Marijuana is big business. It’s an industry with rapid growth. But banks don’t like it.
You can’t blame them. Opening up a bank account for a marijuana-related business creates all kinds of problems with little payoff in terms of profits for the banks. At least, that’s how banks see it right now. Things are likely to be quite different in the future.
To sum up the marijuana business banking problem, it’s all about risk and fee revenue. If the fee revenue can outweigh the risks, banks are all in. To beat the risk, some banks are cashing in on the marijuana industry by charging exorbitantly high fees to marijuana-related businesses.
Unfortunately, these businesses have nowhere else to go, so they’re paying those fees (often thousands of dollars per month). The only other option is for them to leave their dispensary locations at the end of the night with thousands, tens of thousands, or even hundreds of thousands of dollars in cash in their pockets or backpacks. They’re forced to pay their employees, bills, and taxes in cash. It’s not just a logistical nightmare; it’s also a significant safety concern.
The fees sound great, but for the vast majority of banks, the risks of working with marijuana-related businesses still outweigh the fee revenue rewards. That’s because marijuana is still illegal at the federal level and banks don’t want to risk their charters. Even though guidelines have been created that enable banks to work with marijuana businesses, those guidelines offer an assurance but not a guarantee that banks won’t get into big trouble if something goes wrong.
There’s hope for federal banking and/or marijuana laws to change, which would solve the problem for every marijuana-related business across the country (medical marijuana is legal in 23 states and recreational marijuana is legal in 5 states and the District of Columbia with more to come). In December, President Obama signed the 2016 omnibus bill, which included a sentence saying the Department of Justice cannot use money appropriated to it to prevent states from implementing medical marijuana laws. As Gordon Friedman of Statesman Journal says, “That sentence effectively legalized medical marijuana at the federal level.”
3 Common Suggestions to Solve the Marijuana Banking Problem
While marijuana businesses wait for new laws to be passed, there is no shortage of suggestions for how to solve the marijuana banking problem. Three commonly discussed solutions include:
FinTech (financial technology, particularly software as a service – SaaS) is all the rage in the startup world, so why not use it to solve the marijuana banking problem? Many banks claim that the due diligence required to manage marijuana-related business accounts in order to comply with the necessary guidelines make the process too onerous to be worth the time. The accounts simply aren’t profitable. Other banks gouge marijuana businesses to ensure they get an adequate return on their investments.
Much of the problem lies in developing a compliance process, which is an expensive investment for a bank, particularly when changing laws could make the process outdated or obsolete in the future. Entrepreneurs see this problem as an opportunity. What better way to improve compliance processes than through automation? The right software could address compliance problems for multiple industries that are often high risks for money laundering like marijuana, pawn shops, and payday loan providers.
If traditional banks won’t do business with marijuana, then what about alternative banking solutions? No one knew that PayPal would become a standard method of payment for millions of people around the world when it debuted, but for online transactions, it’s the go-to for many people today. While some argue that customers won’t want to sign up for PayPal or another alternative payment solution because they prefer the convenience of debit and credit cards, you have to remember that there was a time when they didn’t have debit and credit cards. People like what they understand, know how to use, and are accustomed to using. Marijuana customers are no different. Make the transition to an alternative payment method easy and they’ll start using it—just like so many people signed up for PayPal.
Yes, an alternative payment provider needs to get a bank account to be able to move all of the marijuana business money around, but if the payment company could take much of the onus of account tracking and compliance off of the bank, then doing business indirectly with the marijuana industry might be more palatable to the banking industry.
Tribal nations have proposed another solution to the marijuana banking problem. In October 2015, Anthony Rivera, a Harvard Business School graduate and former leader of the 1,940-member Acjachemen Nation in Southern California, came forward with his solution—an American Indian banking system through his organization, CannaNative.
Rivera told BloombergBusiness, “The Indian casinos are basically small little banks. They receive deposits in the form of gaming, and they manage cash in a way which is highly regulated with commissioners and regulators.” CannaNative is already working to copy the casino model by enabling tribes to set up financial institutions for the marijuana industry as well as to provide secure cash transportation.
Using Data as a Solution (It’s Working in Washington)
Each of the above solutions has pros and cons, but what can we do within the existing banking and federal regulatory frameworks to make banking more accessible to marijuana-related businesses? If you look at what’s happening in Washington, you’ll see that it can work as long as everyone has access to data.
Steve Kemmerling, former merger and acquisitions investment banker and founder of MRB Monitor (a consulting company that advises banks on how to work with marijuana-related businesses), told Leafly, “Washington state is a good example of a legalized state trying to help its marijuana industry get bank accounts by providing data.”
In simplest terms, the Washington State Liquor and Cannabis Board makes a lot of data about its marijuana industry publicly available (Cannabiz Media has been crunching the numbers to develop its own report on the state of the Washington marijuana economy). Unlike many other states where marijuana has been legalized in some way, Washington publishes data about licensed marijuana businesses, including historical information about sales, inspections, and violations. All of this data is critical to banks that are trying to comply with current guidelines to work with marijuana-related businesses.
As Kemmerling explains, “It’s much easier for a bank or credit union to compare those sales reports to the client’s deposit and the industry as a whole to identify potential anomalies indicative of illicit activity.” Washington’s data transparency helps to ease the compliance and due diligence burdens for banks that use it.
Combine data with working closely with state and federal regulators, and you have a model that is working well in Washington. Spokespersons from both Numerica Credit Union in Spokane and Salal Credit Union in Seattle told Statesman Journal that this is the secret recipe to their ability to work with marijuana businesses.
Bottom-line, it’s all in the data.
What do you think is the solution to the marijuana business banking problem? Share your thoughts in the comments below.
Susan Gunelius, Lead Analyst for Cannabiz Media and author of Marijuana Licensing Reference Guide: 2017 Edition, is also President & CEO of KeySplash Creative, Inc., a marketing communications company offering, copywriting, content marketing, email marketing, social media marketing, and strategic branding services. She spent the first half of her 25-year career directing marketing programs for AT&T and HSBC. Today, her clients include household brands like Citigroup, Cox Communications, Intuit, and more as well as small businesses around the world. Susan has written 11 marketing-related books, including the highly popular Content Marketing for Dummies, 30-Minute Social Media Marketing, Kick-ass Copywriting in 10 Easy Steps, The Ultimate Guide to Email Marketing, and she is a popular marketing and branding keynote speaker. She is also a Certified Career Coach and Founder and Editor in Chief of Women on Business, an award-winning blog for business women. Susan holds a B.S. in marketing and an M.B.A in management and strategy.