Getting banked: financial services and the US cannabis industry

The cannabis industry is the fastest-growing industry on the planet. All over the world, laws restricting the use of cannabis as a medicinal or recreational substance are being relaxed.

But as the world moves from ‘reefer madness’ to weed gummies, this liminal phase throws up a number of problems for those looking to capitalise on the new ‘Green Rush’. In particular, the legal grey area in which cannabis now sits in the US means entrepreneurs and businesses struggle to access secure, robust and straightforward financial services.

While cannabis is legal in some form or another in more than half of US states, and the market value of the industry is estimated to be worth $13.2 billion in 2022, at the federal level it is still a Schedule 1 substance, up there with crystal meth and heroin. This means businesses taking in substantial amounts of money selling cannabis products cannot use banking services and must use cash instead, leaving them vulnerable to crime.

In limbo

These Cannabis Related Businesses (CRBs) are crying out for a banking system that can cater to their needs. In other industries, where legacy systems and institutions have failed to spot an opportunity in the past, fintech has stepped up. The cannabis industry is no different. Sensing an opportunity, organisations have sprung up to cater to this rapidly growing sector.

Infused Banking is one such outfit. Founded by a team of banking professionals who recognised that there was a need for training in the financial sector of the cannabis industry, the company aims to provide a space for bankers to learn how to serve this new industry, which has been largely ignored by traditional banks. It provides training and advisory support to help ensure that banks and cannabis businesses remain compliant with requirements and state laws.

Michael Beird, founding partner of Infused Banking

Michael Beird, founding partner of Infused Banking, recently spoke with FinTech Futures to discuss how banking is changing for cannabis businesses.

Infused Banking was born out of training conducted by its sister-company, BankersHub, which launched the industry’s first Cannabis Banking Professional Certification in 2020 for bank employees wanting a deep dive into cannabis banking compliance, guidelines, challenges, best practices and audit needs.

Beird says the response was overwhelming. “It became clear that there is a critical need to bridge the abyss that exists between financial institutions and cannabis operators.

“We launched Infused Banking this year to specifically deliver education, research and critical networking to both industries, starting first with financial services.”

Additionally, Infused Banking is dedicated to serving the specific needs of women and minorities in an industry that is already lacking representation from these groups.

The firm is already working with companies that want to hire, onboard and train female and minority employees, enabling them to offer scholarships and online resources. “These are just a few of the challenges and problems that need to be directly tackled before the industry grows too fast and leaves these under-represented groups behind.”

Lay of the land

To understand the state of cannabis-related financial services, Beird says one must first understand the legal landscape in the US as it pertains to cannabis in general.

FinCEN, the governing agency with oversight on money laundering and tracking illicit funds in the financial system, issued the Cole Memo in 2014 to offer guidance for federal prosecutors dealing with states like Colorado that were already making cannabis legal.

Other agencies, like the Department of Justice, honoured the Cole Memo when addressing the many CRBs that started emerging in the years following the memo’s issuance, even after its rescission in January 2018 by then Attorney General, Jeff Sessions.

“The rescission sent shockwaves through the growing industry, with states left to wonder if a legal crackdown might be imminent,” Beird says. However, local US Attorneys did not pursue the industry as a priority and growth continued unabated.

“Today, while AG Merrick Garland has not followed up on his promise to issue a ‘new’ Cole Memo, a flurry of other bills have emerged that could provide more foundational protections not only for CRBs, but for financial institutions that have taken the plunge into banking cannabis.”

In a climate of highly partisan politics, cannabis legalisation at the federal level is “highly unlikely”, Beird thinks. Therefore, the SAFE (Secure and Fair Enforcement) Banking Act remains the biggest opportunity when it comes to giving more institutions a reason to get involved in cannabis banking by giving federally chartered institutions protection if they choose to bank CRBs. The bill was passed in 2019 in the House but has yet to be passed in the Senate.

Because federal legalisation remains a pipe dream for now, there is currently a patchwork of laws, guidelines, regulations and general misunderstandings that vary dramatically across the 50 states and territories.

As a result, most larger federally chartered banks have opted to not bank cannabis or companies involved in the industry, leaving the industry up to primarily state-chartered banks and credit unions, which are much smaller and may lack access to many of the critical products and services offered by federal banks.

“This shows that the primary obstacle confronting the financial ecosystem as it pertains to cannabis banking is the continued classification of cannabis as a Schedule 1 drug. This classification, and the stigma associated with cannabis in general, keeps the vast majority of institutions away from banking cannabis,” Beird says.

FinCEN estimates that approximately 750 institutions currently bank cannabis in the United States, based on filings of Suspicious Activity Reports (SARs). These are documents that banks and credit unions must file for any deposit that may originate from cannabis operations (including activity that may never ‘touch the plant’, like hydroponics and even education).

However, just filing a SAR does not mean that the institution proactively ‘banks’ cannabis. It must still comply with the guidelines spelled out in the Cole Memo or possibly run afoul of federal laws despite not banking CRBs at all.

