The cannabis industry is one of the fastest-growing industries in the U.S., eclipsing $20 billion in market value in 2020 and projected to reach $197.74 billion by the end of 2028, according to Fortune Business Insights. All that money needs to go somewhere, but unlike other industries, a cannabis business can’t just walk into a conventional financial institution and open a bank account.
As federal prohibition continues and the cannabis cash piles up in legal states where cannabis businesses can thrive, entrepreneurs have limited options when it comes to finding a place to store it and access other essential financial services. If you’ve experienced difficulty securing or keeping your business’s bank account open, don’t fret! While it might be difficult to find a bank that’s willing to openly work with cannabis businesses, it’s not impossible.
This guide breaks down the ins and outs of cannabis banking, why it’s so hard to find a financial institution to work with, and the tips you need to know to find the right bank for your cannabis business.
What are the main issues in cannabis banking?
If you ask people involved in the cannabis industry why banking is so hard to secure, most will tell you it’s due to federal prohibition. The refrain typically goes that because cannabis is federally illegal, banks stand to lose their FDIC status and federal charter if they work with cannabis businesses. Worse yet, some claim, bankers may even find themselves criminally liable for money laundering as a result of banking the cannabis industry.
None of this conventional wisdom is true. Although the federal prohibition is one factor that has led to restricted banking opportunities, it does not tell the whole story. In fact, banking legal cannabis businesses that operate in compliance with their local and state laws is already legal at the federal level.
This is because the Financial Crimes Enforcement Network (FinCEN) and other federal agencies responsible for regulating financial institutions – such as the Federal Depository Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) – have all made it clear that banking cannabis businesses is much the same as banking other highly regulated industries.
Banks that choose to work with cannabis businesses are required to closely monitor all funds in accordance with current anti-money laundering (AML) rules and regulations. This means instituting robust Know Your Customer (KYC) policies and processes, as well as meticulously documenting every deposit and withdrawal the business makes.
It’s not federal prohibition – it’s stigma and compliance costs
The rules for bankers to work with cannabis businesses in a federally compliant manner are clear. So, why don’t more banks take advantage of the massive market opportunity facing the cannabis industry?
The answer, as is so often the case, is that cannabis remains a stigmatized industry marred by nearly a century of disinformation campaigns and widespread ignorance. As a result, many bankers are afraid to work with cannabis businesses, either due to personal misgivings or fear of reprisal within their own professional or social networks.
“The single most important understanding regarding the cannabis industry’s access to banking and related financial services is that there has been no meaningful federal restriction on cannabis banking since at least 2014, and probably before then,” said Nathaniel Gurien, founder and CEO of Fincann, a cannabis banking network and past CWCBE exhibitor. “The true nub of the problem is the individual banks’ own reluctance to support what they feel is a shady and disreputable industry.”
Additionally, adhering to the federal rules related to banking a highly regulated industry can be costly. Banks are required to set up additional monitoring and, generally, must assign one person to closely manage each cannabis account personally. Moreover, they must periodically file suspicious activity reports (SARs) as required under the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual.
All this demands time, resources, and money from the bank – if they do not already have the infrastructure in place to meet these requirements, they may simply choose to avoid banking any highly regulated industry, cannabis included.
Other financial products impacted by cannabis banking restrictions
This stigma against cannabis and the compliance costs to financial institutions doesn’t just impact banking either, but all financial services. These include:
- Lending: Like all growing businesses, cannabis companies require capital to expand. One major way most businesses acquire additional capital is to seek out a loan or line of credit. Unfortunately, due to the reluctance of many banks to work with cannabis businesses, this access to capital is almost completely shut off for most entrepreneurs in the industry.
- Payroll: It can also be difficult for cannabis businesses to access services intended to help companies pay their employees. Banks often extend payroll processing and bill pay services, but many won’t do so for cannabis businesses – even if they’re willing to bank them. This means cannabis entrepreneurs often have to resort to paying employees in cash or by mailing checks, both of which are not ideal or efficient options.
- Merchant processing: Merchant processing services enable businesses to accept credit cards. Unfortunately, most cannabis businesses remain unable to do so because of restrictions imposed by major credit card networks like MasterCard or Visa.One workaround has been the “cashless ATM” in dispensaries, which customers use to “withdraw” an amount that covers their purchase, plus a fee, then receives the change in cash. For example, if someone purchases $91 in cannabis products, they “withdraw” $100 at checkout used to pay for the product and receive $9 in change. The transaction appears as an ATM withdrawal to the bank, but it is not.In December 2021, Visa announced its intention to crack down on the use of the cashless ATMs, issuing a stern warning to operators who do so.
What about hemp banking?
Perhaps the silver lining in cannabis industry finance is hemp banking. Industrial hemp, legally defined as Cannabis sativa L. containing less than 0.3% THC, was federally legalized for domestic cultivation, processing, and distribution with the signing of the 2018 Farm Bill. Now federally legalized, hemp could be treated like any other agricultural crop, both in the eyes of the law and bankers. Just as a corn farmer would be able to access a checking account, secure a loan, or accept credit card transactions, so too would hemp farmers and manufacturers.
