The Dilemma

Estimated at $16 billion, and on track to reach $57 billion by 2027, the marijuana industry has become highly lucrative in the United States. Compared to the previous year, legal cannabis sales were up 30 percent in 2021. Yet, despite the industry’s rapid growth, less than half of marijuana-related business (MRB) owners have a bank account.

Though 34 states and U.S. territories provide access to the substance either medically or recreationally, possession and distribution of marijuana remain illegal under federal law. Marijuana is currently categorized as a Schedule 1 drug under the CSA (Controlled Substances Act). This poses a significant legal risk to financial institutions that choose to handle MRB transactions.

Deciding To Service

One of the biggest questions commercial banks are asking today is whether to involve themselves or not with marijuana-related businesses. At the end of 2018, FinCEN (Financial Crimes Enforcement Network) reported that over 300 banks and more than 100 credit unions were formally conducting business with MRBs. While forecasting a future of financial growth, banks and credit unions will have to decide whether they’ll be providing service to MRBs or not. Are the current risks of providing banking services to these businesses worth the reward of the considerable cannabis market?

With more and more states creating legislation towards the legalization of marijuana, choosing to bank with these businesses seems like the evident step for increased revenue and future opportunities. Many business owners steer towards a cashless system, but without the involvement of a commercial bank, it’s nearly impossible to do so. Many financial institutions are already handling MRB transactions whether they know it or not.

Banking with owners of the cannabis businesses may be a liability that some banks can’t afford. However, using strategies such as risk assessments/management, transaction monitoring, and due diligence, large and small financial institutions can comply with regulatory requirements and minimize the gamble of a potentially risky customer.

Due to the myriad of risks that come with banking with the cannabis industry, the majority of banks remain wholly uninvolved. Directly correlating with these evident risks, FinCEN reports that less than two percent of credit unions have opted in for processing marijuana-related transactions. In any case, it’s up to financial institutions to offer banking services. It’s a big decision that comes with a checklist of prerequisite regulations and conditions. Here are some questions to consider when moving forward with banking and MRBs:

● Has the board approved the decision?
● Does the institution have the capacity and knowledge to abide by all cannabis-related regulations?
● Does the institution currently have access to technology that would assist with following these regulations?
● Has an analysis of the risks and rewards taken place?

● Does the staff have experience or need additional training for processing these businesses?
● Is the institution well suited to handle such transactions?

Risks Of Banking with MRBs

There is much to understand and many challenges that follow when banks choose to associate with cannabis-related businesses. Some of these risks include:

● Increased compliance with directives
● Supplemental staff and/or technology
● Reputational risks
● Specialized depository procedures

Under the guidance of FinCEN, banks are subject to an increase in their compliance with regulations. This includes overseeing due diligence on MRBs, verifying licenses, registering with proper state authorities, and requesting information from the state and law enforcement. In addition, banks need to stay up to date on regulations and policies in all the states in which they conduct business.

With the increase in regulations, more staff and technology may be required for proper compliance. More Suspicious Activity Reports (SARs) will need to be filed to dispute conflicts between state and federal laws. Monitoring devices and software will also need to be enhanced to watch over the conducted business and ensure everything is kept in accordance with the law.

Aside from the regulatory risks, customers that learn of the bank’s involvement with cannabis-related transactions could affect the bank’s reputation.. There are many positive and negative opinions that come with the use of marijuana. With marijuana still classified as a federally illegal drug, processing the finances of MRBs could potentially damage a bank’s image. This could lead to a loss of trust from customers that disapprove of the use of recreational and medicinal weed.

Because of the naturally potent and distinguished aroma that comes from marijuana, banks may need to consider an alternate way of processing money deposited by MRBs. The implementation of separate depositories and methods will ensure that customers will receive their funds without the strong scent.

Benefits of Banking with MRBs

For some banks, the associated risks that come with cannabis banking are outweighed by potential benefits. The growing market calls for the handling of large MRB transactions. Institutional involvement can be a compelling and beneficial choice. As a result, more banks are assessing the risks and choosing to bank with MRBs.

These benefits can include:

● New increased revenue and partnerships
● Competitor differentiation

The increase in legal marijuana use means there will be an increase in business and cannabis banking demands. Choosing to provide banking services to MRBs can lead to increased revenue. This could be a strategy to attract more cannabis businesses as customers, potentially expanding their customer base.

Competitor differentiation has been proven profitable in the cannabis industry. In states where marijuana is legal, banks have the opportunity to differentiate themselves. Even in the presence of a multitude of MRBs, banks can create a competitive advantage and potentially expand their existing customer base.

The importance of having a risk management partner with cannabis banking can’t be stressed enough. With the recent passing of the SAFE Banking Act, there is greater assurance and opportunity for successful cannabis banking. However, even with the considerable growth of the cannabis industry, it will continually come with high-risk factors. Institutions can mitigate these factors by exercising due diligence. Creating a risk management partnership will help assess the risks and implement protocols to keep banks compliant with cannabis regulations.

For more information on risk identification and management, book an appointment with our team.