Member Blog: The Evolution of Cannabis-Friendly Banks and Credit Unions
If you are a cannabis-related business (CRB) looking for banking services, that search is becoming less demanding. With the U.S. cannabis market expected to exceed $70 billion by 2030, financial institutions are increasingly becoming aware of the opportunity to boost their bottom lines, while supporting the safety and economic development of their local communities. As friendlier cannabis banking legislation emerges from Washington, D.C., we expect to see thousands of financial institutions actively serving the industry, up from the approximately 250 banks and credit unions serving the industry today.
Early on, smaller credit unions were among the most prevalent pioneers in the industry. Even today, most banks and credit unions that are cannabis-friendly are less than $1 billion in size. That trend is changing rapidly, though, and with it, an increased level of sophistication is supporting the cannabis ecosystem. In fact, at least two banks with assets larger than $50 billion on the East and West Coast respectively have entered the market and by all accounts, have booming portfolios.
When looking for a banking partner, CRBs should consider a few key questions:
Does the bank or credit union have an existing cannabis portfolio?
What are the fees for service?
Can the financial institution provide ACH services for business-to-business transactions?
How does it handle cash deposits?
Deposit taking is the primary focus of cannabis-friendly financial institutions however there is activity in a few key areas relevant to the industry.
Lending
Fast-growing industries like cannabis are always in need of growth capital, and the banking sector has been slow to fill this void. The exception to this is in mature markets (such as Oregon, Colorado, and Massachusetts) where banks and credit unions in search of low-cost deposits are increasingly offering lending to attract legal cannabis operators to their institutions. While interest rates are still higher than typical business loans and generally require personal guarantees, the advent of cannabis lending is a welcomed relief to founders and others who have historically had to part with equity to meet capital needs.
Fortunately, lending is increasingly becoming mainstream. By our estimates, 50 or so banks and credit unions have opened their wallets in this regard, with most of the lending activity tied to commercial real estate. Equipment financing has also become more prevalent, and operating lines of credit are extended rarely to those firms with deep operational experience and more substantial balance sheets.
Payments
Until federal legalization occurs, the payments space will continue to include workarounds created by fintech entrepreneurs and others. ACH wallets tied to loyalty programs are often seen in medical markets, and until the end of 2022, cashless ATMs had widespread adoption on the adult-use side.
Most recently, PIN-based debit solutions running on the regional debit rails are gaining traction, and these options pass compliance hurdles that were not present with cashless ATMs. With their advent, merchants are also seeing an increase in sales of 20% or so as compared to cash-only environments.
Access to banking and financial services in the cannabis industry has come a long way in the last decade yet has a long way to go. There is a real advantage for early movers to provide services and we expect more and more financial institutions to recognize the opportunity and get involved.
Member Blog: Cautionary Tales of Cannabis Compliance
As a member of the NCIA, you probably already know how difficult so many of the aspects of business are due to the nature of the industry. Unfortunately, sometimes it seems like the laws and regulations are never-ending, and frankly, it can cause quite the impact on the way operations are handled.
As much as we hate to be the bearer of bad news, it is likely a good idea to be wary of these things, especially regarding compliance regulations.
Cannabis Compliance Regulations
While numerous states have legalized cannabis, it remains federally illegal under Schedule I of the Federal Controlled Substances Act. While the hope is that cannabis will soon be federally legalized and decriminalized, we haven’t quite gotten there yet.
Because of the state of our society and often the stigma associated with cannabis, not to mention the astronomical fines associated with being involved in the legal industry incorrectly, many financial institutions refuse to touch cannabis businesses. Yes, even when a client does everything correctly.
Cannabis companies constantly have to get creative with how they handle revenue –– which is enough to make any business owner pretty uneasy. Without banks, stores are often forced to take payment in cash and invest in ATMs for their shops while they’re at it. Holding so much cash means armored vehicles to collect the money and tremendous crime risk. Yikes, talk about a debacle.
In an attempt to make things easier, some companies have opted to funnel cash through shell companies, but as you can imagine, that puts a big target on their backs. “It can start to look a lot like money laundering,” says businessman Tim Cullen. Despite complaints from states that collecting hundreds of thousands of dollars in cash for taxes is troublesome (to say the least), little has been done to rectify the problem.
A Cautionary Tale
A Massachusetts company running three cannabis dispensaries has found itself in quite the mess despite believing they were following protocol properly. After an eight-month investigation, the company has been ordered to pay $300,000 in restitution and penalties.
This situation has resulted from unintentionally neglecting a state law requiring businesses to pay 1.2 times the regular hourly wage on Sundays and Holidays. The company has admitted that these errors have stemmed from difficulty in hiring a traditional payroll service provider.
