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The 'Wild West' No More: Adult-Use Continues to Grow, Mature

Understanding what is required to serve cannabis businesses and minimize risk helps bankers succeed in this expanding market.

By Tony Repanich

The adult-use cannabis market is no longer the wild west. Established markets in California, Washington, and Colorado continue to grow and mature as new capital enters the market. In California, the expansion of local jurisdictions allowing cannabis retail means that over 100 retail licenses will come online over the next 12 months. Total spending in California, the largest individual cannabis market in the world, is expected to hit $7.1 billion in 2024, representing nearly 23% of all U.S. cannabis sales.

Meanwhile, other states are recognizing the opportunity in legal adult-use cannabis and acting accordingly. One takeaway from the pandemic was the resiliency of the legal cannabis market, as dispensaries were declared essential businesses and sales skyrocketed. The past year has seen adult-use cannabis approved or launched in Arizona, Montana, and New Mexico in the West. With plenty of programs to learn from, states are hitting the ground running. Sales in Arizona, which launched its adult-use program in January, are on track to outpace Colorado. And now we see the start of legalization campaigns in states like Wyoming.

While banking this industry offers compelling financial benefits, such as new low-cost deposit growth, non-interest income, and the potential for earning assets, it comes with a high regulatory burden. Having a clear understanding of what is required to serve cannabis-related businesses (CRBs) and minimize risk to the financial institution will help bankers develop the policies and procedures needed to succeed. With regulations varying from state to state, it’s a complex industry, requiring a considerable investment of resources.

More Cannabis, More Money, More Complexity

A growing cannabis industry means increased complexity for nearly every player. As banks enter or expand their foothold in cannabis banking, it has operational impacts across the organization, from processes and procedures for onboarding new clients and reporting timelines and requirements to insurance and your physical branch security.

Similarly, as CRBs get larger and more complex via vertical integration, mergers and acquisitions, or outside investment, they need banking services and cash management tools that can grow with them and support their changing needs.

Investing in specialized compliance technology will help your bank operate more efficiently by streamlining your processes and ensuring you and your staff can access critical data to meet ongoing regulatory requirements. Automation also allows your team to focus their time, energy, and brainpower on judgmental decision making, analysis, and customer service, rather than mundane compliance tasks. An investment in a compliance platform will also allow your cannabis banking program to scale as the industry grows and new competitors enter the market.

And More Opportunity

As the industry grows, there are a growing number of ways bankers can engage CRBs in their community. Many financial institutions have been reluctant to offer lending to CRBs because of the BSA/AML risk. As more maturity and capital come into these businesses, they are becoming an increasingly attractive source of earning assets.

An entry into more traditional lending for CRBs typically requires a high level of comfort with the industry. But in established and growing markets, the need for capital is ever-present, whether for real estate, new equipment, or more traditional lending. With the right compliance and risk management processes in place, bankers will have access to valuable data to make informed lending decisions and mitigate risk.

Be Ready to Scale

Financial institutions across the country are watching the growing cannabis industry closely, and you can be certain more institutions will be entering the market in the coming years. Banks already engaged in the industry should anticipate ongoing market changes. For new bankers evaluating the potential of a cannabis banking program, it is important to have an operational cost structure that allows you to gain the financial rewards of this industry and remain competitive.

Relationships Matter

As new businesses and banks enter the industry, relationships become increasingly important. Bankers should expect to maintain transparent relationships with clients and regulators alike. Clear expectations of regulatory requirements and open lines of communication will help ensure your bank and its customers stay compliant.

The strong market, social and political acceptance, and the continued possibility of action at the federal level are motivating a growing number of financial institutions to consider an entry into the market or expand their footprint. As legal cannabis industry programs expand across the West, there will be increased opportunities for new and experienced cannabis bankers. You just need the right tools, resources, and relationships in place to stay ahead of the competition.

This article originally appeared on Page 18 in WesternBanker.


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