If there was a clear winner in this month’s election, it was cannabis.
With strong majority support for ballot initiatives legalizing recreational cannabis in Arizona, Montana, New Jersey, and South Dakota, 15 states will now have adult-use programs. Mississippi and South Dakota also passed medical legalization measures bringing the number of states with some form of legal marijuana to 35.
The prospect of federal legalization, or federal recognition of state-level programs, however, is still unclear. A divided Congress could mean that the passage of bills that would help normalize the banking environment for cannabis, most notably the SAFE Banking Act, is unlikely in the near term, even under a Biden Administration.
Yet, the cannabis industry continues to experience exponential growth. The five new legal states are projected to add nine billion dollars in revenue between 2022 and 2025, according to New Frontier Data, making the U.S. legal cannabis market worth $33 billion in the next five years.
The coronavirus pandemic is also fueling interest in this industry. As month-over-month sales figures show, the industry appears to be largely recession- and pandemic-proof. As a result, many state and local governments see cannabis programs as a way to raise new tax revenue.
Similarly, many credit unions are turning to cannabis banking as a new growth source during a down economy. While most initially entered the market to increase low-cost deposits and non-interest fee income, lending appears to be the next big opportunity to generate earning assets and gain a competitive advantage.
Although lending to cannabis businesses can be tricky considering there is no universal standard on collateral for this industry, many bankers are finding that compliance processes implemented on the deposit side that enable them to pass exams and onboard new members can be leveraged to mitigate credit risk with little additional work. This is because they have a crucial advantage: a deep insight into the companies they serve.
The added layer of transparency and data-sharing required to bank this industry enables credit unions to apply judgmental decision making to evaluate lending requests and make informed decisions that support the member’s business goals while protecting the financial interests of the credit union.
This article originally appeared in CU Insight on November 18, 2020