Cannabis Banking: Are the Rewards Worth the Risks?

Banking the legal cannabis business delivers low-cost deposits, and is a rapidly expanding market, but significant regulatory and reputational hazards remain. As more states legalize marijuana, however, more financial institutions are concluding that the benefits outweigh the risks.

More than half the states have legalized the medical use of cannabis to varying degrees — 38 in all with 19 of these making medical and recreational use fully legal. Yet only about 750 financial institutions offer cannabis banking services to legal cannabis businesses, according to the FinCEN Marijuana Banking Update. The ratio of banks to credit unions is slightly more than two to one.

Are financial institutions in states in which cannabis is legal missing an opportunity? It’s certainly a huge market: the North America legal cannabis market is projected to reach $38.2 billion by 2028, registering a 16.6% growth rate from 2022 to 2028. Widespread legalization at the state level and growing use of marijuana for medical purposes is expected to propel much of this growth.

The attraction for banks and credit unions is that cannabis businesses are a source of low-cost deposits, says Cami Cantrell, EVP of Shield Compliance, which provides a compliance management platform to financial institutions. But there’s also an opportunity to offer loans, wealth management, insurance, payroll and other services to cannabis businesses, much as with any small business category.

The $198 million-asset Oklahoma State Bank and the $1.1 billion-asset Salal Credit Union are among the financial institutions that have gotten comfortable with this niche opportunity.

The Federal Roadblock

A big turnoff for many bankers, however, is that cannabis is still not legal at the federal level. Contact with money traced back to state marijuana operations could be considered money laundering and banks and credit unions worry that they could face federal enforcement action. In fact, none of the major banks will serve cannabis businesses and the major card networks prohibit the use of their cards for marijuana transactions (There is a major loophole, however, through the use of so-called “cashless ATM” transactions by which a customer can buy pot products with a debit card).

Eyes on Washington:

The SAFE Banking Act would create a safe harbor for financial institutions that serve cannabis-related businesses in states where cannabis is legal — but passage is anyone's guess.

While the national bank and credit union trade associations don’t take a moral position about cannabis use, they do support the SAFE Banking Act, for public safety reasons relating to the dangers of handling large amounts of cash. The proposed legislation, which passed the House in February 2022, would create a safe harbor from federal sanctions for financial institutions that serve cannabis-related businesses in states and other jurisdictions where cannabis is legal.

Other bills have also been introduced at the federal level, including the Cannabis Administration and Opportunity Act, which would give state-legal cannabis businesses access to financial services, including credit card transactions, according to CNET.

When or even whether cannabis will ever become federally legalized is anyone’s guess, but it seems unlikely in the near-term. Even if the existing bills do come up for a vote in the Senate, it would need ten Republicans and all Democrats to be passed, CNET notes.

Under the Controlled Substances Act of 1970, the Drug Enforcement Agency still classifies cannabis as a Schedule 1 drug, “with no currently accepted medical use and a high potential for abuse.” There have been moves to have the Justice Department once again defer to the states where marijuana is legal, as was done for a time during the Obama administration (and then rescinded by President Trump). But that has so far not happened in the Biden administration.

Despite all the uncertainty, several hundred financial institutions have decided to bank the pot business anyway.

One of the First Movers — and Still At It

When Washington State Initiative 502 to legalize recreational marijuana was proposed in 2012, the $1.1 billion Salal Credit Union started a rigorous due diligence process, says Brent Ballman, Vice President and Director of Business Banking. The credit union felt that cannabis banking could fit nicely into the credit union’s mission of eliminating financial obstacles for members, but management was concerned about regulatory and compliance issues.

However, a FinCEN memo issued on Valentine’s Day 2014 describing how financial institutions could comply with cannabis baking gave the credit union the confidence it needed to start its program.

Salal Credit Union opened its first cannabis depository account in July 2014. Today, the credit union offers depository services as well as limited commercial real estate lending and equipment financing, keeping a careful eye on concentration limits to ensure they are not overexposed.

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Reputation Risk With Cannabis Not as Big as It Once Was

Offering a cannabis banking program could be interpreted to mean that the financial institution supports cannabis legalization, which concerns some bankers. While plenty of people still regard recreational pot use as unhealthy, immoral or both — and it’s not difficult to find evidence to support the dangers of habitual marijuana use — the reputational risk for banks and credit unions may not be as big as it has been in the past. The Pew Research Center says 91% of Americans support the legalization of marijuana in some form.

And almost two-thirds (65%) of consumers support banks and credit unions offering cannabis banking services in states with legalized marijuana, according to an ABA survey.

Salal Credit Union did worry about how its employees and its 52,000 members would react to news that it was offering cannabis banking. The credit union even hired a public relations firm to help educate members and employees about what the cannabis banking program would look like, why the credit union was offering it, how the program would help the community by moving cash off the street and into a regulated entity, and how employees of cannabis businesses would be able to deposit paychecks into bank accounts rather than be paid in cash.

A Market Beyond the Cannabis Dispensaries

When thinking about cannabis business, most people think of growers and dispensaries and other “plant touching” enterprises, but there are a slew of ancillary businesses that derive a significant portion of their revenue from cannabis. Think CPAs, transportation companies, commercial real estate owners, doctors who prescribe medical marijuana, landlords, security firms and utility providers that are paid in funds derived from cannabis sales.

The cannabis industry also includes hemp and CBD businesses that use products derived from the cannabis plant but are manufactured to contain less than 0.3% THC, the “feel good” chemical compound that stimulates brain cells to release dopamine. (“CBD” and “THC” are the most common compounds found in cannabis products. “Cannabis” includes both hemp and marijuana.)

“The opportunity for banks and credit unions is much bigger than dispensary dollars,” notes Kevin Hart, Founder and CEO of Green Check Verified, a cannabis-focused regulatory software and services company. “You can service the entire supply chain, including employees of cannabis businesses and suppliers,” says Hart.

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Oklahoma Bank Decides to Bank the Medical Marijuana Business

While federal versus state legalization remains a concern for Oklahoma State Bank (OSB), the ability to provide banking services to those in the cannabis industry was worth the perceived risk, notes Delene Gilbert, Director of Cannabis Banking for the $198 million-asset institution. Oklahoma legalized medical marijuana in 2018 and OSB began its cannabis banking program one year later.

OSB offers depository services mostly to Tier 1 medical marijuana facilities, which includes growers, dispensaries, transport companies and waste management firms, among others. Tier 2 firms — businesses such as law firms and CPAs that deal with Tier 1 businesses — make up a smaller portion of the deposits. OSB often acts as matchmaker, creating a loose network of cannabis-related businesses that will serve OSB’s cannabis clients, such as insurance firms that will insure the cannabis industry.

OSB hopes to move into lending as well. “We are going above and beyond helping those in the cannabis industry have access to the banking services they need to run their legal businesses,” says Gilbert.

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