In today’s rising interest rate environment, financial institutions across the country are taking a hard look at their balance sheets. Legal medical and adult-use cannabis programs in 38 states and Washington, D.C. offer an opportunity for bankers to grow revenue, and gain a competitive advantage ahead of federal legalization.
In the Great Lakes region, legal adult-use cannabis programs in Illinois, Michigan, Minnesota, and New York have already created a multi-billion-dollar market. Elsewhere there is strong voter support in Ohio for an adult-use legalization initiative that will be on the November ballot, and lawmakers in Pennsylvania have introduced an adult-use legalization bill with bipartisan support.
As more states legalize cannabis, financial institutions and regulators are gaining a deeper understanding of the compliance requirements for this industry. Given the demand for financial services by licensed operators, bankers entering this line of business can obtain low-cost deposits, non-interest income, and the potential for earning assets that offer a yield premium for financial institutions. Fee-based services, such as consumer and B2B payment systems, can also generate ongoing revenue.
Deposit Growth:
Developing new lines of business that generate low-cost funding sources is critical for long-term profitability. With relatively few banks and other financial institutions ready to serve CRBs, demand for cannabis banking services is outpacing supply in many parts of the country, creating an opportunity for first movers. As rates continue to increase, low-cost business checking deposits are increasingly valuable and can lead to other revenue-generating opportunities such as lending and non-interest income.
Lending:
As the cannabis industry continues to mature, lending to cannabis-related businesses has become increasingly attractive from an earning asset standpoint. Some financial institutions are finding new growth by lending outside their existing cannabis banking program, particularly in commercial real estate secured loans, while others offer a full range of loans to CRBs and their employees.
Referral-Based Income Streams:
Non-interest income generated through fee-based services can help offset the cost of operating a cannabis banking program and boost the financial institution’s bottom line. Partnerships with other financial services providers, such as payroll processing, benefits, HR and insurance, can also generate recurring revenue for the financial institution while providing CRBs access to a value-added service that can simplify back-office operations.
Federal vs. State Law: A Tale of Two Realities
With 23 states legalizing adult-use cannabis and contributing to what is expected to become a $72 billion industry by 2030, significant change is occurring at the state level. This includes consolidation and margin compression as CRBs mature. Vigilant monitoring is a must considering each state has its own unique regulations and licensing requirements, and financial institutions must have a clear line of sight into the individuals connected to CRBs and ensure sales activity aligns with deposit activity.
Conversely, while progress toward federal legalization is eagerly anticipated, the lack of significant change in federal cannabis policy has fostered a degree of stability and predictability. This slow but well-worn path now provides a level of certainty for bankers.
Implementing a rigorous process for vetting and onboarding cannabis-related business customers can help mitigate concerns about BSA/AML compliance. Compliance tools purpose-built for the cannabis industry ensure bankers have access to all the data and insights they need to make informed decisions. With the right technologies and processes in place to enable a robust cannabis banking risk management program, the new revenue generated from this line of business can offset operational costs and enable the financial institution to grow and scale efficiently.
Given the complexities of this line of business, financial institutions must understand the economics of cannabis banking and tailor their products and services to meet the evolving needs of their customers. By establishing policies and procedures, implementing an effective technology platform, creating a scalable pricing structure, and developing expertise and relationships now, bankers will have a competitive advantage when federal legalization eventually occurs, and more financial institutions enter the market.
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This article was originally published in Great Lakes Bankers Magazine