Cannabis businesses are an underserved and potentially lucrative niche for
“If you can do it properly, there is revenue to be made in this space because so few banks want to enter into it,” said Danny Schneider, the Bank Secrecy Act officer at Lead Bank in Kansas City, Missouri.
Lead Bank is one of several U.S. banks that are going ahead with pot banking, in spite of the regulatory risks, with help from tech companies that handle much of the compliance and monitoring work. For instance, by partnering with fintechs such as RiskScout and Dama Financial that perform onboarding and due diligence for cannabis businesses, banks already engaging with cannabis companies can scale that part of their business in a safer way. Such partnerships could also help banks that would like to get into cannabis banking but are wary of the risks.
A number of states have legalized some uses of cannabis, but non-hemp cannabis is still a controlled substance at the federal level. (Non-hemp cannabis or marijuana has a higher level of tetrahydrocannabinol or THC, the component of cannabis that gets users high.) Regulatory guidance on anti-money-laundering reporting gives banks some idea of how to comply with federal law regarding cannabis-business customers, such as by regularly filing cannabis-specific suspicious activity reports, or SARS.
So far, no federal statute authorizes cannabis banking. Further, Rep.
“There are the usual know-your-customer obligations, but with cannabis businesses there is an additional layer of burden in terms of assessing their compliance and maintaining and monitoring their compliance with applicable state law,” said Cliff Stanford, a partner at Alston & Bird. “Some banks say it’s not worth it. Others say there is a lot of money there, and we have at least some degree of clarity about our compliance requirements under federal law."
There is room for regtech or fintech providers to help banks reduce the compliance burden, Stanford said.
"If there's something they can rely upon that makes it more efficient, that could move the needle,” he said.
After banking hemp companies for two years,
“You have a choice in banking: you all run after the same business and compete, or find niche markets,” said Melissa Marsal, chief operating officer of West Town. “We did our homework and the market showed that this was an underserved market where we could build up our deposit base.”
Some of the complications for West Town include understanding the nuances in state laws, such as whether marijuana is permitted for medical or recreational use; ensuring the business is not selling to minors; and being unable to process payments using traditional rails for businesses related to cannabis with high levels of THC. The bank can process payments for hemp businesses in a traditional manner.
The $453 million-asset West Town started piloting software from RiskScout, provider of an onboarding and due diligence platform that focuses on high-risk markets, in early 2020 after Marsal met founder Justin Fischer at a conference. When a cannabis-related business wants to become a West Town customer, the applicant answers questions in a web portal provided by RiskScout about the type of business and location and uploads documentation. This primes the bank for an introductory call if it feels the applicant is a good fit.
RiskScout then conducts its own version of a higher-risk Know Your Business program that scours negative news, watch lists and more. Once the business is onboarded, RiskScout takes care of ongoing monitoring and enhanced due diligence.
“Regulators want to know that you have a partner like RiskScout,” said Marsal.
Lead Bank in Missouri, which has $745.3 million of assets, has been banking the cannabis industry since the beginning of 2019. It turned to Dama Financial, a company that helps banks handle cannabis businesses with banking and merchant services, cash management and more, for help sourcing customers, initial due diligence and ongoing monitoring. Lead Bank then layers on artificial intelligence-based transaction monitoring software from Verafin on the back end, a way of “conducting due diligence on the due diligence that has already been conducted,” said Schneider.
“There is a very high resource requirement to bank the cannabis industry and we would not be able to do it to this level without partnering with a fintech like Dama,” said Schneider.
Valley National Bancorp in New York City is piloting a digital payment app called ValleyPay that will function like a reloadable gift card. Cannabis consumers will be able to fund the card from their accounts and use a QR code to pay merchants. The bank is working with Green Check Verified, a technology and advisory company for cannabis banking, and T-Recs, an account reconciliation tool from financial software provider Trintech, to automatically reconcile, verify and monitor transactions at the point of sale and on the back end.
“The tide is moving in a very clear direction,” said Rick Kraemer, chief financial services officer at the $43.4 billion-asset Valley. “We saw an opportunity to provide a better service and we wanted to be part of the solution, taking cash out of the system.”
The availability of such technology is also relevant for banks that are interested in banking cannabis companies, but not quite there.
“A lot of banks are sitting on sidelines and waiting for legislation on the federal level,” said Hunter Robinson, partner in the financial services and cannabis practice groups at Bradley Arant Boult Cummings. “For banks that know they will do this when they have legislative cover, the time to start preparing is now.”
