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Learning by Example: West Town’s Foray into Cannabis Banking.

Updated: Aug 12, 2022

“Hemp Banks Here.”

This is what you’d find out quickly if you were to visit the front page of West Town Bank & Trust’s web site.

As a century-old community bank that thrives on niche or emerging markets, the Raleigh, North Carolina-based institution decided to learn more about the underserved hemp-banking market. By monetizing risks associated with cannabis banking, West Town found it could approach the industry systematically and safely.

Hemp banking has its appeal, thanks in large part to projected growth numbers. Sales for legal cannabis in the US approached roughly $20 billion in 2020, according to New Frontier Data. New Frontier predicts that the market will more than double in size by 2025, reaching $41.5 billion[1].

In addition, legalization efforts are gaining momentum. Currently, 37 states, the District of Columbia, Guam, and Puerto Rico have all legalized the use of THC cannabis to some degree.

The market is particularly appealing for community banks and credit unions because the marquee-name players— such as JP Morgan Chase, Wells Fargo, Visa, and Mastercard — are opting out of serving cannabis companies for fear of the legal uncertainties.

Schooling the Board and Executives

When West Town decided to educate its executives and its board, it tried to determine the potential gains and risks for seriously entering this market, and it looked for ways to mitigate whatever risks are involved.

According to RiskScout’s case study, available here, the board of directors and senior executives soon came on board. “I had a room full of compliance people that were actually excited about banking hemp!,” said Melissa Marsal, the bank’s COO and EVP.

West Town’s team started screening hundreds of cannabis businesses so they could focus on those that fit their target customer profile. By maintaining strict standards and knowing what types of customers they wanted to attract, the bank makes decisions quickly and streamlines its account opening process. In fact, the screening and onboarding of cannabis businesses, which once took ten weeks, is now completed in only two days.

Faster decision-making was enabled by technology, namely, RiskScout’s compliance platform. At the outset of the customer relationship RiskScout validates information on everything from business operations to licenses, key parties involved, and related businesses that a company owns. As the customer maintains their relationship with West Town RiskScout reduces the operational burden involved with ongoing monitoring.

In its first year of actively encouraging hemp businesses to sign on, West Town opened 200-plus business accounts and gained over $40 million in new deposits.

Cannabis Banking: Do’s and Don’ts

Seeing is believing, and so case studies like West Town’s can help leaders at other financial institutions better understand cannabis banking.

In addition, here are a few important do’s and don’ts:

  • Do understand the growth potential. There are currently more than a dozen proposals to legalize cannabis for medical purposes in states where such use is still prohibited, including initiatives in Wyoming, Idaho, and Mississippi. Not only does this mean that the market for THC cannabis is growing, but for banks in states with pending initiatives, deciding whether or not to engage in cannabis banking may soon become a far more pressing concern. A full list of initiatives is available here:

  • Do get familiar with the BSA exam requirements. Compliance for cannabis banking can be onerous and it’s important to learn the specifics early and to seek guidance, when necessary.

  • Don’t rule out greater competition if federal legislation passes. The Secure and Fair Enforcement (SAFE) Banking Act was passed by the House of Representatives, and CUNA (Credit Union National Association) and the ABA (American Bankers Association) have both thrown their support behind it. (For more information, see our blog post: LINK). Were the SAFE Banking Act to become law, the cannabis-banking world may become more competitive.