Why is cannabis banking even a topic?
The opinions expressed are solely those of the author and do not reflect the views of Rolling Stone’s editors or publishers.
Cannabis is one of the fastest growing industries in America. In 2021, nearly 10% of jobs in Missouri came from its legal cannabis industry, and it’s a medical-only program. Also in 2021, Illinois and Massachusetts reported excise tax revenues from cannabis exceeding those from alcohol for the first time. Yet in a recent study by Whitney Economics, 72% of cannabis businesses surveyed said banking was their #1 concern – 72%, ahead of taxes. Why would such an industry be underbanked? Why is cannabis banking even a topic?
A little historical context might help. Not to state the obvious here, but cannabis is a Schedule 1 narcotic, and despite the fact that many states have passed some form of legalization measures, it remains illegal at the federal level. Therefore, every industry dollar that passes through the financial system can technically be considered money laundering. For a bank or a credit union, it was a ban – period, end, period.
Then the Cole Memo came out (although it was later canceled), followed by the FinCEN guidelines of 2014. Slowly the industry started to gain more and more acceptance from financial institutions. But the enterprising financial institution that rushes to fill this need will quickly find that the regulatory burden on banking is very high, perhaps prohibitively high. Just to cite a few examples:
1. The industry is cash-heavy, which is heavier (not to say expensive) than most realize: transporting cash, counting cash, and documenting cash.
2. Due to its federal illegality, accepting funds from industry triggers certain reports required by the financial institution. Because the depository relationship is (hopefully) ongoing, these reports are constantly being filed, causing a lot of extra work for the bank or credit union.
3. The FI must monitor the account so closely that, in quite a literal sense, they can account for every dollar deposited. There are other nuances, but you get the idea: it can be a lot of work, much more than almost any other industry.
At first, this led to many IFs stepping in and then coming back. It also resulted in very expensive banking; I’ve seen fees reach over $10,000 per month just for a basic checking account. But as the market evolved, the acceptance of cannabis businesses by banks and credit unions began to pick up.
Despite this, cannabis banks still seem to be a priority for cannabis executives and entrepreneurs. The very real challenges the cannabis industry faces when trying to access financial services have led to a misconception that cannabis related businesses (CRBs) simply cannot obtain bank accounts. While many financial institutions are not yet ready to finance the industry, a growing number of banks and credit unions are. The likelihood, however, is that you won’t be able to just run a Google search for a listing.
With very few exceptions, financial institutions are generally tight-lipped about their cannabis banking programs, and you probably won’t find them issuing press releases or advertising these programs on their websites – though. Only recently has this started to change, with several institutions being very public about their programs. . Contact local lawyers, accountants and bookkeepers. If they represent or work with other local CRBs, they may very well know who they are doing business with or know someone who does. You should also consider contacting FIs directly even if you are not sure if they work with CRBs. You might be surprised to learn that they do, and if not, they may redirect you to another FI in the area.
Don’t waste your time contacting the major national banks. Yes, you can have a friend who is actively doing business with one, but these are usually exceptions to the rule that are probably not viable. Once one of these banks finds out the true nature of their business, they could “derisk” them – FI code for “close the account”. Instead, look for credit unions, community banks, and regional banks. There is a myth that only local credit unions can stock cannabis, but that is not the case. Moreover, for a CRB, the difference between the organizational structures of banks and credit unions is not as important as the products and services they are prepared to offer.
The pioneering financial institutions that first took the risk of banking the industry were extremely cautious, and it was relatively unusual for them to offer a CRB more than a standard small business deposit account, that is i.e. a place to store money but nothing else. However, we are entering a new phase of cannabis banking where we see financial institutions offering more than just a place to park money. Some are starting to offer loans, payroll services, business insurance, etc., so it’s worth looking around to see what’s available. You might find the new suite of services surprising and comparable to business services for non-cannabis businesses.
Today the industry is largely “banked”, in the sense that companies have accounts somewhere, employees now receive paychecks and direct deposits, instead of cash, invoices are paid by checks or electronically, etc. But it is rather underbanked, in terms of capacity, capacity and cost. But, that’s a subject for another article.