Research conducted by Infused Banking pegs the actual number of institutions at around 250 to 300. “This highlights another obstacle – that quantification of the cannabis banking landscape is purely conjecture as there are few institutions that actually publicise or promote their willingness to open accounts and manage transactions for CRBs,” Beird says.

The reason all this matters is because neither Visa nor Mastercard will allow credit cards to be used in association with any cannabis-related transactions on their payments networks. This has led to some very creative solutions provided by fintechs and other companies for handling card-based activities, while cash remains the primary payment source for more than 80% of all cannabis transactions. Getting this cash into the banking ecosystem, however, is the biggest hurdle that dispensary and operators must address without triggering money laundering violations.

Excluded from payment networks, CRBs must transact in cash, leaving them vulnerable to crime

But Beird says there are fintechs out there meeting the needs of CRBs. Dutchie, the cannabis e-commerce platform, launched a new payment system called Dutchie Pay, to allow consumers, through a closed-loop ACH bank transfer, to purchase cannabis products online for delivery.

Additionally, Mobius Pay and Primo Payments help Tier 2 and Tier 3 cannabis-related businesses to take online payments. On the banking side, the fintechs Risk Scout, Shield Compliance and Green Check Verified are helping banks build compliant cannabis banking platforms.

Taking the plunge

Beird says financial services need to overcome their aversion to risk and ditch their apprehensiveness about working with businesses that either directly ‘touch the plant’ (called Tier 1 businesses) or those involved in the cannabis industry that do not deal with the substance itself (called Tier 2 and Tier 3 businesses, depending on the percentage of total revenues derived from cannabis operations).

“Banks willing to provide products and services address a major issue for operators by giving them a place to park their deposits, especially cash,” Beird says. For services associated with revenue tracking, taxation reporting, profit management and employee pay, many of these businesses require certified accountants, tax advisors, consultants and payroll processing companies, since most banks that bank cannabis are not large enough to provide these services.

“Our study found that over three quarters of the banks proactively banking cannabis provide only checking accounts and nothing more. None of the major accounting, consulting and payroll firms have shown a willingness to jump into the cannabis industry without federal legalisation,” Beird explains.

For banks considering offering these additional ancillary services, Beird thinks a good first step would be to increase the number of bank secrecy officers and compliance managers as most banks cited these staffing areas to be the biggest areas of investment in the early days of cannabis banking and vital for supporting these companies.

Next steps

“While many in the industry are anxious to have the SAFE Banking Act passed in the Senate and sent to the president for his signature, most indicate that nothing short of full legalisation will be sufficient for them to proactively bank cannabis,” Beird says.

The US is not the only nation flirting with cannabis legalisation. Canada legalised the plant with the Cannabis Act in October 2018, which regulated the production, distribution, sale, import, export and possession of cannabis for adults of legal age. Because it went all-in on legalisation, Canada has had to confront the issue of providing financial services to the industry.

The country has an open payment system allowing for card payments anywhere in Canada; legal protections for banking cannabis customers, making banks competitive and accessible; and no patchwork of laws varying between provinces.

“Canada is the only strong comparative to the US in terms of legalisation and has largely avoided most of the problems we are experiencing by legalising cannabis at the national level,” Beird says.

Financial education will play a major role in the normalisation and therefore financial opportunities of cannabis banking, Beird believes, and needs to be a foundational part of onboarding all new employees, especially in states or regions where medical and/or recreational cannabis is legalised. By treating CRBs as the banker or advisor would any other ‘higher risk’ customer, the customer is seen as a potentially long-term relationship with the financial institution.

“In our research, bankers reported that new cannabis customers were switching institutions because their former one knew little about the industry and/or showed no interest,” Beird explains.

Institutions that are most aggressive about proactively engaging with CRBs incorporate training about the industry itself. That training covers terminology, workflows, compliance requirements and more. “This makes these customer facing professionals more credible with business operators already suspicious of financial service providers.”

A green and fairer future

Cannabis criminalisation has hurt disadvantaged and minority groups disproportionately. As for what financial institutions and the financial sector can do, the most requested bank product, besides a checking account just to get started, is access to capital and loans.

Businesses, especially small minority-owned businesses, lack access to funds even in low-risk, non-CRB industries. But add the cannabis factor and it forces these businesses to seek exorbitant loans from potentially more risky sources. “The banking industry will benefit from taking on the risks in more ways than just financially,” Beird believes.

By supporting young, thriving start-ups run by minority groups, the institution will get to take credit for that investment through the Community Reinvestment Act. It becomes another way the institution demonstrates how it gives back to the community it calls home.

When these local CRBs establish ties with local banks that bank cannabis, there will be solid, legitimate and local oversight. Consequently, they have less reason to feel threatened about crime, especially as dispensaries won’t have to require and process vast amounts of cash.

“It doesn’t take an advanced degree to understand why crime rises if everyone knows these are cash-intensive businesses, when they don’t have to be in this age of digital payments and authorisations.

“Building those bridges will help build respect, understanding and greater compliance through education, which is what Infused Banking is all about,” Beird says.