Have you had the Cannabis Talk with your bank?
Twenty years ago, if I had entered my board room and proposed to the directors that we bank the Cannabis industry, I would have been promptly escorted out.
In fact, as they were preparing to dispatch me to someplace at which I would get some rest, relaxation…..and therapy, I am sure I would have caught the muted undertones of: “That’s too bad! He must have cracked under the pressure.” So much has changed in that time. While I still need rest, relaxation and therapy, banking Cannabis is no longer crazy.
That is not to say that boards of financial institutions across the United States are eagerly welcoming the idea. But each week, more financial institution directors are openly considering the topic. Why? There are a number of different reasons. The most compelling is that legalized Cannabis is a rapidly growing industry that will reach approximately $40 to $50B in the next five years, which is likely to accelerate as Cannabis continues to be legalized and continues to carve into the market-shares of alcohol and tobacco. Thirty-three states have legalized some form of Cannabis and a handful of states have meaningful Cannabis legalization legislation in this year’s election. Polling has indicated that 66% of U.S. voters support the legalization of recreational Cannabis. And, the average Cannabis related business pays 1% to 1.5% interest on their deposits plus fees to the financial institutions that are openly banking them.
Another reason that directors of financial institutions are discussing Cannabis is that they want to ensure that their institution is not banking any Cannabis. Other directors want to understand what management intends to do about the Cannabis clients that already exist in their institution. The truth is that many boards that think their bank doesn’t have any Cannabis presence are wrong. And many bank presidents and boards are facing a dilemma as they find out some of their better customers are involved in some way with the Cannabis industry.
Let me give you two examples of dilemmas financial institutions are facing. A well-established farmer in an agricultural area may have decided to diversify crop rotation first to hemp and then to Cannabis to maximize yield and fully optimize growing capacity. Of course, that farmer may get paid for the crop yield in cash and have to now uncharacteristically deposit that cash in the local branch. Or a well known commercial real estate owner leases some space to a Cannabis Related Business and is now depositing cash paid rents into the bank. In both of these cases, the customer may be well known to the bank and have ties to various board members.
In any case, banks would be well advised to understand the existing and potential exposure of Cannabis Related Businesses to their institution and make sure that their policy statements give them the latitude they may need or want. Given the growth in the industry in the states in which Cannabis is legal, the need to implement adequate controls in financial institutions is destined to be an increasing focus for the regulators. Right now there is scant regulation that has been written and so enforcement is a challenge. That will change. RLR and HDCS are available to help you scrub your deposit portfolio, craft policy statements that make sense for your institution and put in a system of controls that keeps your institution safe.