Posted: Thu November 12 10:30 AM PST  
Member: Elizabeth Pearce
Updated: Thu November 12 10:48 AM PST
Tags: finance, accounting, banking

Every Bank that plans to focus primarily on the cannabis industry will experience failure to launch or will close shortly after opening its doors.  Cannabis banking is a need that everyone in the medical marijuana industry knows.  And the Federal Reserve, the FDIC and state banking regulators understand the challenges to managing a cash-based business.  These regulators are also seeking cannabis banking solutions, but a bank with a primary focus on the cannabis industry is just not one of the options.

One of the leaders in this fight is Fourth Corner Credit Union.  If you haven’t been following their story closely, start with this video from the New York Times which gives a good overview of the cannabis banking challenges.  (Sigh, I'm not sure how to embed the video, so click here to go to the video.) 

More recently, Mark Goldfogel, an EVP with Fourth Corner Credit Union wrote and Op-Ed in Marijuana Business Daily where he reminded readers that billion of dollars in sales occur annually in the legal cannabis industry.  Denying these state-licensed businesses and their vendors transparent access to banking creates an unsafe environment for everyone. It is the prohibition on banking, not the industry, that is enabling dangerous practices to continue.

While Fourth Corner is taking the Kansas City Federal Reserve to court next month, it is still my contention that a bank, focused primarily on the cannabis industry, will not be allowed to move forward.
Step back with me for a moment and consider what a bank does.  All Banks take money from depositors and lend to borrowers.  The business has two sets of challenges:
  • Depositors typically come with multiple and different time horizons.  Managing that constituency, so there is always enough short-term cash on hand to repay the depositors when they request their cash can be tricky.  A Bank Run occurs when more depositors demand their cash than there is cash on-hand.  As you know, Banks use higher interest rates to encourage depositors to leave their money in place for longer periods.
  • Borrowers also come with challenges.  Primarily these relate to the repayment of the loans as expected.  There are multiple borrowers and in some cases multiple loans by those borrowers. 

Thus, the banker’s role is to understand the lenders, the repayment risks and to charge enough to offset the loans that go bad, pay the depositors fair returns AND cover the bank’s overhead – including the lender’s salaries and a return to the shareholders/owners of the bank.  In this context, diversification becomes a key principal for managing the bank's risk

There is an important between a Bank and a Credit Union, like Fourth Corner.  Credit Unions may be the early entrants into cannabis banking.  These financial institutions have historically focused on a single segment or industry and the regulations under which they operate reflect this small, niche perspective.  Credit Unions are assumed, by regulators and financial industry participants, to be less sophisticated than banks.  All Credit Unions operate much tighter oversight and with stricter regulations than banks.

There are many things that we, as consumers and business owners, think of as banking activities which Credit Unions are not allowed to participate in. Credit Unions have significant restrictions on business lending.  For example, a Credit Union engaged in banking the cannabis industry would not be able to provide an marijuana extraction company with financing for a new piece of equipment, nor provide a cultivator with working capital loan to fund the period between planting and harvest. 

Banks that have looked into cannabis banking (and many have been doing their homework) estimate that it will take one compliance officer for every four to six cannabis clients. That includes banking the easy ones, the firms that don’t cross the green line and touch the plant.  So the overhead is high – They see the opportunity and believe they could charge enough to pay for the cannabis banking compliance.

The bigger issue is the diversification.  How large would the cannabis business become relative to other business on the banks’ books?

Here is the bottom line: If you are in a state with legal medical marijuana, and you want to help cannabis banking – find a bank willing to do small cannabis banking and bring them your car loan, your mortgage, your best friend’s cabinet making or restaurant business.  Help the bank grow its non-cannabis business, so that it can put cannabis businesses into a diversified portfolio.

Please click on the Green Box at the top "E.P. Blog" to see my other articles. I work with cannabis business owners, sharing insights they may not find elsewhere. 


Elizabeth Pearce

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