Avoiding Compliance Related Repercussions
One way many owners are attempting to get around payroll and tax issues is to misclassify their employees as 1099 contractors to avoid many of the tedious payroll-associated hurdles. Sounds too good to be true? It is! The Department of Labor does not take this kind of infraction lightly, and if you think $300,000 for missing Sundays and a few holidays is a steep fine, buckle up, and fast. If the DOL suspects the misclassification was intentional, you can expect up to $1,000 in criminal penalties per employee and even jail time. So for some legal options……
A Promising IRS Initiative
The IRS has recently launched a program titled “Cannabis/Marijuana Initiative” with the hopes of implementing a strategy to increase voluntary compliance. This is fantastic news for the industry because, as was the case for the dispensary above, often, the breeches are simply a result of misinformation. Hopefully, with an initiative such as this one put in place, small business owners can grasp tax regulations before any compliance issues arise with the guidance of the IRS on the industry’s side.
A Helpful Hand
Another great option is investing in a software solution that supports the cannabis industry and won’t leave you hanging. With payroll support and full-service banking, HCM software can prevent issues that may arise by automating the systems that cannabis businesses spend a great deal of time on in avoiding any missteps. You must find a company that won’t leave you hanging with an unreliable banking service.
Conclusion
While more and more of America seems to be coming around to the idea of legal cannabis businesses being a legitimate industry, we still have some ways to go. In the meantime, covering all your bases and ensuring compliance is the best bet to ensure you don’t end up between a rock and a hard place — and as a result, spending a small fortune in fines and fees. Be sure to keep up with changing laws and consider your options for the best shot at easy and secure payroll and tax keeping.
PeopleGuru develops and supports cloud-based Human Capital Management (HCM) software to help mid-market organizations in the Cannabis Industry attract, retain, and recognize their people and streamline back-office HR and Payroll functions.
PeopleGuru HCM is a highly configurable, true single solution residing on one database that efficiently manages every stage of the employee lifecycle. Behind PeopleGuru’s best-in-class technology, is a team of Gurus who are passionate about helping clients meet their desired business goals by ensuring that they always have the tools and support they need to deliver on their strategic HR objectives, maintain tax & legislative compliance, and boost people productivity.
Alexa is the Assistant Marketer at PeopleGuru. With a B.A. in Advertising and currently pursuing an M.A. in digital strategy, Alexa has a passion for writing, content creation and branding strategy. Specializing in copywriting and unique niche positioning, the world of HCM Software is her latest and greatest challenge.
As our readers saw in last week’s blog, this month has been a milestone for cannabis banking reform.
Earlier this month, the Subcommittee on Consumer Protection and Financial Institutions held its first ever hearing on marijuana and financial services, entitled: Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses. Up for discussion was a new draft of the Secure and Fair Enforcement (SAFE) Banking Act, which is expected to be introduced any day. The bill is being sponsored by Reps. Ed Perlmutter (D-CO) and Denny Heck (D-WA) in the House, and by Sen. Jeff Merkley (D-OR) in the Senate. All of them have been longtime champions of this cause.
Watch this video for an update on the February 13 hearing:
Because cannabis remains illegal under the federal Controlled Substances Act, individuals who grow, possess, use, sell, transport, or distribute cannabis remain subject to federal criminal prosecution. Under current law, financial institutions providing banking services to legitimate and licensed cannabis businesses under state laws are subject to criminal prosecution under several federal statutes such as “aiding and abetting” and money laundering.
Regardless of whether they’re state or federally chartered, all banks are federally regulated (by FDIC, OCC or the Fed), and thus subject to these rules.
The SAFE Banking Act seeks to harmonize federal and state law by prohibiting federal banking regulators from:
Threatening or limiting a depository institutions’ access to the Deposit Insurance Fund
Discouraging, prohibiting, or penalizing depository institutions for servicing cannabis related businesses
Taking any action against a loan made to a covered business
Forcing a depository institution to halt providing any kind of banking services to state-legal cannabis related businesses
The bill has a few changes from last Congress, including:
Protections for ancillary businesses from money laundering and other laws
Changes the language addressing businesses in Indian Country.
Adds requirement that Financial Institution Examination Council develop guidance to help credit unions and banks understand how to lawfully serve cannabis businesses.
Adjusts the definition of “Cannabis-related legitimate business” to match up with the definition used in last session’s Senate language
Once the SAFE Banking Act is introduced, NCIA will begin gathering cosponsors from both sides of the aisle for the legislation, and will be working with the House Financial Services Committee and its members to advocate for a mark-up of the bill.
While NCIA is making change and advancing our issues every day, there’s still much work to do! Make sure to mark your calendars for our 9th Annual Cannabis Industry Lobby Days in Washington, D.C. on May 21-23 so that you can tell congressional offices your personal story. There’s strength in numbers, and we can’t do it without you!
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