Community banks and credit unions for decades have been going head to head for mortgages, car loans and even commercial business. And already, the cannabis banking market is proving just as competitive.
As states began to legalize the drug, credit unions gained an early edge with their willingness to take deposits from cannabis companies, but banks are rushing in to fuel an
One factor giving credit unions an early leg up was that the National Credit Union Administration has been the “most reasonable” regulatory body since financial institutions began doing business with cannabis firms, said Tyler Beuerlein, chief revenue officer for Hypur, a technology and payment provider in Scottsdale, Arizona, that helps financial companies operate in highly regulated markets such as cannabis.
The NCUA has made an effort to assist credit unions behind the scenes after deciding early on to treat cannabis sellers as they would any other high-risk industry, Beuerlein said. By comparison, bank regulators had a tendency to be more difficult at the beginning of the process, he said.
And that rigid posture in many cases has had a trickle-down effect on the financial institutions they regulate.
But bank regulations may soon soften. The SAFE Banking Act, which aims to give some clarity to cannabis bankers, passed the U.S. House of Representatives earlier this year but has yet to clear the Senate.
Banks may also have an edge in their sheer scale. According to the Financial Crimes Enforcement Network, 174 credit unions and 510 banks reported that they provided some services to the marijuana industry as of March 31, based on suspicious activity report filings that mentioned key phrases tied to cannabis sales. By comparison, 107 credit unions and 334 banks had filed SARs related to this space in the second quarter of 2018. Some SARs indicate the cannabis business is compliant with state laws and the bank or credit union will continue to do business with it; others indicate that the bank or credit union plans to terminate the relationship based on its findings.
But credit unions remain competitive in this market. When Kings Garden, a cannabis cultivation, processing, distribution and manufacturing company in Coachella Valley, California, went looking for a banking partner it found no takers among the traditional banks.
The company instead turned to Salal Credit Union in Seattle for all of its banking.
“We were unable to obtain banking with a traditional bank,” said Lauri Kibby, co-founder and chief financial officer of Kings Garden. “We are extremely happy with our credit union experience. It has advanced app-based banking features, wire and ACH capabilities and prompt response times.”
The $1.1 billion-asset Salal opened its first cannabis business deposit account in July 2014. After a shakeout period, it originated its first loan for the sector in September 2014.
As the cannabis industry has grown, the credit union has continued to add services, according to Russell Rosendal, Salal's president and CEO.
“Cannabis businesses have access to all deposit and cash management services. We have a cash pickup service that goes to the businesses to reduce risk to business employees and limit cash in our branches,” he said.
Salal recognized that because the cannabis industry is cash-based, there was a significant safety risk to the businesses and the community if those companies could not get traditional banking products, Rosendal said.
“We recognized our responsibility to work with government and law enforcement in helping to monitor the industry while reducing the illicit market,” he said. “We also saw an opportunity to help grow an industry with untapped potential in health, wellness and community economic development.”
Despite the regulatory uncertainty, banks are already gaining ground, according to Beuerlein. Seven years ago, most institutions actively banking the market had assets of less than $1 billion. But over the years, larger and larger institutions, most of them banks, have entered the business.
One of the boldest new entrants to the cannabis banking landscape is a $50 billion-asset bank that has already expanded its program into multiple states, Beuerlein said. He would not identify the bank, which he said has made a strong effort to stay out of public view.
“Banks seem to be the most aggressive in" expanding into new markets, "and the size of banks I have seen entering the market recently has been impressive,” he said.
Rosendal conceded that banks have some advantages, but he said credit unions benefit from personal service, knowledge of the legal and regulatory rules and willingness to listen to each business' unique needs.
“We don’t place the cannabis industry in a box,” he said. “Our solutions are tailored to the individual needs of our members. We recognize this is a journey and we know we need to listen and learn from our businesses and other third-parties.”
The $1.9 billion-asset CFG Bank in Lutherville, Maryland, began serving cannabis industry in March.
President and CEO Bill Wiedel said the bank saw a need in the market for more efficient financing as the cannabis industry in Maryland is in expansion mode, and there are only two institutions in the state that are involved in the business.
The bank has an edge over some smaller players because of the size of deals it can offer, Wiedel said. “We are able to do loans up to $30 million, which gives us an advantage,” he said.
Also, the bank’s relationship managers have a strong reputation for being creative in structuring deals and providing fast turnarounds in the lending process. “We are very entrepreneurial in how we do business, and the entrepreneurs who own these businesses appreciate that,” Wiedel said.
Wiedel said that the SAFE Banking Act will “definitely” increase competition, but that any resulting regulations will not be enacted for two or three years.
Kibby said that while federal authorities have said they will not override state cannabis laws, it remains a knotty issue for most banks, and many fear excessive rules, compliance burdens, missteps and sanctions. That keeps most banks and some credit unions from working with the industry, she said.
"As a result, businesses, workers and communities in several states must deal in piles of cash because of the conflicts between state and federal law," Kibby said. "This creates logistical challenges and, for many, threats to safety. Businesses that house large sums of cash are obviously vulnerable to robberies.”
The SAFE Act won't have much effect on competition or the general state of cannabis banking in the U.S., Beuerlein said.
“This is and will remain a cash-intensive business,” he said. “As a result, it will pose a significant risk and regulatory compliance burden to any institution attempting to bank it. The overwhelming majority of licensed cannabis operators are already banked in the U.S. This is by no means the crisis it has been made out to be.”
