Cannabis Banking Can Be a Catalyst for Credit Union Growth

Over the past several months it's been hard to ignore the seemingly constant stream of news regarding states enacting new or updated legal cannabis programs. A notable example is March 31, 2021, when the state of New York became the 15th state to legalize recreational marijuana—creating one of the largest markets in the country. To put that into perspective, the NY marijuana industry is projected to become a $2.5 billion a year industry by 2026.

While this new legislation is expected to bring approximately $350 million a year in tax revenue to the Empire State, it highlights an issue not uncommon to states with medical-turned-recreational cannabis programs. That issue is: What do you do with all that cash?

The reality is that the majority of the legal cannabis industry remains unbanked or underbanked. And while a medical marijuana dispensary may have been able to get by without access to the financial system, the exponential growth that comes from recreational sales is difficult to manage without even the most basic banking products. This is where credit unions come in.

Credit unions throughout the country continue to fill the void left by institutions that are unwilling to navigate this emerging market. The dichotomy between state and federal law, cash-intensive nature and seemingly unpredictable growth patterns make the cannabis industry one that is rife with risk, but it's also rich with opportunity. The opportunity to serve members of the community while tapping into a lucrative niche market has never been as clear as it is with cannabis. Quite simply, cannabis is a catalyst for growth.

Building a Line of Business

A cannabis banking program should be considered a new line of business, so you ought to follow your credit union’s existing playbook for bringing new products to market. Of course, there also are areas of this line of business that are highly unique, so let’s outline some of the prudent steps your credit union should take to evaluate, develop and launch a compliant, profitable cannabis program.

1. Conduct a cannabis-specific risk assessment. Begin by identifying and evaluating the specific risks posed by this line of business and assess what controls you have in place to mitigate them. This should be taken into context alongside your existing Bank Secrecy Act/Anti-Money Laundering risk assessment. The risk assessment serves as a road map for the policies, procedures and controls you’ll need to adopt as you develop your program.
2. Develop a financial model. Create a measurable and realistic depiction of the “reward” side of your risk vs. reward equation as part of your decision-making process. This includes deposit growth, interest and non-interest revenue, product mix, and such ancillary aspects of the program as consumer accounts for employees of the cannabis businesses.
3. Craft an initial cannabis banking policy. Outline the policy statements your credit union will use to guide the development and management of this line of business. The cannabis banking policy should serve as a stand-alone document the board of directors can review and approve before moving forward.
4. Develop your program materials. After board approval comes the development phase of your program, when you’ll need to draft and/or update the relevant policy and procedure documents, account agreements and other artifacts needed to support the line of business. This phase includes a number of key decisions you’ll make about the operations of your program, as well as the selection of the key vendor(s) that will support your oversight and servicing activities.
5. Launch your program. Develop a formal go-to-market strategy that outlines the types of businesses you want to work with, as well as the steps you’ll take to attract them. The strategy should include realistic milestones based on your financial model and dedicated resources to enact the strategic plan. Your initial cannabis relationships will serve as valuable resources to test your initial assumptions, allowing you to iterate on various aspects of the program to improve the overall quality of this line of business, making sure it aligns with your examiner’s expectations.

Develop a Collective Understanding

Following these fundamental steps allows you to properly educate your board and other key stakeholders on the “how” and “why” of cannabis banking. This education builds a collective understanding within the institution that drives the cannabis strategy forward, which is a key factor in successfully serving the cannabis businesses in your community. This collective understanding helps align the various teams that will participate in developing and implementing your program, while also helping to effectively communicate the credit union’s position and policies on this topic.

The growth and evolution of the cannabis industry throughout the U.S. is leading more and more credit unions to build or improve their cannabis programs. While there’s talk of federal legislation such as the SAFE Banking Act being passed under this administration, the truth is some credit unions are already serving this market—and have been doing so for years. These credit unions have identified the needs of the businesses in their communities and stepped up to serve them. By doing so, they’re not only supporting the growth of this emerging industry but also materially impacting the safety of their community by helping to keep cash off the streets.

With complex risks and operational considerations, there are also proven strategies and dedicated partners that are supporting successful cannabis programs throughout the country. If you feel cannabis banking is the growth catalyst your credit union has been looking for, you may want to seek out experts in this area to help you align your goals with the tactics needed to achieve them.

Mike Kennedy is co-founder and head of product at Green Check Verified, a cannabis banking regtech that offers a suite of compliance technology solutions and advisory services for financial institutions. At GCV, Kennedy is focused on compliance management systems within the financial services industry. Founded in 2017 by a team of technology, banking, and regulatory experts, GCV focuses on the intersection between banking and the emerging legal cannabis industry. The organization provides the services and technology needed to connect these two industries in compliant and profitable ways.