By So Jene Kim and Olivia Markbreiter
Amid uncertainty about the regulatory and legal environment for cannabis, banks remain reluctant to bank the cannabis industry and marijuana-related businesses. As a result, few people seem to know the size of the opportunity. However, cannabis is developing like almost any other industry: There are booms and busts, gold rushes and recessions, regulatory burdens and emerging technologies. In fact, the cannabis industry is already showing signs of maturing, with increased M&A activity and the rise of ancillary products like cannabidiol, or CBD, entering mainstream retailers.
Set aside both hype and fear: cannabis banking can be a massive financial services opportunity. Here are four myths about the cannabis industry and its potential opportunity for banks:
Myth: Cannabis will never be legalized, so we can never bank it
Today, cannabis is recreationally legalized in 11 states, medicinally legalized in nine, and decriminalized in 13. Cannabis remains illegal in 17 states, as well as at the federal level under the Controlled Substances Act, which hampers efforts to regulate and safely bank this industry. However, change is expected: the House of Representatives passed the SAFE Banking Act, which would allow financial institutions to bank legitimate, state-licensed cannabis businesses in states where the drug is legal. The pressure is currently on the Senate to follow suit.
Meanwhile, financing of certain legitimate MRBs such as CBD—a non–addictive cannabis extract commonly used to treat anxiety and muscle pain—is readily available nationwide, with all 50 states legalizing it in varying degrees. Retailers have taken notice: according to Wise Guy Research Consultants, the CBD industry is estimated to rise by cumulative annual growth rate of 39.5 percent from 2018-2025 to reach $3.86 billion. CBD oil products have already gained credibility with mainstream retailers, including Walgreens, CVS and Rite-Aid, releasing plans to bring CBD products to their shelves. CBD is also available online and in many brick–and–mortar shops across the country.
Most importantly, the FDA recently approved the first drug with CBD as an active ingredient, Epidiolex, to treat severe forms of epilepsy. While many believe that marijuana banking means financing dispensaries and growers, the rise of CBD and other “non-plant touching businesses” illustrates the opportunity for banks to consider the legal implications of working with MRBs without waiting for protections in federal legalization. The key message here: banking for marijuana-related businesses is happening now and will continue to grow, even if bankers remain reluctant to bank growers of marijuana directly.
Myth: Smaller banks don’t stand a chance
Overall, there are 493 banks and 140 credit unions that can support MRBs, according to Marijuana Moment. Community banks and credit unions are poised to be first movers with the most significant potential for upside. The reason for this competitive advantage is partially due to federal regulations: As cannabis becomes legalized state–by–state, community institutions are taking advantage of the challenge for banks whose markets straddle jurisdictions with different legalization frameworks.
Myth: It’s expensive to enter this market.
Depending on the level of services offered and the kinds of cannabis firms served, it’s true that banks need to spend more on risk management, monitoring and reporting. However, banks can employ banking-as-a–service providers to bring new products and services to market rapidly. These technology companies develop white label and turnkey solutions that financial institutions and fintech challengers can quickly plug into their core banking system and offer under their branding. One cannabis BaaS provider offers MRB banking and payments software with capabilities such as lifecycle management, cash tracking technology, and the ability to source deposits using the automated invoice management software. It can integrate into point-of-sale providers, e-commerce platforms, and data analytics software. By finding the right technology partner, banks can quickly scale to enter this market.
Myth: If I do enter this market, it would be all about cash management
Although cash management is a crucial concern for cannabis firms, once banking becomes more widely available for MRBs, fewer transactions will have to be cash-based. In fact, MRBs are looking for banks that can provide holistic banking partnerships, from lending to advisory services. For example, M&A advisory: Nearly $8 billion has been inked in MRB M&A deals. High-necessity products and services will also include asset-based lending, payments and tax services.
Cannabis banking is coming, and the industry needs trusted banks and advisors for sophisticated banking needs. To succeed, MRBs will need access to banking products and financial services that are tailor-made to the unique servicing and regulatory needs of their clients. This presents an opportunity that community banks should not dismiss out of hand.
So Jene Kim is a partner in Capco’s finance, risk and compliance practice. Olivia Markbreiter is a senior consultant and member of Capco’s digital acceleration team.