Industry Insight: Understanding Cannabis Banking Challenges

Hi and welcome to Can Strategy elevating your cannabis business venture the go-to podcast for cannabis entrepreneurs looking to level up their business game. Today we're tapping into one of the most complex and intriguing aspects of the cannabis industry banking. Yes, you heard that right the world of finance meets the world of cannabis. On the surface, it may sound dry, but it's an area full of intrigue, challenges and innovative solutions. It's also a critical part of ensuring the growth and stability of the cannabis sector. Whether you're an entrepreneur looking to start your own cannabis business, an investor trying to understand the risks and opportunities in this rapidly evolving sector, or simply a curious observer, this episode is for you. We'll unravel the complexities of cannabis banking, discussing the obstacles faced by cannabis businesses and securing traditional banking services due to the federal classification of cannabis. We'll also highlight some of the creative solutions businesses have adopted and the potential changes on the horizon.

Despite the growing acceptance of cannabis at the state level, it's still classified as a Schedule I controlled substance under federal law. This is the same category as heroin, lsd and ecstasy, indicating that these substances have a high potential for abuse and no accepted medical use. What does this have to do with banking, you ask? Banks in the United States are regulated by federal law. This means they have to comply with federal rules and regulations, one of which is the Bank Secrecy Act. This act requires banks to report any transactions involving more than $10,000 in cash and any suspicious activities that might signal money laundering, tax evasion or other criminal activities. Given the federal stance on cannabis, banks can view transactions with cannabis businesses as suspicious and flag them as potential money laundering. To better understand this, consider how banks work. They're required by law to monitor their customers' transactions for suspicious activity and if they notice something that could be potentially illegal, they must report it to the authorities. In essence, a bank dealing with a cannabis business could be perceived as indirectly facilitating an illegal activity, despite the fact that this activity is entirely legal within certain state borders. This discord between state and federal law puts banks in a very precarious position. The risks associated with servicing cannabis businesses are high not just hefty fines, but more severe consequences such as loss of charter, meaning the bank would have to cease operations. Even criminal liability could be on the table for the bank and its executives.

Now let's imagine you're a bank weighing the potential risks and rewards. On one hand, you have a burgeoning industry with enormous financial potential, on the other, you face significant legal and operational risks. When it comes to the banking industry, a sector known for its aversion to risk, it's not hard to see why many financial institutions have steered clear of the cannabis space. They simply decide that the potential legal and financial fallout isn't worth the rewards. This creates a massive hurdle for cannabis businesses. Without access to traditional banking services, they are forced to operate mainly in cash, from accepting only cash payments from customers to paying suppliers and even taxes in cash.

The industry has adopted some creative solutions in response to this predicament. First, let's talk about credit unions and local banks. Unlike multinational banks, these smaller institutions are usually state regulated, making them more inclined to work with cannabis businesses, especially considering the potential economic benefits for local communities. Now, it's not a perfect solution by any means. These institutions often charge higher fees due to the extra risk and workload associated with cannabis banking, and not all states have these types of banks or credit unions that are willing or able to serve the cannabis industry. Another approach is the use of cashless ATMs. These work in such a way that customers at a cannabis dispensary will use the terminal to withdraw funds that go directly to the dispensary and a corresponding voucher is then given to the customer. This method provides a workaround to the cash problem, but it doesn't solve all issues related to record keeping and safety. This approach has been widely accepted and successful in dispensaries until a recent threat to the practice in July 2023, when MasterCard instructed US financial institutions to stop allowing purchases of cannabis on its debit cards, followed by a slew of cease and desist letters to cannabis dispensaries. It's yet to be seen if this move will cause other companies to take similar action.

Lastly, legislative efforts are underway to bridge the gap between state and federal laws. The Safe Banking Act, for example, aims to prohibit federal banking regulators from punishing banks for providing services to cannabis-related businesses in states where it's legal. The Safe Banking Act has passed the House seven times with strong bipartisan support, but unfortunately has yet to pass in the Senate. As we delve further into the realities of the cannabis banking conundrum, we encounter an interesting paradox that begs for closer scrutiny. You see, by denying cannabis businesses access to banking services, the federal government finds itself missing out on potential financial benefits and, somewhat ironically, perpetuating the very problems they aim to avoid.

Firstly, let's talk about visibility. As it stands, the cash-heavy operations of cannabis businesses make it difficult for financial regulators to keep a close eye on transactions. In a legitimate banking environment, however, every dollar is tracked, every transaction is recorded. From a regulatory perspective, incorporating cannabis businesses into the existing banking system would offer a far more transparent view of the industry's finances, facilitating regulatory oversight and making it easier to monitor for fraudulent or illegal activities. Secondly, we come to the matter of tax revenue. By forcing cannabis businesses to operate primarily in cash, the government potentially loses out on substantial tax revenues. If these businesses had access to regular banking services, it would be easier to enforce tax compliance, leading to a likely increase in government revenue. It's an economic stimulus waiting in the wings. Lastly, there's the federal government's purported concern over money laundering. The irony here is that, by denying banking services to legitimate cannabis businesses, the government could inadvertently be driving some transactions underground, thus creating the very conditions for money laundering to thrive. Conversely, allowing cannabis businesses to use banking services could mitigate this risk, providing a regulated environment for financial transactions to take place. One might argue that it's in the government's own interest to reconsider its position on the matter of cannabis banking, but until they do so, we continue to navigate the world of doing business with oodles of cash For potential investors, this banking issue needs careful consideration.

Can you, as an investor, deal with the risks and headaches associated with a predominantly cash-based business? How comfortable are you with the lack of financial transparency that can come with cash operations? The cannabis industry is not for the faint of heart, but for those who can navigate these waters, the potential rewards could be significant. To wrap up, the issues faced by cannabis businesses regarding banking and financial services are multi-layered, steeped in regulatory complexities and legal contradictions. While these challenges may seem daunting, they are part and parcel of a rapidly evolving industry that teeters on the edge of federal legality and state entrepreneurial spirit.

With any seismic shift in societal norms, such as the legal acceptance and commercialization of cannabis, growing pains are inevitable. Yet these hurdles also serve as a testament to the industry's resilience and potential. This narrative is far from over. With legislative changes on the horizon and an industry tirelessly advocating for financial reform, the hope for a more accessible and secure banking environment for cannabis remains alive and strong. Thank you for joining us on this exploration of cannabis banking. We hope it's offered you a clearer understanding of the financial challenges and opportunities in this space. If you found this episode valuable, be sure to subscribe to our podcast, can Strategy. Elevate your Cannabis Business Venture and leave us a five-star review. If you're a leader in cannabis business, whether a small startup or a booming enterprise, and you're looking to navigate these waters effectively, don't hesitate to reach out to Can Strategy, the go-to cannabis business consulting firm, for all your cannabis business licensing, launch and operational development needs. Until next time, keep growing, keep learning and here's to making the cannabis industry the best it can be.