What Lessons Can You Learn From Other State Programs?

If you plan to build a cannabis banking program, you can learn important lessons from FIs serving other legal markets. Here’s what you should know.

It’s no secret that, in the cannabis industry, every state is unique. But just because regulatory frameworks, licensing structures, and market leaders look different as you cross state lines doesn’t mean there isn’t plenty you can learn from those operating in other states.

If you plan to offer cannabis financial services in your state as it develops a new legal cannabis market, you can learn some important lessons from financial institutions that are already serving other legal markets. This guide will explain some of what to look for, along with the differences to expect from state to state.

Lesson #1: Legalization is just the beginning

It’s often a long and winding road for a state to approve legalization, but take a look at any state with a legal cannabis market and it’s clear that nothing happens overnight. Once legalization is approved, either by ballot or through legislation, there’s still months or years of work ahead. The state needs to establish a regulatory framework, licenses must be developed and applications processed, and plants must be cultivated and harvested before retail sales can begin.

Consider Ohio, which legalized cannabis in November 2023 by ballot initiative. The law itself was only written a month later, and then an additional period of developing a clear regulatory framework followed. Months later, the state still didn’t have an application process for licensing. Once licenses are issued, cultivators will need months to grow their first crops and supply the rest of the market. Ohio aims to begin sales in late summer or early fall 2024, which is a relatively aggressive timeline that could be delayed. In other words, it takes time to roll out legal cannabis sales.

Taking advantage of this lag time to build your financial institution’s cannabis program is key. While cannabis operators are busy putting together business plans, finding real estate, and pursuing licenses, you should define the products and services you plan to offer, determine the fees you’ll charge, and establish a compliance program that will check all the boxes with regulators. Join industry associations, which often form before legalization occurs, so you can meet others in the space and establish credibility before the market officially opens for business.

Aim to get these elements in place before licenses are issued, which will put you in a great position to secure “seedling accounts,” customers who are pre-license but still need financial services. Millions and even billions of dollars are spent in the pre-licensing stage of the market, while businesses are applying for licenses, securing real estate, and courting investors. These activities all require financial services, and establishing these relationships early can pay off in a big way once licenses are issued and cannabis operators open their doors.

Lesson #2: Take note of what the market requires and what it will bear

Establishing your program early means knowing which services cannabis operators need and what they’ll be able to pay for those services. That’s a challenging prospect when your state doesn’t yet have a legal cannabis market to review. Fortunately, every state now has a neighbor that, at the very least, has a legal medical cannabis program. Most states have a neighbor that has legalized adult-use cannabis, too. Look to these states to get a sense of what other financial institutions are doing and how cannabis operators are responding.

Understanding what financial institutions in other markets are doing can help you devise your own program. Perhaps you want to just focus on your niche, such as cannabis banking. However, if you see serious demand for payroll processing as well, you may want to find a partner that can extend these services to your customers, possibly even on a white label basis.

You should also consider the prices and fees your market may bear by looking at your neighbors. In the early days of legal cannabis, exorbitant fees were commonplace. Today, fees tend to be more competitive, especially in mature markets where many financial institutions have entered the market. Plan from the start how you intend to offer services to your customers at competitive fees in order to quickly gain a foothold as the market develops.

Lesson #3: Learn how to gain a competitive advantage early on

In more developed cannabis markets, you can look to successful FIs to learn more about how to make your services profitable without making them cost-prohibitive to your customers.

For example, some cannabis banks are able to charge low or no fees on deposits because they’ve accepted cannabis dollars and used them to lend to non-cannabis businesses (and, increasingly, directly to cannabis businesses). While cannabis lending represents a risk that many banks aren’t willing to engage in, there’s little risk in lending those dollars to businesses in other industries. The profit generated from these loans can help minimize costs to cannabis customers, making your financial institution more attractive to startups looking to save as much capital as possible.

Lesson #4: Predict potential obstacles you might face

In most newly legalized states, licenses are issued and then lawsuits follow. In New York, for example, the Conditional Adult Use Retail Dispensary (CAURD) licensing program has been subject to multiple lawsuits and a court-ordered injunction that suspended the issuing of new licenses. Expect delays like this when your market rolls out a new legal cannabis program.

Prepare for these sorts of delays and build them into your financial models. Anticipating a stutter step in the beginning of your market can help you absorb any costs or slowdowns to business. This will be easier if you’re able to extend pre-license financial services to seedling accounts that haven’t yet begun their operations in earnest.

Limitations of drawing inspiration from other states

Analyzing nearby cannabis markets can yield important insights as you build a cannabis program at your financial institution. Be forewarned, though, that you should also consider the differences between the markets you study and your local market as it develops.

“Suspicious activity” varies from state to state

When you serve cannabis businesses, you need to understand what constitutes suspicious activity. After all, you’re required to submit suspicious activity reports (SARs) to the Financial Crimes Enforcement Network (FinCEN) as part of your anti-money laundering (AML) obligations. But what looks suspicious or anomalous in one state may be business as usual in another.

For example, in Washington state, it’s normal for customers to make small basket purchases for lower total amounts. So, if you suddenly see a lot of big ticket sales coming out of a customer in Washington state, it should trigger some additional investigation. However, in California, large basket sizes are the norm and it’s less common to see small dollar sales. There, the roles are reversed.

Although these states are near one another, consumers behave very differently, and so what constitutes suspicious activity and anomalous transactions is very different. Understanding these varying dynamics is important, and getting to know your local market is key to catching suspicious activity early.

Data requirements may not be the same

Depending on your state’s regulations, the data collection requirements governing what retailers must upload into a tracking system may vary. Some states stipulate that no more customer information can be required of a cannabis dispensary than would be for a typical retail business, while others require much more detail. Regardless, you need to collect enough information to ensure the transactions made were legal and the customers were of the legal age to purchase. Without this information, the customer may be too risky to work with, so consider what you’re able to collect under the law.

Licensing structure might be significantly different

Some states cap the number of licenses available to cannabis operators, while others offer licenses to seemingly anyone who applies.

For example, in Connecticut, only 18 licenses were initially allocated for dispensaries, making them very expensive and providing assurance to financial institutions that licensed operators were serious players. However, in Oklahoma, licensing was more widespread and available at a low cost. Since it was easy and cheap to obtain a license, it was hard to determine which operators were likely to stick around and which were a flash in the pan. That can make it hard for financial institutions to determine who is worth onboarding and who isn’t — that can prove seriously costly in the early days of a new market.

How compliance partners support financial institutions

If the above sounds like a lot, you don’t have to go it alone. Working with a compliance and growth partner like Green Check can make your first steps easier. Partners like Green Check have wide-ranging expertise in multiple states and can help you plan for whatever comes your way as your state’s market emerges.

Additionally, the right partners can connect you with other industry stakeholders. For example, Green Check also offers Green Check Connect, a marketplace of verified cannabis operators and financial service providers that makes networking easy. Whether you’re looking for customers to support your new cannabis program or financial service partners who can help expand your services, choosing Green Check gives you access to a world of opportunities.

Finally, with a tool like Green Check Verified in your corner, you don’t have to go it alone when it comes to account monitoring. A powerful, data-driven tool like this can help you track every transaction and flag suspicious activity for you, so you can rest assured that you’re on top of everything.

Green Check sets your financial institution up for success

When you work with Green Check, you won’t face the steep learning curve other financial institutions have to deal with. That means you can drive business sooner and gain a competitive advantage from the outset of your state’s cannabis industry. Jump to the front of the line and bring in those highly valuable seedling accounts today so you can own the market tomorrow.