The legal cannabis industry in the US has exploded to a $35B retail market, powering a robust ecosystem of cultivators, manufacturers, and retailers. Despite this growth, financial services for cannabis-related businesses (CRBs) remain a complex, high-risk space. This duality presents community financial institutions (CFIs) with both challenges and opportunities. Serving CRBs requires enhanced compliance measures and careful navigation of regulatory gray areas. Yet, for CFIs prepared to meet these demands, cannabis banking can offer significant rewards, including access to low-cost deposits, noninterest income, and earning assets, along with a chance to differentiate in competitive markets. The Cannabis Banking Landscape Today, approximately 240 financial institutions nationwide support CRBs, a modest slice of the nearly 10,000 banks and credit unions in the country. CFIs have led the charge in this space, leveraging their ability to adapt to regulatory guidance and address industry needs. Reasons To Enter the Cannabis Space
- Low-cost deposits. Cannabis businesses primarily hold non-interest-bearing checking accounts, giving CFIs access to low-cost deposits.
- Non-interest income. CRBs offer fee-based revenue opportunities, though increased competition is lowering fees in some markets.
- Future lending potential. While some CRBs may have access to commercial real estate loans today, a maturing market and well-capitalized operators could lead to broader borrowing opportunities in the future.
- Market differentiation. By developing specialized expertise in high-risk banking, CFIs can gain a first-mover advantage on CRB relationships.
Key Challenges in Cannabis Banking Despite the rewards, CFIs must tackle several significant hurdles to serve this industry effectively.
- Federal vs. state legislation. Cannabis remains a Schedule I drug at the federal level, creating tension for institutions operating under state legalization frameworks. CFIs must study state-specific licensing and compliance requirements while adopting practices to bridge this legal disconnect, such as reconciling banking activity with state-monitored seed-to-sale tracking systems.
- Intense compliance demands. Enhanced due diligence, ongoing monitoring, and detailed reporting are essential in this high-risk vertical. Many states utilize seed-to-sale tracking systems, allowing correlation between cannabis inventory movement and deposit activity. CFIs must also file frequent Suspicious Activity Reports (SARs), including limited SARs for complying CRBs, underscoring the need for robust compliance frameworks.
- Reputational risk. Transparent communication with stakeholders, including regulators and customers, helps mitigate the perceived risks while emphasizing the institution’s commitment to compliance.
Building a Cannabis Banking Program
For CFIs ready to serve CRBs, thorough preparation is crucial. These strategies can help ensure compliance and profitability.
For CFIs ready to serve CRBs, thorough preparation is crucial. These strategies can help ensure compliance and profitability.
- Conduct a thorough risk assessment. Start with an institution-wide risk assessment to evaluate potential regulatory, operational, and reputational impacts. One important consideration is alignment between leadership and operational teams, with a shared goal of why your institution is trying to enter the CRB space and take on the additional risk. Secure board approval before initiating cannabis banking, ensuring top-down commitment to the required resources, staff, and systems.
- Build a strong compliance infrastructure. Develop processes that meet the unique demands of CRB relationships, from onboarding to ongoing monitoring. Policies should focus on verifying clients’ state licenses and ensuring deposits align with legal sales reported to state authorities. Ongoing training for staff is critical. Many CFIs even partner with experts to design tailored compliance frameworks.
- Maintain open communication with regulators. Engage early and often with regulators to build a compliant program. Some federal regulators, like the Federal Reserve Bank of Chicago, have invited cannabis banking experts to provide training for their examiners, emphasizing a willingness to support responsible programs.
- Foster strong client relationships. Assign dedicated relationship managers who understand the cannabis industry, related terminology, and industry-specific challenges. These are all key to building trust and rapport with CRB clients. By fostering long-term relationships, CFIs position themselves as trusted partners, which can lead to repeat business as CRBs scale and require more services.
- Scale strategically. Scaling cannabis banking programs requires careful resource allocation. A commonly cited benchmark is one BSA analyst for every 50 CRB accounts. Leveraging technology to automate compliance tasks, such as monitoring transactions and report filing functions, allows CFIs to manage high volumes without overburdening their teams.
The Future of Cannabis BankingThe CRB banking landscape is set to evolve as the industry consolidates, regulations shift, and public perceptions change. As consolidation unfolds, opportunities will arise for CFIs to engage with well-capitalized, stable operators. Regardless of if and when there is broad federal reform, enhanced due diligence will continue to be required to ensure safety and transparency. CFIs that develop niche expertise in cannabis banking will be well-positioned to secure top-tier CRB clients and remain competitive in an increasingly crowded field. Final Thoughts Cannabis banking isn’t for every institution. However, CFIs with a clear business objective for serving this industry and a willingness to make the investment in resources, compliance, and expertise can gain substantial rewards. By supporting licensed cannabis operators, CFIs can access new revenue opportunities while playing a critical role in professionalizing this emerging industry. Whether your institution is poised to enter this market or still weighing the risks, understanding the nuances of cannabis banking is essential for making wise decisions in this complex yet promising space. To learn how Shield can help your financial institution serve cannabis and other high-risk industries, please visit www.shieldbanking.com***Occasionally, we publish guest content from industry experts with deep knowledge in their respective fields. The opinions and views expressed in this guest content are those of the author(s) and do not necessarily reflect the views of PCBB.
