Can You Beat The Cost of Funds for Cannabis Deposits?

Part of the reason the legal cannabis industry is underserved when it comes to banking and financial services is a perception that it’s simply too expensive for FIs. It makes sense on the surface — due diligence requirements and regulatory compliance requires more work, thereby driving up the costs. The truth is, you can get a compliant cannabis banking program up and running without the perceived extensive spend. Here’s a closer look at how you can beat the cost of funds for cannabis deposits and help the legal cannabis industry flourish.

The State Of Cannabis Banking By The Numbers

Cannabis banking is in demand. According to a report from Reuters, which draws on numbers published by the Financial Crimes Enforcement Network (FinCEN), only 10 percent of banks and five percent of credit unions work with cannabis businesses in the U.S. However, the real number is likely even lower — Green Check estimates around 300 financial institutions currently serve the industry. That’s because the FinCEN number includes “Marijuana Termination” and “Marijuana Limited” Suspicious Activity Reports (SARs), which are sometimes filed by financial institutions that are actively working to keep cannabis out of their portfolios.

Meanwhile, cannabis businesses generated more than $33 billion in sales in 2023, a number that’s projected to grow to $56.9 billion by 2028. That’s a lot of revenue, and few places for that revenue to go. Simply put: cannabis businesses are hungry for compliant, cannabis-friendly banking, and you can offer it to them.

Is Banking Cannabis Businesses More Expensive?

Banking cannabis businesses should be no more costly than working with businesses in other industries. The cost of managing a cannabis dispensary’s money, for example, is much the same as the cost of managing a sporting goods store’s money.

Of course, there are far more rules around cannabis businesses than there are sporting goods stores, which means a lot of due diligence and compliance reporting on your end. Many financial institutions or cash transportation services choose to charge a premium (a “Green Tax”) as a result. That’s where the perception comes from that banking cannabis businesses is expensive, but there is no inherent reason why banking cannabis businesses should be more expensive.

Where The High-Cost Perception Comes From — And How To Manage Actual Costs

The upfront investment it takes to establish a cannabis banking department could dissuade many would-be cannabis bankers if the proper factors aren’t taken into consideration. However, this is a one-time expense that pays off for years and decades to come. By seeing startup costs through this lens, it puts the investment into perspective, especially when it comes to the significant volume of business you can expect to attract when operating a cannabis banking program.

The costs of managing the multifaceted compliance requirements may seem burdensome as well. However, ongoing monitoring and compliance reporting requirements can be carried out at minimal cost once your team is up and running. This is particularly true when your organization deploys the right tools that streamline and simplify the application, management, and monitoring processes associated with the program.

Additionally, you can cover the upfront investment and compliance costs by leveraging the funds your cannabis clients deposit. While lending to cannabis businesses is perceived as risky given the plant’s federally illegal status, there’s nothing stopping you from lending out the dollars a cannabis business deposits to non-cannabis businesses. Lending these dollars helps mitigate risk because non-cannabis businesses have credit scores and underwriting models that financial institutions are already comfortable working with. These loans can also generate a return that directly offsets the expense of setting up a cannabis banking program and ongoing monitoring and compliance reporting costs. This is not to say that you cannot lend directly to cannabis-related businesses; in fact, approximately 50 percent of Green Check clients lend directly to this market. Of course, additional considerations apply when making these higher-risk loans.

Tips For Building A Profitable Cannabis Banking Program

The core of a compliant cannabis banking program involves expanding on procedures you likely already have in place — it may not be as heavy a lift as you may think. Here’s a step by step look at what it takes to build a cannabis department in your financial institution.

Understand FinCEN guidance around banking cannabis

In 2014, FinCEN released detailed guidance governing how financial institutions can work with state-legal cannabis businesses in a federally compliant way. This guidance describes how financial institutions can serve the cannabis industry while maintaining their obligations under the Bank Secrecy Act, particularly surrounding anti-money laundering efforts. Before launching your cannabis banking program, familiarize yourself and your team with this guidance to ensure you build a program based on the principles outlined by FinCEN.

Review and bolster KYC and AML procedures

When it comes to cannabis banking, Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols are comprehensive and effective. That includes monitoring all of the company’s financial transactions, and leveraging data from point of sale systems and wholesale invoices to maintain transparency into your clients’ operations.

When building out a cannabis banking department, make sure you have a compliance officer with cannabis expertise, whose job it is to oversee these compliance functions and continuously monitor state and federal laws and regulations for any changes. This is one of the initial investments your FI would make in establishing a cannabis banking program.

At Green Check, we recommend working with certified cannabis compliance officers, or sending your compliance officer to obtain the Accredited Cannabis Banking Professional certification.

Gather robust documentation during client onboarding

The more information you have upfront, the better, so establish a checklist of must-have documentation. Any information you can gather on their historic finances, supply chain, sales, and ownership. Check out our list of recommended documents for cannabis banking clients at minimum. Closely review all this information before approving new cannabis banking clients to ensure you’re considering compliant, legitimate cannabis businesses.

Work with Green Check

You can make things a lot easier when you work with Green Check. We’re your partner to bridge the gap between cannabis and banking to support healthy, mutually beneficial relationships.

We support your ongoing compliance monitoring through Green Check Verified, your window into every dollar your cannabis clients are bringing in and where they’re coming from. This platform manages the entire banking relationship, from the initial application forward. And once your program is established, you can join the Green Check Connect marketplace to start meeting verified cannabis operators that we’ve already vetted as compliant with all applicable regulations.

Yes, You Can Beat The Cost Of Funds For Cannabis Deposits

It might seem daunting to take your first steps into banking cannabis businesses. Indeed, the industry comes along with some strict regulations that you’ll need to navigate, and you’ll need to do your due diligence to guarantee your clients’ are operating fully within legal boundaries. But doing so might be a lot easier than you suspect, and the return can be well worth the initial steps.