Normalizing Cannabis Banking

By Stacy Litke, Green Check Verified

Like any new technology or line of business, there always seems to be three buckets of adopters. There's the early adopters — those on the bleeding edge who are always ready to try something new. There's the fast followers — those who want to be early to the game, but who are not quite as adventurous as the group that gets bruised in a new arena. Then there's the normalized group — those that wait until everyone else has tested the waters before jumping in.

The U.S. financial industry’s adoption of cannabis banking is no exception to these categorizations. Of course, there were the pioneers who led the charge, took a few lumps and navigated through some operational mishaps along the way — all while learning from examiners who were also new to these programs. But now we are solidly in the era of the fast followers, those who waited enough time to clearly see the opportunity and recognize that no one’s bank is getting shut down over this new line of business. We’ve been working with this group to build and scale programs for a few years now, and they are increasingly coming to us more educated on the industry and less intimidated by the opportunity. To me, this is a sign that we are moving towards normalization.

In fact, about half the banks we talk to are aware that you can bank cannabis in a safe and compliant manner, and they are also aware that doing so provides a source of premium fee revenue and low-cost deposits that can bolster an institution’s performance. The remaining challenge that seems to concern many of them is the perception that you need an army of compliance experts to run a program. That may have been true for the pioneers, whose sometimes outdated metrics and best practices are shared over and over again without being

updated, frightful for listeners like all of the best legends. Nowadays though, there are automation tools, like ours, that can support a compliant program with four to six times less FTE than those original manual programs. There’s a reason so many financial institutions take the fast-follower approach.

So when will we see normalization?

We here at Green Check are optimistic that the state level momentum will continue to the point of Federal legalization within the next few years. (And if you're thinking legalization means less regulation, then we might ask “when was the last time you saw the government reduce oversight?”). We're also seeing some of the established markets level off in terms of new cannabis business licenses and pricing, while growth is occurring rapidly in states with new programs and those that are adding adult-use to existing medical markets.

The Illinois market in particular added 75 additional licenses in 2020. According to the Chicago Tribune, there were still 30 additional licenses to be granted as of December 2020, and there is a tremendous amount of sales growth predicted for 2021. As of the end of 2020, we're seeing an average of over $3 million in sales per month, per license.

Also noteworthy, as of February 2019, the Treasurer’s Office introduced the Banking Options for Legal Cannabis-Related Businesses Act. This act provides protections within the Illinois state banking laws for financial institutions that provide services to cannabis-related businesses. Additionally, as of July 2019, the Illinois Department of Financial and Professional Regulation (IDFPR) is prohibited from penalizing or discouraging a state bank or credit union solely for providing financial services to cannabis-related businesses.

These are all signs of a transition towards normalization, so it’s time for your institution to ask some important questions. Is this a line of business that will support the overall goals of your institution? And if so, do you want to be at the tail end of the first follower group, or would you rather wait until the practice is normalized? What competitive advantages does timing give you? Hint: those benefits of being a fast follower rarely apply to the normalized group.

If the answers to those questions lead you to the idea of launching a program, know that you will need to be thoughtful in your approach, which includes a risk assessment, financial modeling and board education in order to demonstrate to examiners that your institution clearly understood the risks and rewards of such a program. It’s also important to understand the benefits of using automation. One of the main lessons learned from the early adopters are the pitfalls of manual programs, which we’ve seen highlighted by examiners in recent years.

In summary, this is not a line of business to be afraid of, but the success ultimately relies on both preparedness and timeliness. When you're ready to work through the process, look us up at www.greencheckverified.com.

About the author: Stacy Litke is Director, Banking Compliance for Green Check Verified. IBA Associate Member