Independent Banker - September 2023 - 62

Compliance
Banking the Cannabis Industry: A Tale of Two Realities
Challenge/ Solution: Cannabis banking offers financial benefits such as new low-cost deposit growth, noninterest
income, and the potential for earning assets. While the federal government's lack of progress on passing
cannabis reform legislation creates stability and predictability, rapid change at the state level means banks must
adapt their products and services to meet changing demand. To serve cannabis customers effectively, banks
must have a plan in place to meet the regulatory compliance demands of the industry.
Pricing has also become a key differentiator. Historically,
banks used pricing to offset or monetize the compliance
function. Now, bankers are using pricing tools to benefit
customers while creating value for the institution. For
example, offering account analysis can encourage
customers to maintain higher balances while generating
noninterest income on accounts with lower balances.
Stability at the Federal Level
While progress towards federal legalization is eagerly
anticipated, the lack of significant change in federal
cannabis policy has fostered stability and predictability.
Operating under guidance introduced in 2014 by FinCEN,
federal regulators have gained significant experience
working with banks serving the cannabis industry. This
slow but well-worn path now provides a level of certainty
for bankers.
The cannabis industry is rapidly evolving, marked by the
coexistence of two distinct realities: dynamic state-level
markets and a slower pace of change at the federal level.
While state-level legalization and market consolidation
require banks to evolve their products and services to
meet changing demand, the federal government's lack of
progress on passing cannabis reform legislation, like the
SAFE Banking Act, creates stability and predictability.
Banking cannabis-related businesses offers compelling
financial benefits such as new low-cost deposit growth,
non-interest income, and the potential for earning assets,
but banks must be grounded in the realities of the industry
and have a roadmap in place to navigate this line of
business.
A Rapid Pace of Change at the State Level
With increasing legalization - today, 23 states have
approved adult-use cannabis - state cannabis markets
are undergoing significant change. This includes
consolidation and margin compression as CRBs mature.
To stay competitive, banks need to understand the
economics of the cannabis industry and tailor their
products and services to meet the evolving needs of
their customers. Lending, reporting, and comprehensive
cash management solutions have become necessary
components in effectively serving these clients.
Because each state has its own unique regulations and
licensing requirements, however, vigilant monitoring
is a must. Banks must have a clear line of sight into the
individuals connected to cannabis businesses and
ensure sales activity aligns with deposit activity. A robust
compliance program, including monitoring, ongoing due
diligence, and suspicious activity reporting (SARs), forms
the foundation for serving these customers.
Technology that automates compliance tasks and aids in
ongoing monitoring improves compliance outcomes while
contributing to a better customer experience. As cannabis
operators face increased competition and tighter margins,
banks that minimize the compliance burden are gaining a
competitive advantage.
Download our Cannabis Banking Playbook at
shieldbanking.com/cannabis-banking-playbook
to learn more.
Richard Drennen, Business Development Officer
richard.drennen@shieldbanking.com
(425) 249-7168
SHELBY IRELAND, UNSPLASH

http://www.shieldbanking.com/cannabis-banking-playbook

Independent Banker - September 2023

Table of Contents for the Digital Edition of Independent Banker - September 2023