Can a Credit Union Make Bread Off of Panama Red?

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Can financial institutions (FIs) create a new source of revenue from the fledgling marijuana industry? Opinions differ. According to an article published on The Financial Brand, an AVP at a Colorado-based credit union said the pot business is too big for FIs to ignore, and was quoted as saying:

“It’s vitally important that this industry has access to banking services. It’s a recipe for disaster if these folks can’t conduct their business in an above-the-table, legitimate banking environment. There is no question it’s an industry that’s here to stay, and the dollar volume related to it is stunning.”

A Washington-based credit union exec said, on the other hand:

“If someone in the pot business came into one of their branches today, the answer would be no. We don’t establish bank accounts for anybody who works with marijuana, because it’s still an illegal substance at the federal level.”

At the heart of the issue are compliance issues. A Credit Union Magazine article titled Can CUs Serve the Budding Marijuana Industry? concluded:

“The compliance burden of doing so appears not only insurmountable, but also overreaching. For FIs providing financial services to marijuana-related businesses, the new guidelines include three new types of suspicious activity reports (SARs). Additionally, there are seven new customer due-diligence requirements, such as verifying with the state whether the business is duly licensed and registered, as well as ongoing monitoring for suspicious activity. But the real kicker is the due-diligence requirement to determine whether any of the priorities listed in the guidance could be implicated by the marijuana-related business.”

The potential hurdles and compliance burdens aren’t stopping one entrepreneur, however. Paul Alexander not only believes in providing financial services to the fledgling marijuana industry in Washington and Colorado, but thinks a credit union dedicated to this industry can thrive, and is betting that it will expand to other states.

Alexander is a serial entrepreneur with other successful business startups under his belt. I spoke with him recently to get his thoughts on why he believes his new venture, Dispensaries of Pot Employees Credit Union (DOPECU) will succeed. Alexander believes a number of factors weigh in his favor:

  • Community. At the core of DOPECU‘s business plan is the belief that the new credit union won’t just attract marijuana-related businesses to the CU, but those businesses customers as well. Alexander believes that not only will pot-related businesses be attracted to his new credit union, but that the businesses will help attract and recruit new members from their customer base. Alexander plans on giving the businesses referral fees for new members that join DOPECU as a result of their references.
  • Demographics. Alexander cited consumer research from Gallup that found that 14% of consumers between the ages of 18 to 29 are regular marijuana smokers, and that 13% of Liberals (of any age) smoke pot regularly (see the research study here). Alexander believes a marijuana-focused credit union will be more successful attracting the coveted Gen Y population than other CUs.
  • Specialization. According to Alexander, established credit unions overestimate their ability to serve the financial needs of marijuana-related businesses. Alexander said that, by focusing solely on this industry and its customers, DOPECU will better understand the unique financial and business needs of pot-related businesses.
  • Regulatory trends. Alexander is betting that other states will follow in Washington’s and Colorado’s footsteps, citing California and Oregon as two states likely to legalize pot (see chart below). The entrepreneur doesn’t even want this to happen too quickly, as he would like to establish DOPECU in Washington and Colorado, before other states change their laws.

When asked about the compliance issues, Alexander said he believed that by focusing narrowly on a single industry, DOPECU‘s compliance burden would be no greater than what other credit unions face.

My take: Alexander makes an interesting case for DOPECU, and it’s hard to bet against entrepreneurs with a great track record. I’m somewhat skeptical that many young consumers will be drawn to a credit union so closely affiliated with marijuana, but with the dual focus on both pot-related businesses and consumers, it might not take too many consumers to sign on for DOPECU to be viable. 

What do you think?

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