Oklahoma State Bank was inundated with applications when it debuted its cannabis banking program in early 2020.
But this brought challenges as well as opportunities. When a traditional business opens a bank account, it must supply documents such as an operating agreement, employer identification number and articles of organization, but "in cannabis banking, that's the very beginning," said Delene Gilbert, director of cannabis banking at the Guthrie, Oklahoma bank.
The $219.5 million-asset OSB has undergone three software conversions in its hunt for a comprehensive solution that can handle the load. Gilbert and her team wanted a product that was designed for the cannabis business and could handle onboarding, monitoring and ongoing due diligence.
The topic is also timely for OSB: on March 7, Oklahoma voters will decide on a measure that legalizes recreational cannabis use.
"This last conversion put us in place where we could deal with the amount of accounts we have in our portfolio and sets us up for responsible growth in the industry as we approach a recreational measure in March," said Gilbert.
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The feedback from regulators has been that "having a fintech in place to help scale our growth and be compliant is crucial," said Gilbert.
The Secure and Fair Enforcement Act, or
"The SAFE Banking Act just says you can bank cannabis companies without regulatory scrutiny," said Chris Chick, chief operating officer and chief lending officer of CFG Bank in Baltimore, Maryland. "You're still subject to FinCEN guidance and BSA requirements."
The SAFE Banking Act has been passable for almost a decade, but one thing or another has always gotten in the way. Congress should pass it now.
Even so, the lack of clarity at the federal level may keep banks on the sidelines.
"For banks serving or entering the market today, it gives them more time to build their expertise ahead of more competition entering the market later when the SAFE Banking Act, or something similar, is passed," said Tony Repanich, president and CEO of Shield Compliance, which helps banks comply with regulation when serving the cannabis market.
The first fintech that OSB found to support its cannabis program satisfied the bank from a compliance standpoint but the onboarding component was not user-friendly or intuitive for its customers.
"We were asking for more information than the state was asking for to get a license," said Gilbert. The second company's transaction variance reporting, which alerts the bank to potential issues when reconciling transactions, did not meet OSB's standards.
The third company, Shield Compliance, hit the marks that OSB was looking for. Shield's software helps financial institutions manage compliance for cannabis businesses, including providing white-labeled application portals, collecting necessary data to underwrite new cannabis relationships, monitor those relationships, and manage government reporting.
The customized application lets OSB specify which licenses it is requesting (for instance, for seeds or edibles), move forward with applications where the business is still renewing their license and can provide proof, and set up alerts that automatically notify customers ahead of license expiration dates.
"It ramped up our ability to communicate with and better service our clients instead of spending time on the back end validating and manually vetting these businesses and their licenses," said Gilbert.
Repanich has seen larger banks, or those with more than $50 billion of assets, actively serving this market, whereas several years ago most players had less than a billion of assets. He has also seen more early entrants scale beyond their home markets.
"We believe the reputational risk associated with serving this industry has diminished significantly given the acceptance by the states and acceptance by the general population," he said.
CFG Bank, which has $4.1 billion of assets, started lending to cannabis businesses in the spring of 2021 after Maryland approved its medical use. It later started offering deposit services as well. "We tend to look for
The bank uses Green Check Verified, which automates cannabis banking compliance, and CRB Monitor, a corporate intelligence database for the cannabis industry, to check that clients are in good standing with their states, monitor sales activity for red flags, and more.
Because it does business in multiple states, "The big thing is making sure the companies are in compliance with all the requirements that are unique to each state," said Chris Chick, chief operating officer and chief lending officer.
Ramon Looby, president and CEO of the Maryland Bankers Association, is aware of two banks in his membership that bank cannabis companies.
"This conflict" between legalization within states and illegality at the federal level "causes worry for folks who are looking to get in," said Looby.
The state of Colorado legalized medical marijuana use in 2000 and recreational use in 2012. Jenifer Waller, CEO and president of the Colorado Bankers Association, estimates there are 35 financial institutions in Colorado that serve this segment. She finds that most banks rely on some kind of compliance system, whether homegrown or from a third party, to track "seed to sale, and every penny in and penny out to ensure no there are no illegal funds entering that marijuana-related business," she said. "It takes a lot of expertise to serve this industry."
She also believes that cannabis banking is far more widespread than most people realize, especially in states where it has been legal for many years.
"Whether or not you are intentionally banking the industry, you have marijuana funds in your bank, [for instance] because the marijuana business is paying for utilities and you're banking the electric company," she said. "What I love about the SAFE Act is it gave them protection whether they accidentally or intentionally bank marijuana-related business."
The Gunnison Bank and Trust Company in Gunnison, Colorado developed a proprietary compliance system when it entered the cannabis banking space in 2009.
"It's a system we've been working on for 14 years," said Ashley Burt, president and CEO of the $225 million-asset Gunnison. "I don't think the term fintech had been coined yet. And no one was selling turnkey compliance programs."
He finds the SAFE Act has little bearing on his bank.
"If it ever passes, it may remove a threat that in our opinion was very low to begin with," he said. "However, it will do nothing to reduce the compliance burden and associated risks."
