Five steps to succeed and prosper in cannabis banking
As a Blue Wave crashes on the shores of Congress and Democrats assert control of the House of Representatives, there’s reason to believe a Green Wave may soon follow. Democratic lawmakers in both chambers have introduced a slate of bills to align federal policy with state marijuana laws. Notably, a House congressional committee voted in late March to approve the SAFE (Secure and Fair Enforcement) Banking Act, a bill sponsored by Rep. Ed Perlmutter (D-Colo.) that would protect financial institutions that serve the cannabis industry. A companion bill in the Senate is sponsored by Sen. Jeff Merkley (D.-Ore.).
In fact, the prospects of this and other cannabis reform bills passing into law are better than ever before. As recently as last week, U.S. Treasury Secretary Steven Mnuchin said that absent of a regulatory solution to existing banking access issues for the marijuana industry, Congress needs to resolve the problem with legislation “on a bipartisan basis.”
Over the past few years, the legal medical and recreational cannabis market has flourished. According to Arcview Market Research, the U.S. legal market alone may top $21 billion by the end of 2021. Since California legalized medical marijuana in 1996, some form of medical or recreational marijuana is now legal in 33 states, representing approximately 95 percent of the U.S. population.
Despite the groundswell of support for cannabis legalization, banking has yet to catch up to demand. In some states banking services are sparse to non-existent; in others such as Washington and Colorado, financial institutions (FIs) face increasingly stiff competition to attract and serve top-performing marijuana related businesses (MRBs). This demand is expected to grow as federal cannabis legalization gains greater support. Already, federal regulators accept that financial services organizations operating under their jurisdiction are providing services to MRBs and passing compliance exams.
Regardless of any new legislative protections, enhanced due diligence requirements for FIs serving this high-risk industry are expected to remain in place. Here are a few considerations for financial services organizations that seek greater reliability and efficiency in their processes as they better manage risk, ensure a positive customer experience and scale operations.
- Automate compliance and reporting processes. Compliance and risk management can be complex, expensive and time consuming. While many FIs already serving MRBs meet their compliance requirements, most do so manually, which can drain resources. Automating compliance improves overall compliance outcomes and frees up resources to focus on more value-added activities, such as better serving customers and growing deposit portfolios.
- Cannabis banking goes beyond compliance. The biggest hurdle for banks and credit unions serving MRBs involves instituting an effective compliance and risk management program. But they must also consider how cannabis banking affects other parts of the operation. For example: Does the FI have a well-conceived product and pricing strategy in place? What about security protocols for cash deposit and cash handling? What is its tolerance to offer traditional lending and credit services to MRB customers—and will those services extend to MRB employees? These issues and more should be raised as banks enter this market.
- Minimize cash transactions with payment solutions. While the majority of MRBs remain predominantly cash-based, FIs can improve overall safety and compliance by offering customers access to products that help them collect payments electronically. For consumers, payment solutions offer great convenience, security, loyalty and peace of mind. Non-traditional payment solutions are increasingly available to the cannabis industry and with the right compliance present viable alternatives to cash.
- Accelerate the onboarding process. When we talk to FIs, we often hear about how long it takes to approve new customers. FIs greatly improve their competitiveness when they reduce the new customer onboarding window from the current five or six weeks to just one or two. A unique product offering designed for MRB customers, along with clearly defined parameters for accepting new customers, accelerates the process and allows them to collect the fee income associated with these customers much faster.
- Use cannabis banking experts to get started. The complex web of regulatory and compliance protocols compels FIs to develop clear policies and procedures. This empowers boards to understand and sign off on how they’ll manage MRB banking risk; how much business they’re willing to take; and what monitoring to put into place to stay within the newly set boundaries. Engaging cannabis banking experts early on can help banks forge an operational model that works for this industry.
Increased acceptance of cannabis, along with new legislation and rapid market growth, is ushering in a new age of competition in MRB banking. Financial institutions should take steps now to implement best practices to serve these customers and put themselves in a strong position to benefit from new sources of revenue and growth. If a Green Wave is indeed gathering, call it a monetary color that careful, thorough bottom-line bankers can surely appreciate.
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Check out Tony on BAI’s Podcast: Cannabis banking and the path to navigate compliance.