As demand for cannabis banking services grows, so too does the competitive landscape. Legal cannabis businesses, already dealing with challenging market conditions marked by high tax rates, complex regulations, and competition from the illicit market, must also navigate the emergence of cannabis banking offers marketed by unregulated third-party financial service providers.
We recently sat down with Cole Saini, Director of Risk Management at California-based KeyPoint Credit Union, to talk about how regulated financial institutions can provide reliable and cost-effective cannabis banking programs, and what cannabis-related businesses (CRBs) should look for in a banking partner.
KeyPoint Credit Union was established in 1979 to provide financial services to employees in the then-nascent Silicon Valley technology industry. Today it is one of California’s largest credit unions with seven branches and more than 63,000 Members. Backed by its Board of Directors, KeyPoint launched a cannabis banking pilot program in February of 2020, just as the coronavirus pandemic was hitting our shores. While initial interest from cannabis businesses slowed, the program quickly reached capacity in the following months and has expanded to meet the demand from the industry.
Here are a few highlights from our conversation.
Why should financial institutions take on the risk associated with serving the legal cannabis industry?
Cole Saini: This is an interesting question, especially in the context of the coronavirus pandemic. Before COVID-19, we saw the legal cannabis industry as an important part of our growth strategy centered around increasing low-cost deposits. With the changes in the market, our program is now an important source of non-interest income. But going back to the question of risk, the truth is, every financial institution board is risk averse. At KeyPoint, we went through a comprehensive risk assessment process before launching our pilot program. Fortunately, there are now more efficient ways to manage the risks associated with this industry. Software solutions providing automated monitoring and validation of business accounts, such as what is offered by Shield Compliance, has enabled us to deliver on our AML/BSA requirements, while at the same time reducing our reliance on expensive human capital to manage the program. As a result, we have been able to lower our costs significantly while maintaining extremely high levels of compliance. We expect an eventual reconciliation of state and federal law on cannabis. When that happens, the financial institutions that got into this market early should have a strong competitive advantage.
"We have been able to lower our costs significantly while maintaining extremely high levels of compliance."
What competition do financial institutions face in this sector?
CS: In most legal states, demand for cannabis banking services outpaces the availability of cannabis banking programs from regulated financial institutions. As a result, cannabis banking services that appear to be a viable alternative to regulated financial institutions are appearing in the market. We encourage CRBs seeking a banking partner to do their due diligence when evaluating these services. First, many of these companies charge extremely high service fees which can be assessed at two to three percent of deposits (with no maximum service fee). This causes many CRBs to continue operating largely in cash. Second, these services may place transaction restrictions on CRBs. For example, outgoing payments may require pre-approval. Lastly, and perhaps most importantly, these third-party service providers don’t face the same regulatory scrutiny as financial institutions. This scrutiny is important because it safeguards cannabis businesses from the risk of a sudden shut down of their accounts and makes banking safer by insuring their deposits.
What should an MRB expect from a regulated financial institution?
"Cannabis businesses should expect a true, transparent banking solution in every sense of the word as far as the products and services available to them."
CS: Cannabis businesses should expect a true, transparent banking solution in every sense of the word as far as the products and services available to them. This includes mobile and online banking capabilities, check writing, access to debit cards, bill-pay service, and armored carrier services for cash deposits. Financial institutions have the added benefit that they are regulated and can provide a full picture of compliance.
Partnering with experts who can assist with implementing compliance technologies, risk management policies, and operational processes required for banking this industry will help financial institutions create the foundation for an effective audit program and ultimately gain the financial benefits of cannabis banking.