Banking + Cannabis: A Match Made in Investment Heaven?

Banking + Cannabis: A Match Made in Investment Heaven?

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Despite cannabis being illegal under federal law as a Schedule I drug, the U.S. legal marijuana industry is still possesses an estimate value of $10.4 billion in 2018, encompassing over 250,000 jobs. What’s more is that 62% of Americans believe the use of marijuana should be legalized. This is double what it was in 2000 (31%) and five time what it was in 1969 (12%). With consumer industry support ramping up in line with federal marijuana legalization discussions, should banks now begin to see the cannabis industry as a legitimate enterprise? Let’s find out:

Why Have Banks Historically Shied Away From Cannabis?

For many years, banks wouldn’t even give cannabis businesses the time of day, let alone a business checking account. At that time, banks saw marijuana-based companies as nothing other than a back alley business funded by the mob and other criminal elements. Years later, the legal cannabis industry is booming and 493 small banks and 140 credit unions are involved in providing their services to these businesses according to the Treasury Department’s Financial Crimes Enforcement Network.

Large banking brands, on the other hand, have avoided getting involved in the industry until recently when banking conglomerate, Citigroup began considering the possibility of getting into the business. From a banking perspective, expanding into serving marijuana-related businesses can help banks lock down new accounts, that can increase their deposit threshold, thereby adding more loan volume to their portfolios.

Cash Is King in the Cannabis Industry Right Now

For as long as the legalized cannabis industry has been around, cash has always been the one and only way to do business. Unfortunately, this is incredibly inconvenient at the register and requires the business to have tons of cash on hand which can be an incredibly dangerous position to be in regardless of the industry.

Since banks have historically rejected cash deposits and made is so that marijuana businesses cannot process credit-card payments, clear checks, make loans or underwrite stocks and bonds, it has left these companies in a difficult position where their scalability is in constant chaos. How can a business meet demand when they’re unable to make the sizable investment that it takes via a bank loan to get there? Since traditional financial institutions and payment processors will not offer cannabis businesses merchant card accounts, they have been forced to pay for everything in cash and count them in “cash rooms” that are like a bullseye for theft.

How Does the SAFE Banking Act Affect the Cannabis Industry

Thankfully, in September 2019, the U.S. House of Representatives passed the SAFE Banking Act with broad bipartisan support (321-103). This bill could quite possibly be the biggest federal legislative and policy change for cannabis in U.S. history is passed into law. The bill provides protections from federal enforcement for banks, credit unions, and insurers that service the cannabis industry. Cannabis companies will also be authorized for the first time to use electronic payment processing systems. This is big news because it would allow businesses to become more agile at the register and keep from needing to only use cash to pay their taxes, vendors, and employees.

Can the banking and cannabis industries form a symbiotic relationship regardless of the passage of the SAFE Banking Act? That remains to be seen. The good news is that the shields are coming down on the banking industry’s long-standing stigma of the cannabis industry. The banks that look past the short sighted risks of entering the cannabis market will surely be rewarded in due time though.

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