In late May, the Minnesota legislature passed a bill legalizing adult-use cannabis, joining 22 other states with similar legislation. The new law expands Minnesota’s $85 million medical cannabis program, in place since 2014, and will be a significant expansion of the market. According to Marijuana Moment, annual cannabis sales are projected to surpass $500 million by Fiscal Year 2027.
While it could take 12 to 18 months for licenses to be issued and regulated sales to start, a new legal market for adult-use cannabis brings with it a surge of new businesses and new capital. To ensure the processes, procedures, technology, and trained staff to serve this industry are in place, bankers need to start with a plan. Fortunately, a playbook exists to help bankers understand both the opportunities and the risks related to serving cannabis-related businesses (CRBs) and navigate this new market successfully. Here are a few points from that playbook to keep in mind.
Understand the Realities of Cannabis Banking
While banking this line of business offers compelling financial benefits such as new low-cost deposit growth, non-interest income, and the potential for earning assets, banks need to make sure they are grounded in the realities of the cannabis industry and the strategic business reasons for getting involved.
Having a clear understanding of what is required to serve CRBs and minimize risk to the financial institution will help bankers determine if this industry is a good fit for their institution.
Update Policies and Procedures
Banks will need to update their existing policies and procedures to reflect the compliance and regulatory requirements of this industry or develop new ones if necessary. Cannabis banking will touch almost every aspect of the business, from audits and insurance to cash transporting and processing, and even branch security. As new businesses enter the industry, you’ll need to have rigorous risk assessment standards and procedures in place to ensure you’re banking legal funds and have a clear line of sight into the business and its beneficial owners.
Meeting compliance requirements includes developing the systems, applications, and onboarding processes that allow you to vet potential customers and access critical customer and transaction data, all while delivering a positive customer service experience.
BSA/AML Compliance
As a banker, you’ll have a responsibility to ensure your cannabis clients are operating within state guidelines. Having systems and processes to help you reconcile data from multiple sources can help you do that efficiently and accurately. Investing in specialized BSA/AML compliance technology will help your bank operate more efficiently, allowing compliance staff to focus their time, energy, and brainpower on judgmental decision-making, analysis, and customer service.
Staff Training
While technology will help make your staff more efficient, you’ll also need to hire or train specialized cannabis bankers who have a deep understanding of the industry. This knowledge will help them better monitor customers’ business activity while allowing them to deepen their customer relationships.
Both bankers and customers should expect high levels of transparency in their operations and interactions. This can pay additional dividends down the line, as strong, open relationships yield positive referrals.
Be Prepared for Increased Competition
As an emerging industry, banks should anticipate ongoing market changes and be prepared to adapt to remain competitive. Specifically, there is significant interest in how changes to federal cannabis policy will impact banking. While we do not believe the passage of federal reform, such as the SAFE Banking Act, would change the compliance and due diligence required for this industry, it would be an important step toward removing the regulatory uncertainty in the market and would open the door for more financial institutions to serve the industry.
The U.S. cannabis market is poised for substantial growth, with projections from New Frontier Data estimating it to reach $72 billion annually by 2030. With strong growth projected for Minnesota and legal adult-use states across the Midwest, you can be certain there will be more financial institutions entering this market in the coming years. Increased competition typically comes with more competitive terms for the customer, so you'll want to be ahead of the curve and be ready to sharpen your pencil when that time comes.
The Cannabis Banking Playbook
The emerging legal cannabis industry brings significant growth potential, along with challenging operational demands and complex regulations. But cannabis banking does not have to mean high-risk banking.
Informed by the experiences of pioneer bankers, the Shield Compliance Cannabis Banking Playbook defines a path forward for banks to serve cannabis-related businesses compliantly while gaining the financial rewards from this market. Download Now
This article was originally published in Minnesota Bankers