There's money in weed, but where to put it? While most Western New York banks balk at working with marijuana businesses, some see opportunities.
New York's burgeoning marijuana industry is expected to bring in billions of dollars, and that money needs to be kept somewhere.
It's a tricky problem for those in the weed business, as banks — typically hungry for new deposits — are far more reticent when it comes to cannabis.
Financial institutions are on shaky ground when it comes to weed due to tenuous federal regulations.
A small but growing number of banks, however, has weighed the risks and decided the upside of working with the industry is worth it.
"We view this as a diversification strategy, both on the funding side as well as on the revenue side," said Sean Willett, Warsaw-based Five Star Bank's executive vice president and chief administrative officer. "I see this as a growing opportunity within our footprint."
Most other banks in Western New York — and across the country — are taking a wait-and-see approach as federal lawmakers debate how the industry should be handled.
There are about 9,000 banks and credit unions in the United States. As of the fourth quarter of 2022, only 479 banks and 168 credit unions reported dealings with marijuana-related businesses to the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) — about 7% of depositary institutions.
Risk v. Reward
The fundamental dilemma at the heart of cannabis banking is that marijuana, though legal in many states, remains an illicit drug, according to the federal government. This put banks — which are subject to strict federal regulations and overseen by numerous federal agencies — in a tricky position.
"Banking the cannabis industry puts the banks at serious risk of losing their federal charter or otherwise facing legal liability," said Ryan Stearns, a partner with Lippes Mathias and co-leader of the firm's cannabis team.
The federal government has carved out regulations that allow for legal cannabis banking, but they're far from ironclad.
The country's largest banks, like JPMorgan Chase and Wells Fargo, mostly still avoid cannabis banking. For an institution at that scale, the modest rewards still aren't worth the regulatory risk.
However, for a smaller bank like Five Star, the potential rewards for banking marijuana-related businesses are far from modest. The cannabis industry presents a rapidly growing group of depositors with less competition for their dollars.
Five Star is a lender on the initial phase of a planned multiphase, $300-million cannabis campus that California-based Zephyr Investments LLC will build on 80 acres at Buffalo Lakeside Commerce Park.
The bank plans to work with the cannabis industry on two fronts. For a select few large projects, the bank will work directly with business owners and developers.
However, the majority of Five Star's cannabis-related business dealings will be via a new partnership with Safe Harbor Financial LLC, a Denver-based financial technology company that connects marijuana-related businesses with partner banks and credit unions.
Five Star Bank will operate primarily behind the scenes — the money will move through the bank's system, but businesses will work directly with Safe Harbor. Five Star will provide both lending and deposit services this way.
Safe Harbor, which started as program of Partner Colorado Credit Union before becoming its own company, is active in 20 states. The partnership gives Five Star Bank access to potential customers far beyond New York.
"We are providing, effectively, the infrastructure," Willett said. "Safe Harbor has the relationships, we have the opportunity, so it's a very symbiotic and complementary partnership."
For those in the marijuana businesses, the shaky status of banking has been a constant obstacle.
"You almost have to pivot very rapidly, because some banks will shut your account down," said Aleece Burgio, a local attorney who works with several marijuana-related businesses.
Burgio worked with a law firm in Oregon that had to change banks four times in 18 months. The firm didn't handle cannabis, but its clients did, and that made banks nervous.
In New York, the owners of marijuana-related businesses struggle to find banks and work with the small handful willing to take their money.
This doesn't apply only to marijuana growers, processors and sellers. Anyone who makes money primarily off the marijuana industry, even if they don't handle the product directly, is subject to similar scrutiny.
New businesses that are pursuing a state license are usually unable to create a bank account until they have the state's OK. This can further complicate the already-complex effort of getting a new business off the ground, Burgio said.
"You're almost better off not trying to get a bank account until you get your license," she said.
Few banks are willing to accept deposits from marijuana businesses. Even fewer are willing to lend them money, according to Burgio.
"Financials in cannabis are brutal right now," she said. "Lending is very much not available at traditional banks."
This means business owners must turn to private lenders for startup capital.
Though the banking situation is slowly improving, Burgio believes it will take federal action to truly stabilize.
Until recently, cannabis banking primarily has been the domain of very small financial institutions — particularly state-chartered credit unions, which are not subject to all the same strict federal oversight as banks. However, as the industry becomes more confident that the federal government won't reverse its position, bigger banks have started to enter the fray.
"Each year the average size of the financial institutions we work with is stepping up," said Tony Repanich, president and CEO of Shield Compliance. "We're seeing larger and larger banks have interest."
Shield is a Seattle company founded in 2018 that provides risk management and regulatory compliance services to financial service institutions that work with marijuana-related businesses.
The average size of the banks Shield partners with grows every year, according to Repanich. Currently that average is about $1.5 billion in deposits.
Shield Compliance does not have clients in New York, but it has worked with the Independent Bankers Association of New York State to provide info on cannabis banking to association members.
Marijuana banking is in its infancy in New York state, but banks here have the advantage of hindsight.
"They're entering into this space getting to stand on the shoulders of bankers that have gone before them," Repanich said.
Despite the risks, he sees substantial upside for banks that enter the fray now, while the industry is still young.
"There is an opportunity for bankers to gain a first-mover advantage," he said.
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This article was originally published by Jacob Tierney in the Buffalo Business First Journal