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Banking the Cannabis Industry: A Tale of Two Realities

Challenge/Solution: Cannabis banking offers financial benefits such as new low-cost deposit growth, non- interest income, and the potential for earning assets. While the federal government’s lack of progress on passing cannabis reform legislation creates stability and predictability, rapid change at the state level means banks must adapt their products and services to meet changing demand. To serve cannabis customers effectively, banks must have a plan in place to meet the regulatory compliance demands of the industry.


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The cannabis industry is rapidly evolving, marked by the coexistence of two distinct realities: dynamic state-level markets and a slower pace of change at the federal level. While state-level legalization and market consolidation require banks to evolve their products and services to meet changing demand, the federal government’s lack of progress on passing cannabis reform legislation, like the SAFE Banking Act, creates stability and predictability.


Banking cannabis-related businesses offers compelling financial benefits such as new low-cost deposit growth, non-interest income, and the potential for earning assets, but banks must be grounded in the realities of the industry and have a roadmap in place to navigate this line of business.


A Rapid Pace of Change at the State Level


With increasing legalization – today, 23 states have approved adult-use cannabis – state cannabis markets are undergoing significant change. This includes consolidation and margin compression as CRBs mature.


To stay competitive, banks need to understand the economics of the cannabis industry and tailor their products and services to meet the evolving needs of their customers. Lending, reporting, and comprehensive cash management solutions have become necessary components in effectively serving these clients.


Pricing has also become a key differentiator. Historically, banks used pricing to offset or monetize the compliance function. Now, bankers are using 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.


Stability at the Federal Level


While progress towards federal legalization is eagerly anticipated, the lack of significant change in federal cannabis policy has fostered stability and predictability. Operating under guidance introduced in 2014 by FinCEN, federal regulators have gained significant experience working with banks serving the cannabis industry. This slow but well-worn path now provides a level of certainty for bankers.


Because each state has its own unique regulations and licensing requirements, however, vigilant monitoring is a must. Banks must have a clear line of sight into the individuals connected to cannabis businesses and ensure sales activity aligns with deposit activity. A robust compliance program, including monitoring, ongoing due diligence, and suspicious activity reporting (SARs), forms the foundation for serving these customers.


Technology that automates compliance tasks and aids in ongoing monitoring improves compliance outcomes while contributing to a better customer experience. As cannabis operators face increased competition and tighter margins, banks that minimize the compliance burden are gaining a competitive advantage.


The Cannabis Banking Playbook


Sign up to get your copy of the Shield Compliance Cannabis Banking Playbook — the essential guide to compliant cannabis banking for banks and credit unions. Download Now



This article was originally published in Independent Banker

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