: What’s your go-to-market strategy?
CL: We’re going to be a lend-first institution. Our primary focus is on the south Florida commercial market — small to medium-sized businesses all the way up to early stage, larger enterprises. We’ll expand as we grow, but we want to be hyper-focused on serving that market. To start out, we’re offering two commercial accounts: a basic commercial checking account and a money market account. Then we’ll expand to providing accounts with more sophisticated capabilities as well as [Interest on Lawyer Trust Accounts] for lawyers. Because of the markets we’re in, those two accounts are absolutely necessary.

BD: As a new bank, how do you ensure that you’re making good loans?
CL: It was a top priority for us to recruit good, trusted bankers who understand that you need to balance the needs of the bank and the needs of the market. The bankers we’ve hired know how to do that. On top of this, if you can get a banker who’s been successful with the tool set that most traditional institutions give them, and then you give them a better set of tools, imagine the experience that you’re creating for those bankers and their customers. You’re empowering them to do something exponentially greater than they could in the past. And by giving them that set of tools, you’ve now inspired and motivated them to push even further and start challenging systems that otherwise they would have never challenged. We see it very much as a virtuous circle.

The Traditional Community Banking Model is Dead

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retail-banking-2-12-16.pngConsumer banking needs have not changed all that much over the last decade. However, the way those needs are met are going through transformational change. As such, community banks must find ways to shed the traditional ways of delivering banking services and morph into the new reality. Those banks that embrace the change will win, big. Those that do not will be acquired by those that do.

So what is the transformational change? It basically boils down to two key thoughts. The industry is now all about customers, not products, and it’s all about relationships, not transactions. Although fundamental in concept, these are dramatic changes from the traditional community banking model.

Historically, banks have focused on products, not customers. This is reflected in the fact that banks organize themselves along a product orientation. This results in numerous employees chasing the same opportunity. Even worse, it results in banks spending resources chasing certain customers with a product basis they will never use or buy. For example, older baby boomers are saving for retirement. As such, they need savings, investment, trust and advisory services. Trying to sell them a 30-year mortgage has a slim chance of success. Trying to sell retirement services to a millennial also will be met with failure. Banks need to focus on customers. We need to learn from our retail brethren and listen to the customers’ needs and then bring forward our products and services that meet the customers’ needs. This greatly enhances the likelihood of success, as we are giving customers what they want and need as opposed to what we want to sell. Selling hot soup in the middle of the summer is not a sustainable business model. It may get some limited sales, but is the wrong product at the wrong time.

Banks have also focused on transactions as opposed to relationships. This made sense when we had a product orientation. However, customers breed relationships and so we need to build and maintain them. Banks need relationship managers to be the primary point of contact with customers. They will act as a traffic cop, directing customers to in-house expertise that meets the customers’ needs. Their job is simple: Know the customers, their needs, their business and their personal situations and then meet and exceed those needs.

To shed the traditional model, banks must embrace a different culture. This means we need to:

  1. Adopt customer segmentation across all silos within the organization
  2. Reorganize into a customer-centric model
  3. Hire relationship managers (call them whatever you want)
  4. Establish strong calling programs 
  5. Create affinity with various customer segments

Integrating these concepts into a bank’s culture requires a commitment from the board and CEO. They will need to accept change and be willing to change the business model accordingly. They will need to break down the traditional silos inside the bank and integrate all departments into a customer-centric mode.

The following list is proven to aid in this endeavor.

  1. Create relationship managers and have them report directly to the CEO. Banks will still have product managers, but they must coordinate through the relationship managers.
  2. Integrate customers into your budgeting and planning process. This means plan on getting customers and their relationships as opposed to various non-related products.
  3. Build product bundles that fit targeted customer segments.
  4. Target and track market share of customer segments.
  5. De-emphasize brick and mortar and emphasize targeted delivery by segment.
  6. Track family, friends, neighbors and acquaintances as sources of new business. Leverage off affinity.
  7. Proactively identify opportunities and chase them. Do not wait for customers to knock on your door or call you.

Banks can continue to whine about falling spreads, lack of core business, high expenses and low fee income, or they can change with the times and shift to a customer-friendly, relationship-oriented culture. Banks who do thrive and become acquirers. Banks who do not will wither and likely become acquired. We have numerous case studies of banks that are shedding the traditional models in favor of the new on and all of them are winning in their markets.

How to Make Your Bank Customer-Centric

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5-7-13_Celent.pngWinning retail banks will provide a different and better offer of value. They will:

  • Be customer-centric (finally) by delivering more than simply plumbing
  • Have a strong digital offering (mobile, tablet and online)
  • Turn zero-sum games into win-win situations

Here’s the cold, hard truth: Retail banking today is a means to an end for customers. Banking lets people accomplish other, more enjoyable things. Banking is not fun; it’s not a destination; and it’s not something that people would choose to do given any reasonable alternative. With the products and services that banks offer today, most often the highest praise that can be given is, “That wasn’t terrible.”

So what can banks do to change the game so that they have a realistic chance of having their customers actively praise them? Three actions, driven by technology and spurred by non-bank competition, can help banks transform customers’ feelings about them.  

First, banks should (finally) become truly customer-centric. The industry has been talking about this for a dozen years, but this time—really—it’s getting serious. Here’s why: Technology has advanced enough to make a host of truly useful solutions feasible, and consumers are demanding to be served differently now.

Exposed to great online experiences from Amazon to Zappos, customers wonder, not unreasonably, why banks can’t do the same?  And when the banks fail to deliver, frustrated financial services consumers begin to look around for someone who can do a better job delivering on their raised expectations.  

Second, banks must have a strong digital offering. This encompasses not just online, but also mobile and tablet devices. Bank of America predicts that in less than two years it will have more customer access accounts via mobile devices than through the online channel. And more than half of millennials now choose their bank based on its mobile experience.  

Third, banks should create win-win situations with the customers. The retail banking business model has been constructed as a zero sum game: Banks win when customers lose, and vice versa. There’s a finite pie that banks and customers have to share, and one group’s piece grows as the other’s shrinks. That’s not the basis for a fruitful relationship.  

Bankers should search for ways to create positive-sum games by aligning the interests of the bank with those of its customers. When the customer does well, the bank benefits. For example, banks can increase assets by helping customers understand (and act on) the need to save for retirement.  

Win-wins can also take the form of partnerships with third parties by delivering value to customers that they wouldn’t be able to get on their own. With some merchant offers, for example, banks can provide value to small business (i.e. new customers) and retail customers (in the form of discounts).

A bank’s internal organization is typically the biggest barrier to delivering a truly customer-centric experience. Banks have gotten away with a lot for a long time because alternatives were few and customers were conditioned not to expect too much. But that paradigm has been irreversibly altered; banks can’t let antiquated organizational silos stand in the way of delivering new value to newly empowered customers.  

Changing will be hard, but guess what? Customers don’t care. They don’t care about legacy systems, or regulatory burdens or organizational structure. They want what they want, and will be delighted when you surprise them with something that they didn’t even know they needed.  

Maxims for a customer-centric bank in the mobile age:

  1. Put the customer first and be in his or her corner
  2. State your offer of value clearly
  3. Save your customers time
  4. Save your customers money
  5. Let them know when they’ve done well