What about CBD banking?
Unfortunately, even the 2018 Farm Bill didn’t make things easier on hemp-derived CBD businesses. Although industrial hemp – the leaves, stalks, and branches of the cannabis plant – is federally legal and easily banked, CBD is a different story.
The 2018 Farm Bill removed the regulation of hemp from the purview of the U.S. Drug Enforcement Agency (DEA) and divvied it up between two agencies. The U.S. Department of Agriculture, in cooperation with state agencies, would be responsible for hemp. The U.S. Food and Drug Administration (FDA) would be responsible for CBD products intended for human and animal consumption.
This is where things get messy. CBD is the primary ingredient in an FDA-approved pharmaceutical product, an anti-convulsant known as Epidiolex. This means that CBD products intended for human or animal consumption must be FDA-approved to be used as an ingredient in products sold on the market. The only type of CBD product that has been given a pass so far is topicals. To further complicate matters, the only regulation issued by the FDA regarding CBD in the years since this change is regarding marketing these products.
The regulatory uncertainty surrounding CBD products makes it risky for bankers to work with CBD brands. Some may be willing due to the legalization of hemp, but many realize the FDA could issue changes at any time, making the segment a big risk for the famously risk-averse finance professionals.
What is the SAFE Banking Act?
The Secure and Fair Enforcement (SAFE) Banking Act is a bill that has circulated through Congress since it was introduced in 2017. This measure intends to ameliorate the issues cannabis businesses face when it comes to securing banking and financial services by codifying the existing FinCEN guidance on banking cannabis businesses into law. While the legislation wouldn’t change much about how cannabis banking works, it could encourage hesitant banks to work with the industry.
The SAFE Banking Act has hit a number of pitfalls. After a slow start, the bill reached its first major milestone when it obtained approval in the House of Representatives by a bipartisan vote of 321 to 103 in 2019. The SAFE Banking Act expired while awaiting a vote in the Senate as the 116th Congress came to a close.
Then, in 2021, the SAFE Banking Act passed the House of Representatives again by a vote of 321 to 101. The bill was to be added to the National Defense Authorization Act (NDAA) 2022, which would effectively force a Senate vote on the measure. However, the SAFE Banking Act was removed from the NDAA at the final moment last December, stalling its progress once more. As of February 2022, the bill has been reintroduced in the House.
Best tips for securing a bank account for your cannabis business
Every aspect of a financial institution’s services can be difficult to come by for cannabis businesses. But not all bankers believe the stigma facing the industry, and many are aware that federal regulations in fact allow the legal banking of state-compliant cannabis businesses.
“The truth is that there are actually roughly 200 banks that [work with the cannabis industry],” Gurien said. “Less than half of them welcome THC licensees, and more than half of them are local credit unions and community banks that often have months-long waitlists to apply for an account.”
The silver lining is that although it may be difficult to find, cannabis-friendly banking and financial services are out there – you just need to know where to look.
- Don’t lie to the bank: Many cannabis entrepreneurs have been ill-advised to hide the true nature of their business in an attempt to get an account faster. Doing so is a costly and illegal mistake. Accounts can be shut down without warning, and your business may be blacklisted from opening other accounts.
- Be prepared to get rejected: Some banks simply don’t want to work with a cannabis business. Being upfront with prospective banks will make the process a lot more efficient; those that aren’t willing to work with the industry will sever ties immediately, while those who are open to it will work closely with you to navigate the unique state of banking and finance in the legal cannabis industry.
- Leverage your professional network: There are a lot of great cannabis professionals that can help connect you to banks that are already legally banking and supporting cannabis businesses. Leverage your own professional network to find these connections.
- Prepare your documentation: Even cannabis-friendly banks have to abide by the strict regulations set out in the FinCEN guidance governing highly regulated industries. This means they need to account for every dollar in and every dollar out, so it’s important you offer detailed, transparent documentation into your business’s operations. The easier you make it for a bank to onboard you as a client, the more likely your search for financial services will bear fruit.
- Stay in touch with your banker: Once you secure banking for your cannabis business, stay in close contact with your banker. Forming a tight-knit relationship is key to ensuring the longevity of your account and availing your organization to additional services.
Cannabis banking done the right way
The cannabis industry has been unfairly forced to deal fully in cash or engage in questionable loopholes to obtain basic bank accounts. Unfortunately, some of these methods have compounded the stigma facing cannabis businesses in the eyes of the very bankers that decide whether to work with the industry. The reality though, is that there already exists a federally legal path for bankers to work with the cannabis industry, and many are stepping up to the plate despite their fellow bankers’ misgivings. As legalization begins to expand and more banks do so in a safe and compliant manner, there is hope that these services will expand in the years to come.