For the vast majority of banks and credit unions, working with the fast-growing legal cannabis industry is out of the question, an endeavor not worth the risks due to ambiguous federal law, reputational risks and other factors.
But opportunities for innovation and community support exist for financial institutions willing to engage with marijuana-related businesses. The November-December issue of Texas Banking features an article by a C. T. Bauer College of Business finance professor whose research explores how two credit unions in Washington State made it work.
Lizzie Berger, Assistant Professor
The article is based on Assistant Professor Elizabeth Berger’s research, "Half Banked: The Economic Impact of Cash Management in the Marijuana Industry.” The paper, by Berger and co-author Nathan Seegert, is forthcoming for publication in the Journal of Finance.
“Engaging with marijuana firms exposes financial institutions to legal risks, including the potential violation of federal money laundering laws,” Berger writes in the Texas Banking article. “The federal government’s ambiguous guidance further compounds the uncertainty, as it can be revoked at any time, leading to liquidity risks and account closures. On top of the legal and liquidity concerns, financial institutions must also grapple with reputational risks.”
Despite those impediments, a relatively small number of financial institutions have ventured into providing financial services for marijuana businesses. Berger’s article details how two credit unions in Washington State, Numerica and Salal, worked with state and federal regulators to develop guidelines designed to “help businesses and bankers figure out how to bank as legally as possible.”
Their motivation included potential profit, but also concerns about public safety, Berger writes.
Other states with legalized marijuana, but no banking solutions, had experienced an uptick in violent crime and home invasions. The credit unions’ position was that it was in the best interest of their communities to take cash off the streets and store it securely in a financial institution. They developed highly customized procedures for working with marijuana businesses such as creating a “Cannabis Committee” to approve and monitor new marijuana-related accounts.
“Local credit unions used relationships with their local community of financial regulators, business leaders, legal experts and state regulators to reduce uncertainty and limit the risks of working with recreational marijuana businesses,” Berger writes. “Solutions evolved over time but were labor-intensive, hyper-localized and emphasized due diligence, strict compliance and constant contact with state regulators.”
Not surprisingly, she writes, fintech firms have found a niche market by creating software platforms that streamline compliance for financial institutions willing to be among the first to work with the legalized cannabis industry.