Cannabis remains in regulatory purgatory, often allowed to some degree at a state level and remaining federally illegal. As has been the case for years, state specific regulations are nuanced, limiting access for many Americans and clouding a safe regulatory approach for financial institutions to serve the industry. Today we’ll dig into how the industry is faring and potential regulatory relief on the horizon.
Whitney Economics released their Q4 2021 Business Conditions Survey Report near the end of January 2022. In this report analytics were based on a survey of nearly 400 cannabis operators that were skewed to the northwest region of the United States.
While many consider cannabis operators to be making money hand over fist, this may not always translate to profitability. The typical narrative is about the high levels of cash in the industry, and inability to place cash at a financial institution. While high levels of cash do exist the survey found that only 42% of respondents were profitable and that 37% were not even profitable.
This bears consideration for the types of services you as a financial institution may be willing to offer a cannabis company. While deposit accounts may have funding implications, there is limited potential for loss other than replacement with a higher cost source of funds. However, with such a high percentage of the industry not even meeting profitability, lending becomes riskier with a higher probability of default (PD).
Industry sentiment is equally as disjointed as regulatory opinions. 41.5% of respondents felt the industry is heading in the wrong direction compared to a smaller, albeit close, 39.4% of respondents who think the industry is moving in the right direction. What makes this statistic more interesting is when you break it out by emerging vs mature markets. The graphic from the Whitney report shows how sentiment is significantly more favorable in emerging markets.
Based on conversations we have with industry participants I would guess that mature market participants are frustrated with increasing taxation and regulatory burdens as well as difficulty connecting with supply chain participants that are cost effective and/or local. When it comes to vertical integration, Whitney did find that vertically integrated operators were more confident and optimistic.
The Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2021 passed the House on April 1, 2022 and it was not an April Fool’s joke. The act as written removes marijuana from the list of scheduled substances under the Controlled Substances Act and eliminates criminal penalties for an individual who manufactures, distributes, or possesses marijuana. While this is a step in the right direction, there are still hurdles to legality and this is by no means a sure thing. The MORE Act of 2019 also passed the House and subsequently died in the Senate.
America COMPETES which had passed the house on February 4, 2022 originally included language from the SAFE Banking Act. However, those hopes were squashed when the Senate passed an amended version that removed this language, and the proposed legislation no longer includes support for cannabis banking.
As we’ve mentioned before, even with some sort of decriminalization or legality the regulatory burden on this, hopes for the industry will remain high. As a financial institution that wants to serve this space (now or in the future) you will need to build out a comprehensive program, train your staff appropriately, and put systems in place to support the higher degree of monitoring associated with emerging markets industries. It’s never too early to start.
This is a young industry (legally), so even if legal burdens are lifted there is still a need to understand and monitor the space to a higher degree. Financial institutions are and have been in the business of taking risk; by understanding industry risk, developing policies and procedures to mitigate loss, and learning how to best serve industry participants cannabis remains a profitable market sector.