Cannabis Banking: Weighing the Risks and Rewards

Since Colorado and Washington legalized the recreational use of cannabis in 2012, another 17 states have followed suit, while 37 states allow medical use. However, until cannabis is legalized on a federal level, marijuana-related businesses (or MRBs) will continue to struggle to access financial services.

Providing services to MRBs remains a thorny issue for financial institutions as well, not only because of legal risks, but also due to regulatory issues like anti-money laundering and reporting requirements for suspicious activity.

“While there is no law that says banks can or cannot do business with cannabis companies,” CNN Business Perspectives explains, “banks are required to file reports to Uncle Sam detailing a customer’s suspicious or illegal activities. That can prove costly. A bank can be subject to large fines if it incorrectly reports on its transactions, or if a future bank regulator accuses it of not following the reporting guidance properly.”

Risk and Opportunity in Cannabis Banking

Think tank Cato Institute reports that roughly 10% of commercial banks in the United States served the cannabis industry in 2021. The ambiguity of the current risk and compliance landscape surrounding cannabis makes taking on customers in the industry a risky proposition, but it also presents an opportunity for financial institutions to serve an underbanked market.

“With cannabis businesses, there is an additional layer of burden in terms of assessing their compliance and maintaining and monitoring their compliance with applicable state law,” a compliance attorney told American Banker. “Some banks say it’s not worth it. Others say there is a lot of money there.”

The cash-based nature of MRBs presents risks of theft and other crimes, as well as money laundering concerns, making financial institutions understandably wary. While large banks and credit card networks steer clear of the cannabis industry due to federal regulation, smaller banks and credit unions are starting to step in to fill the gap.

The legal cannabis market in North America is projected to reach $38.2 billion by 2028, The Financial Brand reports, and early entrants like Washington State–based Salal Credit Union have shown that firms can successfully manage compliance issues while providing much-needed banking access.

“We … know that it’s an underserved market, and credit unions are known for serving underserved markets,” Salal’s vice president of business services said in an interview. “We wanted to help get the cash off the streets to improve public safety.”

In addition to depository services, institutions have an opportunity to offer other essential financial services that most MRBs don’t have access to, such as payroll, lending, and wealth management.

Cannabis Banking Risk and Compliance Management

However, a high-risk industry like cannabis requires commensurate risk and compliance management.

In 2014, the Financial Crimes Enforcement Network (FinCEN) released guidance clarifying Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services to marijuana-related businesses. The guidance covers obligations surrounding customer due diligence and suspicious activity report (SAR) filings.

With the future of federal legislation still a big question mark, financial institutions considering cannabis banking need to be proactive with sound governance, risk, and compliance (GRC) management practices. Consulting firm Cherry Bakert outlines some considerations for capitalizing on the risks and returns of cannabis banking, including mitigating exposure to:

In addition to understanding the potential risks, financial institutions need to consider other aspects of effective GRC management, including but not limited to:

• Culture and Training: Understanding and enforcing compliance with federal, state, and local laws and regulations
• Policies and Procedures: Establishing effective, well-documented processes for due diligence, risk assessment, and governance, particularly for high-risk customers or services

“Tailoring and customizing policies and procedures to address cannabis-related business matters (such as underwriting requirements, collateral considerations, customer due diligence and suspicious activity monitoring) is also necessary along with providing training to employees who will serve customers in the cannabis industry.”

• Oversight and Reporting: Monitoring key risk and performance indicators to align risk management with appetite and objectives

A proactive and rigorous approach to addressing the risk and compliance landscape for cannabis banking provides financial institutions protection against risk exposure as they expand their customer base. This potentially lucrative market includes cannabis-adjacent businesses that receive revenue from the industry, such as transportation and real estate companies, clinics that prescribe medical marijuana, or security and utility providers, among others.

Public Perception of Cannabis Banking

While financial institutions may have concerns about the reputational hazards of cannabis banking, consumer acceptance is growing. According to research from the American Bankers Association, 66% of U.S. adults support Congress passing legislation that allows cannabis businesses to access banking services in states where cannabis is legal.

The stigma within the financial industry also appears to be waning. A nationwide survey by Promontory Interfinancial Network found that 82% of bankers favor the federal government allowing financial institutions to serve MRBs.

______________________

As legalization initiatives continue to expand at the state level, banks and credit unions are weighing the risks and rewards of cannabis banking.

Due diligence is important in deciding to enter any new market, but the unique risks associated with MRBs—cash transactions, potential proximity to illegal operations, enhanced regulatory scrutiny and reporting obligations, to name a few—make understanding the environment crucial.

“We did a lot of research about the industry and applicable regulations. We had numerous in-depth conversations and presentations educating our board of directors and our regulators regarding the industry and we sought legal counsel,” Salal Credit Union explained.

Offering a cannabis banking program is a high-risk endeavor, but institutions are also starting to discover the risks of not serving this industry, according to Bank Director. As demand for banking services continues to grow, financial institutions may face losing high-worth customers to cannabis-friendly competitors.

As the number of banks and credit unions taking the plunge into cannabis banking is “quietly accelerating,” there may be no better time to consider entering this emerging market. 

Read Next | Cannabis Banking: Risk Considerations →