The State Of Cannabis Banking In The Credit Union Space

Cannabis is a growing, lucrative industry with many states legalizing the sale and use for medical or recreational purposes. With more states set to change their cannabis laws in the future, credit unions are becoming increasingly interested in learning more about the potential implications of banking cannabis-related businesses (CRBs).

Many first-mover credit unions began supporting local cannabis businesses with securing large amounts of cash on hand. Because marijuana is classified as a schedule I drug, most credit and debit card companies refuse to work with CRBs, leaving most companies with an excessive amount of cash left in the registers. In the early days, this was the primary service offered by financial institutions; however, this strategy is no longer competitive.  

Cannabis businesses are now looking for a full suite of products from preferred financial institutions. This includes ACH originations, wires, debit card services and most importantly, lending. Smaller credit unions that have not traditionally offered these types of services are adding cash management services, lest they be neglected by more established cannabis businesses. But a smaller financial institution cannot advance its services alone–it must partner with experienced cannabis personnel to develop its program.

From a talent perspective, the most successful cannabis banking programs are hiring professionals with business development and cannabis industry expertise. Fortunately, there are an increasing number of experts with prior experience who are building out these advanced programs. This includes a number of new and helpful industry certifications which focus on managing, growing and reducing the risks associated with a cannabis banking program.

Additionally, as these markets mature and continue to bring more financial institutions into the space, competitive pressure on pricing has become commonplace,with fees going down — often in the $500 to $1,500 range, and sometimes lower. It is important to be aware of new competition for cannabis banking customers, and understand the reason(s) for a cannabis business member’s departure. This may lead to an institution reviewing and adjusting pricing based on the market. 

Examiner Expectations and Gaining a Technological Edge

As examiners and regulators get more comfortable in the cannabis space, they are also asking deeper questions. Many are searching for details beyond just customer due diligence and SAR/CTR filings. They are seeking to understand more about the sales validation process, and how a credit union can identify behaviors that are outside of normal activity.  

Before diving in, credit unions must do the proper research as cannabis compliance guidelines and regulations are not universal. There are regional differences in examiner expectations as to how much due diligence or validation needs to be done, or when SARs should be filed. This is a direct result of having no well-defined regulatory guidance at the Federal level. 

One key solution to this is to have early and direct conversations with examiners so your credit union has a clear understanding of the expectations around the program. This also allows the  opportunity to position the credit union in alignment with those expectations. 

Credit unions that have developed a future-proofed, efficient cannabis banking line of business built on a foundation of transparency and scalability for long-term success allows assurances within the NCUA. Assurances such as serving the cannabis industry in a compliant manner will not result in harm to the institution. 

In a recent webinar with Rodney Hood, past Chairman and current board member of the NCUA, he assured credit unions that, “if you all are performing your tasks and are doing a good job of following the tenets of the Bank Secrecy Act and all that is associated with that, we the regulators are not going to shut you down.”

Hood also indicated that he was “really proud of the fact that we at the NCUA have an internal working group that’s looking at how we are helping the 208 credit unions currently working with cannabis businesses to navigate the waters when doing so.”

This commitment to assist their credit unions is commendable, and Hood’s words stem from a passion for financial inclusion: “I have often stated that financial inclusion is the civil rights issue of our generation. I’ve always said I wanted to pave a pathway forward for low-to-moderate income communities — immigrant, minority, ethnic and tribal communities — all of these are individuals who have been left woefully behind when it comes to economic progress. Well, now I’m adding cannabis businesses owners as another group that has been left really behind when it comes to having a pathway forward.”

Banking groups including NCUA are speaking in Washington D.C. in support of federal level guidance on this topic. There has been a renewed interest in legislation with the recent introduction of both the CLIMB Act, and CAOA. Hood is optimistic that action will happen at the Federal level, and said he looks, “forward to the day coming when there can be bipartisan support around getting this legal at the federal level. That will remove a lot of the uncertainty and reduce a lot of ambivalence about the other 4,700 credit unions or so that may be eligible to participate but who have chosen not to do so today.”

Additionally, technology is becoming increasingly important in creating a modern cannabis banking program. Much like the industry saw years ago around BSA/AML monitoring, examiners are advocating for technology rather than manual programs even for institutions without large portfolios. Today, there are countless tools in place to help financial institutions monitor all necessary activity for running a safe and compliant program. For credit unions, technology also improves the member experience for the cannabis businesses they are serving — eliminating manual processes, and reducing the burden of satisfying compliance requirements. 

Hood himself remarked, “I also believe that financial technology is integral to the lifeblood of our credit union system. Why do I say that so emphatically? I say it because I think the fintech tools can help our institutions have the scale, it can help them have greater efficiencies, and it can further help their member owners have 21st century tools to meet their mission. I, for one, certainly believe that fintech tools can help us in the cannabis businesses.”

Where Credit Unions Can Go From Here

While we are seeing a shift from the early days of cannabis banking in terms of services offered, pricing, and the use of technology, credit unions can successfully navigate the waters of risk management and regulatory scrutiny. As previous inflated liquidity levels run off to higher priced investment vehicles and increased expenses, credit unions are able to pull in some low cost deposits with cannabis banking programs, and provide a much needed service for the community. 

There is a growing acceptance of the cannabis industry among financial institutions and the communities they want to keep safe. De-stigmatization starts by supporting this line of business through collective wisdom, educational resources, and the right to financial services; just like any other business in the U.S.