Needham Bank CEO Joe Campanelli sees the current state of cannabis banking as a Catch-22: Most banks and credit unions won't work with legal dispensaries because they see them as high risk, but in Campanelli's view, dispensaries are only high risk because most banks and credit unions won't work with them.
Taking deposits is a critical service in an industry that handles much of its business in cash, Campanelli said. Indeed, a decade after the first states legalized recreational use, marijuana providers continue to rely heavily on cash because most banks and credit unions refuse to accept them as customers.
“It’s ironic,” Campanelli said. “Because of the discrepancies at the federal and state levels, you’re actually increasing the risk in the industry, not mitigating it … I personally believe the industry shouldn’t allow cash. It should all be debit or credit, so you have an audit trail.”
Campanelli and his team at the $2.9 billion-asset Needham Bank, of Needham, Massachusetts, spent the past two years studying the cannabis industry. They were actually looking for an entry point around the time Eastern Bankshares in Boston
“We reached out to [Eastern]. We put in a phone call and asked, What’s your intention with the business?” Campanelli said.
That conversation led to a deal announced this month that gives Needham, headquartered in the eponymous Boston suburb, a cannabis banking operation with $500 million in deposits for a modest payout. Though the $17 billion-asset Eastern did not disclose the exact terms, it characterized the consideration it received as immaterial. Campanelli described the transaction in a similar fashion.
“Here, we’re picking up $500 million in deposits with no deposit premium,” said Campanelli, who served as president and CEO at Sovereign Bank in Wyomissing, Pennsylvania, from 2006 to 2008 and as chairman and CEO at Flagstar Bancorp in Troy, Michigan, from 2009 to 2012.
Like many states, Massachusetts has been steadily loosening its controls on marijuana use. Bay State voters approved a ballot measure decriminalizing possession of small amounts of pot in 2008. Four years later, in another ballot initiative, they voted to legalize medical marijuana. In 2016, Massachusetts voters approved a measure permitting adults over 21 to grow and sell limited amounts of recreational pot.
At the federal level, however, marijuana remains classified as a Schedule I drug with no accepted medical use and a high potential for abuse. Legislation providing a safe haven for depository institutions seeking to serve legitimate cannabis-related businesses in states where its use is legal has repeatedly passed the House of Representatives but has never gained traction in the Senate. Moreover, the
Campanelli expects that acceptance of marijuana on the federal level may still be a few years away. When it happens, the legal concerns that have kept so many banks out of pot banking will likely evaporate, he said.
“Once you reconcile the federal and state regulatory variance, lots of banks will get in this,” Campanelli said.
By then, the deal for Eastern’s cannabis business will have provided Needham with a head start over banks that are sitting on the sidelines today, waiting for the federal bar to lower, according to Campanelli.
Needham’s goal is to offer “a whole host of credit and noncredit products” to Eastern’s existing clients, as well as new ones it attracts. While other institutions play a waiting game, Needham plans to busy itself forging “good, lasting relationships,” Campanelli said.
Brian Bauer, president and chief strategy officer at Abaca, a fintech based in Little Rock, Arkansas, that provides financial services to cannabis businesses, called Needham’s planned move into cannabis banking a boon for an industry that remains critically underserved by banks.
“We were glad to read that Needham is jumping into the industry,” Bauer said. “There is so much demand out there.”
While cannabis industry sales topped $20 billion in 2021, operators are struggling to access the capital they need to grow, according to Bauer.
“Some sources [estimate] that more than 50% of cannabis operators are actively looking for capital, ” Bauer said. “Yet despite these challenges, the industry still managed to grow in excess of 30% year over year for the last several years."
That growth appears to be continuing apace. Arcview Market Research, which focuses on the cannabis industry, estimates sales will top $47 billion in 2026.
Nevertheless, it is likely risks involved in cannabis banking will remain elevated for some time, Bauer said. Major payment systems continue to resist serving cannabis-involved companies, and Perlmutter’s safe- haven legislation, the SAFE Act, could lead to heightened attention from regulators.
“What we believe is that cannabis does remain high-risk and high-compliance for a long time due to some of the industry dynamics, just like gaming, just like hemp-CBD and some other industries as well, even beyond the SAFE Act,” Bauer said.
At the same time, there is no appetite for undoing any of the legal gains cannabis has made in states across the country.
"We've not seen any markets go back," Bauer said. "Once revenue starts flowing and a state is able to benefit, reversal becomes highly unlikely."
Needham’s deal for Eastern's cannabis business is expected to close during the first half of 2022. The company plans to retain Cannabis Business Leader Paul Evangelista, who founded the unit at Century in 2013, as well as all his team.
In April, when his company struck its deal with Century, Eastern Chairman and CEO, Bob Rivers said he was excited at the prospect of an entrée into pot banking. Rivers professed himself “impressed” with the operation but ultimately decided it wasn’t a good fit.
“We … have determined the business is not well aligned with our approach to serving our business customers due to the special handling required with meeting the banking needs of cannabis-related businesses,” Rivers said in a press release.
