Making Your Mark in Cannabis Banking

If there ever was a time for credit unions to consider cannabis, it is now.


I get more than a few strange looks from my former banking colleagues when they find out I now help financial institutions get into cannabis banking. Many still view it as too risky, and the ingrained image of the “stoner owner” does not instill a lot of confidence amongst bankers. However, in the words of Bob Dylan, “the times they are a-changin’.”


Not only is high-quality capital flowing into this fast-growing sector, but the people leading it are bringing deep traditional business experience across the entire cannabis ecosystem. As a result, the market opportunity is growing exponentially. According to the latest findings from New Frontier Data, the U.S. legal cannabis industry is projected to double to $41.5 billion by 2025. Recreational cannabis programs, now legal in 15 states, are primarily driving this growth. Several more states are likely to follow suit this year, and Democratic control of both Congress and the White House is expected to accelerate progress toward eventual full federal legalization.

If there ever was a time to consider cannabis banking, it is now. Here are some of the trends I see shaping the market over the next few years.


Price Will Become a Competitive Differentiator

As legal adult-use cannabis programs launch in more states, financial institutions will face increased competition for the best cannabis-related business (CRB) accounts. With added competition, there will be more pricing pressure. Credit unions should think about how they can future-proof their cannabis banking programs to generate low-cost deposits and reliable non-interest income today while offering a price structure that is ­competitive longer term. This involves evaluating two scenarios. First, if your credit union needs to lower prices down the road, will it still be able to make money while meeting its compliance requirements? And second, does your credit union’s existing approach to compliance allow it to scale its program to serve new members? Building scale and efficiency into cannabis banking programs today will enable credit unions to adjust pricing as needed to remain competitive when more financial institutions enter the market.


Lending Will Become More Mainstream

As the cannabis industry starts to mature, credit unions are beginning to offer a wider range of products to CRBs. Of course, the number one issue for these ­businesses is access to depositories, which continues to be why most credit unions get into cannabis banking in the first place. But these institutions also entered the cannabis banking space to address an important balance sheet problem: The need for a low-cost deposit strategy to fund strong loan demand. As credit unions seek more earning asset opportunities in the current economic environment, there is growing interest in lending to CRBs. Indirect (and sometimes direct) real estate lending is emerging as the most common entry point, but we have seen direct lending into the cannabis organization itself in a few cases. There are real obstacles associated with lending to these businesses, but credit unions are starting to overcome these challenges by leveraging their BSA/AML compliance investments. When credit unions have all the belts and suspenders in place on that side of the house, they often have deeper insights into their CRB members than their ­traditional ­borrowers. These insights can help offset some of the credit risks.


Federal Recognition Will Likely Precede Full Legalization

Although Democratic leaders in Congress continue to project confidence that they will pass sweeping cannabis reform under the current administration, the timeline for such action is less clear. While full legalization may ultimately be the goal, my sense is that over the next 12 to 18 months, we are more likely to see federal recognition of state-level programs that would lead regulators to issue rulemaking that goes beyond the existing Financial Crimes Enforcement Network (FinCEN) guidance. This would also likely be the impetus for many financial institutions, including those with heftier balance sheets, to get off the sidelines of this burgeoning market. I would not be surprised if we saw the number of financial institutions serving the market jump from under 200 today to between 600 and 1,000 in the coming years.


Federal recognition, however, will not eliminate the need for enhanced due diligence. The illicit market is still going strong to the tune of $65 billion per year, and legacy money will eventually want to find its way into the legal banking system. When you have that much illicit activity occurring, you need to make sure that bad actors are not attaching themselves to good businesses. Here again, an efficient and cost-effective BSA/AML program can become a competitive advantage as more financial institutions enter the space.


When I was tasked with developing new lines of business in my previous role as a retail banker, I always sought out a playbook to adopt best practices while minimizing risk. Fortunately, a cannabis banking playbook exists today to help credit unions serve this market, pass their compliance exams and maintain a competitive edge as the market changes in the years ahead.


Originally published in Credit Union Times on February 22, 2021


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