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Could startup Shield Compliance solve marijuana banking problems?

Shield Compliance is a Seattle-based startup in "regtech" — regulatory technology, an area that's evolved out of fintech, or financial technology.


Shield Compliance, a Seattle-based startup in "regtech" — regulatory technology, an area that's evolved out of fintech, or financial technology — thinks it could find some receptive clients in Ohio's burgeoning marijuana industry, where, like the rest of the country, access to banking services remains a challenge.


Shield Compliance specifically works with financial institutions to provide cannabis banking, which is particularly onerous because of a mismatch between state and federal laws. While more than two-thirds of U.S. states now have some kind of marijuana program through medical and/or recreational markets, marijuana's federal prohibition makes it a risky area for banks to participate in as federal regulators would view marijuana as an illegal business.


However, some institutions are still serving marijuana-related businesses (MRBs) despite this — at least 633 as of this spring, according to a report from the Financial Crimes Enforcement Network.


Shield suggests there are possibly just two institutions knowingly banking marijuana customers in Ohio (one of those is certainly Wright-Patt Credit Union of Dayton).


Some clients have accessed banks by more surreptitious methods, as Crain's has reported, but are promptly kicked out once the banks find out. That includes ancillary businesses that don't touch the plant, such as packaging manufacturers, and reportedly even some employees of marijuana companies. Banks that have shut down accounts tied to marijuana businesses include KeyBank, Huntington Bank and PNC Bank. Almost every large, super-regional bank has, or would, shut down accounts tied to marijuana when they discover the connections.


Putting aside the uncertainties with federal prohibition that keep national banks away from the industry, institutions can still generally serve those businesses if they adhere to certain strict compliance measures. State-chartered banks and credit unions are more likely to be involved. The question for those institutions is whether they want to put resources toward all the layers of compliance to which they'd have to adhere.


Helping banks comply with those regulations to properly serve the marijuana sector is what Shield Compliance aims to do.


The company recently announced raising a $5 million Series A funding round led by Copia Investments. Per the company, that fundraise brings its post-money valuation to $20 million. The capital builds on another $5 million in seed money raised in March.


Collectively, the money will support further development of Shield Data Hub while "increasing the pace of deployment at financial institutions across the U.S.," according to the company. That includes banks in Ohio, Colorado, Illinois, Massachusetts, Michigan and Washington.


"Shield Compliance offers a complete and secure platform built for bankers by bankers," said Scott Walker, fund manager of Copia Investments, a growth venture equity firm focused on services and software within the fintech industry, in a statement. "Shield's solution meets the diverse compliance requirements faced by financial institutions serving MRBs and addresses a critical need in a rapidly growing, yet woefully underserved market. Under the direction of the company's experienced leadership team, Shield is gaining strong traction in legal cannabis states and is quickly becoming the clear choice for the banking industry."


"We are pleased to see the confidence Copia Investments and a growing set of customers across the country have in our product," said Noah Carey, founder and CEO of Shield Compliance, in a statement. "It reflects our core belief that the cannabis industry must have access to banking services, and that our purpose-built solution meets the compliance requirements of this industry while enabling financial institutions to operate efficiently and effectively."


With movement on the SAFE Banking Act, which would provide safe harbor for banks working in the marijuana industry, there's hope in the finance world that banking services for cannabis could open up in the future. But it's unclear if or when the Republican-controlled Senate will actually move on the bill, which passed through the House in September.


So, in markets like Ohio, the push to help banks serve marijuana clients could be a game-changer for those trying to access an industry flooded with cash.


Mike Adelman, president and CEO of the Ohio Bankers League trade group, said he's heard of Shield, but has not met or spoken with anyone from the startup. He added he's often called by similar companies trying to gauge the interest in marijuana among Ohio banks.


"We tell them appetite-wise, we know of a small handful of banks who are maybe dabbling in the space, or at least curious about it," he said. "But the vast majority just do not want to get into it in part until there's clarity at the federal level."


Ohio banks do tend to be run by very conservative boards in conservative communities that still shy away from marijuana — not just because of federal laws, but because of the surrounding stigma.


So whether Shield Compliance will find hospitable clients in Ohio is unclear.

But if it does, aside from being a potentially lucrative play for the startup, it could very well enable more marijuana businesses to access banking services for which they've been clamoring.


This story was originally published on Crain's Cleveland Business.