How community banks can build successful cannabis banking programs

Banking the cannabis industry offers an attainable solution to the immediate challenges facing community banks in the United States..In October 2023, the Conference of State Banking Supervisors released the findings from their 11th annual survey of community banks that highlights some of the challenges faced by the industry. Among the top 10 external risks highlighted in the report are cost of funds, core deposit growth, regulation, loan demand, and competition..Cannabis banking empowers financial institutions to address each of the challenges identified in the CSBS survey due to the un- and under-banked status of the industry. Long excluded from the financial system due to the inherent BSA/AML risks associated with the production and sale of a federally-prohibited substance, cannabis businesses are eager to find a home with a bank that's ready to treat them like any other small business. .However, unlike every other small business, they have come to accept certain restrictions and fees in order to maintain accounts with a bank they believe will be their partner for the long run. Talk to any existing license holder and you'll consistently hear stories of losing bank accounts with the "big" banks that maintain an anti-cannabis policy, and a crippling lack of access to lending..Cannabis operators are actively looking to find a home for funds associated with what remains a predominantly cash-based business. This leads to a scenario where the cost of funds associated with this industry can be much lower than others, as a historic lack of access to banking means that, for better or for worse, cannabis operators don't necessarily expect access to more sophisticated products like interest-bearing deposit accounts (though they'd be ecstatic to have it). A low cost of funds leads to increased core deposits..Every financial institution that chooses to bank cannabis must deal with the regulatory burden associated with banking businesses that are legal at the state level but not federally. While there is no explicit safe harbor offered to community banks that serve the industry today, such as the SAFE or SAFER Banking Act, there is solid guidance provided by FinCEN in the 2014 memo "BSA expectations regarding marijuana-related businesses" and years of precedent established by the toleration of these programs by all of the major federal banking agencies..It's worth noting that no community bank in the past 10 years has been told by a federal regulator that they must exit cannabis banking solely due to the federal status of marijuana..Should your community bank join the hundreds of other U.S. financial institutions that have embraced the industry, you may be surprised to understand that competition for those accounts is now a very real thing. While cannabis businesses are indeed still willing to deal with higher fees and reduced access to financial services, they are always looking for the best-fit financial institution. Long gone are the days of charging $5,000 a month and a percentage on deposits for a simple checking account. So how can a community bank position themselves as a compelling option to the industry?.Lead with trust.If you speak to any cannabis operator, you will undoubtedly hear stories of losing accounts, leaving them scrambling to process payroll and pay vendors at the least convenient time. When they don't have options in their market, many operators are willing to take a chance with one of the big national brand banks, hoping that they'll slip under the radar. To mitigate that risk, they will often open accounts at multiple banks in order to have contingencies in the event they receive the notorious 30 day account termination notice letter in the mail..Treat them like the legitimate, highly-regulated, state-legal businesses that they are and positive word of mouth will spread in this tight-knit community; do the opposite and the program won't get off the ground..Make the application and onboarding process easy.Cannabis businesses understand that they will be subject to enhanced due diligence and will be ready to provide you with a long list of required documentation, but it's important to remember that these are still businesses at the end of the day and it's very difficult for them to operate without a stable banking relationship..If they have to wait four weeks for an application to be reviewed, they'll likely look elsewhere because they simply can't afford to wait that long, regardless of how attractive they find your service offering on paper. Two weeks is becoming the upper limit for what a cannabis business will accept. Making it easy for them to upload documents, making it clear what is needed in advance as opposed to making piecemeal "one more thing" requests, and using industry-specific software to do so builds trust and hopefully speeds up a process where time is a commodity in short supply..Offer lending.The need for lending cannot be overstated. Barred from federal programs that help many small businesses get off the ground, cannabis entrepreneurs often have to bootstrap their businesses with investments from friends and family..When that fails, or when they're ready to expand, they often are forced by a lack of options to seek private capital that can come with abnormally high interest rates and onerous terms. Cannabis operators are always looking for institutional lenders who are willing to lend because they perceive them to be more reliable and less likely to exploit them with small print. .A financial institution that can offer lending at anywhere from between 9 percent to 15 percent will find eager customers while retaining a premium that's attractive to the bank. Accepted enhanced due diligence requirements ensure that risk associated with lending to the industry means a community bank will have greater insight into their cannabis customers' financial health than they do any other, mitigating risk to perhaps a greater degree than that associated with other "normal" industries..Meet them where they are.The cannabis industry remains relatively insular due to historically difficult relationships with law enforcement, and that lack of trust in the "outside world" unfortunately has also affected their willingness to trust other "establishment" entities, like banks. The aphorism of "once burned, twice shy" definitely applies here. They more than likely won't respond to traditional marketing activities because they've been conditioned to assume that if they walk into a bank branch, they'll be shown the door as soon as they mention the industry they're involved in. .A community bank must signal that it's cannabis friendly, so it is incredibly valuable to reach out virtually through industry websites, trade associations, webinars, and even in person at cannabis conventions. Local and regional conventions are great because an operator can associate a friendly face with the community bank they pass every day on their way to work. .They respect when community banks actually show up and are willing to be "on the record" in support of the industry, which can certainly allay their fears that the bank will abruptly decide to exit this line of business..A major opportunity for community banks.Though seldom does one think of cannabis banking as a way to mitigate the risks associated with the current community banking climate, banks that choose to do so will find effective ways to address concerns about cost of funds, growing core deposits and lending..Since 2014, an increasing number of financial institutions have engaged with the industry, with support from industry-leading fintech connectors like Green Check, resulting in increased competition, but there are ways that community banks can stand out from the crowd. While regulatory concerns remain, somewhat paradoxically to perceived wisdom, the key to sustainable growth and expansion is embracing the cannabis industry. Community banks can lead the way..Paul Dunford is co-founder and vice president of knowledge at Green Check, a fintech firm focusing on creating solutions for cannabis banking.