Booming adult-use cannabis sales during the first few years of the COVID-19 pandemic led some to deem the industry ‘recession-proof.’ While it remains to be seen how inflation and a potential economic downturn will impact future sales, recent projections show medical and adult-use cannabis sales reaching upwards of $33 billion by the end of this year. New legal adult-use cannabis programs in states like New York, New Jersey, and even Montana, which launched its market earlier this year, are responsible for much of this growth. And legalization is being decided at the ballot in at least five other states.
As consumers and businesses feel the squeeze and economic uncertainty lingers, cannabis banking can help banks and credit unions find new growth with low-cost deposits, new lending opportunities, and non-interest income revenue streams.
Developing new business that generates low-cost funding sources is critical for long-term profitability. With relatively few financial institutions ready to bank cannabis-related businesses (CRBs), demand for cannabis banking services is outpacing supply, creating an advantage for first-movers. As rates increase – the Federal Reserve has raised interest rates four times this year as part of its efforts to address inflation – low-cost business checking deposits are increasingly valuable and can lead to other revenue-generating opportunities such as lending and non-interest income.
As the cannabis industry continues to mature, lending to CRBs has become increasingly attractive from an earning asset standpoint. Some banks and credit unions 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.
A rigorous process for vetting and onboarding new customers can help mitigate concerns about BSA/AML compliance when it comes to lending. Compliance tools purpose-built for the cannabis industry can ensure banks and credit unions have access to all the data and insights they need to make timely informed decisions. Here again, early adopters with strong customer relationships and a high level of knowledge about the cannabis industry will find themselves at an advantage.
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 a financial institution’s bottom line. Banks and credit unions can create new revenue streams by referring CRBs to payment providers offering non-cash payment options for the retail environment. For example, they can support cannabis-focused fintech companies as sponsors for ACH wallets or other electronic payment mechanisms, or as lenders behind a buy now, pay later product.
Partnerships with other financial services such as payroll processing or benefits, HR, and insurance can also yield referral income for banks and credit unions while helping cannabis customers meet their needs as growing businesses. These referral relationships can generate recurring revenue for the financial institution while providing CRBs access to a value-added service that can simplify back-office operations.
In today’s rising rate environment, financial institutions across the country are taking a hard look at their balance sheets. The growing legal cannabis market offers a unique opportunity for banks and credit unions to participate in a new line of business, grow revenue, and improve customer engagement, all while supporting public safety and securing a competitive advantage for years to come.
This article originally appeared in California Bankers Association Magazine in Issue 5