Updated: Feb 2, 2022
Bank Director, an information resource targeted to board and senior management members of the financial community, released their 2021 risk report. While there is a lot of good information in this report, what caught our eyes were some of the findings on how respondents reacted to marijuana banking. Take a look at this:
“Forty-one percent of respondents represent a bank headquartered where marijuana use is at least partly legal. Overall, one-third are unsure if their bank would be willing to serve marijuana businesses. Just 7% serve these businesses; 34% have discussed banking this industry but don’t work with these companies yet.”
These numbers tell us there is a clear discrepancy between supply and demand, and that there are significantly more marijuana related businesses than there are financial institutions willing or able to bank them. Marijuana-related businesses remain woefully underserved and, as a result, create tremendous opportunities for growth when a financial institution devotes the resources to launch a program.
The findings of this survey are compounded by the fact that Forbes most recently projected the legal cannabis market at $43 million by 2025. With this level of growth, it is more likely than not that even some of your existing customers either have or will be entering the marijuana industry.
Bank Director’s survey results provide what is essentially three stages of maturity in serving marijuana businesses, (1) Active Participant, (2) Under Consideration, (3) Off-Radar.. Let’s dive into steps your financial institution can take to prepare relative to your institution’s current position.
What to consider when marijuana business line hasn’t been discussed:
1. Begin by understanding the industry. Hold informational interviews with multiple professionals in the space, given the federal ambiguity there are multiple perspectives on how to run a compliant program.
a. Don’t let anyone tell you there’s only one way to be compliant. Other than SAR filing requirements (also mildly ambiguous) financial institution requirements have yet to be set in stone.
b. Understand that different marijuana industry sectors present different risks and understanding those risks are vital to detecting and deterring potential businesses that are outside of your institution’s risk tolerance
2. Evaluate the rules and laws in geographies which you would potentially serve and understand that even if your institution is not chartered in a state with a legal cannabis program, it is generally permissible for your institution to serve the marijuana industry in states that do have a legal cannabis program in place.
3. Investigate the types of customers or members you could encounter in your community. Know that at some point an existing customer or member valued by your institution will be associated with marijuana. Would you displace them from your institution if they were Tier II? Tier III?
a. Tier I: Plant Touching
b. Tier II: Supporting Industries
c. Tier III: Incidentally Related Entities
4. Hold conversations at the Board and Senior Management Level.
a. How does Marijuana play into strategy?
b. What are potential hold ups? (Why haven’t we discussed it already)
What to consider now that you have baseline industry understanding
1. Develop a policy. Whether you are or aren’t ready to take on Marijuana-Related Businesses, having a policy puts you in a position to know your financial institution’s current risk appetite. And, if in the future your institution chooses to enter the space, it will be easier to adjust your risk appetite than develop it.
2. Choose which types of customers or members your institution would or would not be comfortable banking after having a thorough understanding of what types of risks are associated with each industry sector.
3. Determine program needs.
a. How many full time employees are needed?
b. What kind of software or partnerships are needed?
c. Who will oversee the program?
Continuing to improve your program
1. Remain apprised of changing state and federal legislative or policy decisions.
2. Consider entering other higher risk verticals to maximize return on investment from your enhanced operational and compliance infrastructure.
3. Periodically review your application funnel to ensure you are bringing in the right businesses risk appetite and strategic goals.
4. Periodically evaluate customer or member levels against concentration limits (and establish concentration limits if you don’t have them).
5. Ensure you have contingency plans
a. One for subject matter experts that are integral to running your program
b. One for exiting the industry (or portions of the industry) given legislative or policy change at the State or Federal Level.
Regardless of the stage your financial institution finds themselves in today, it is vital to ensure policies and procedures are tailored to reflect the institution’s current marijuana banking practices and risk appetite. Whether or not the institution is banking the marijuana industry, it must be addressed in each policy and procedure and line of business specific training tailored to the institution’s marijuana banking position should be conducted.
As of today, only 7% of respondents from the Bank Director survey currently bank cannabis. Wouldn’t you like a piece of the remaining 93% of the market?
Interested in learning more? RiskScout will be hosting a webinar on Wednesday,December 8, 2021 at 2:00pm CT entitled: Getting Started: Organizing Risk and Compliance as you Venture into Higher-risk Markets CLICK HERE TO REGISTER