The cannabis industry has been largely cash-based due to the federal prohibition of the drug, which makes most banks reluctant to serve the sector. However, some banks and credit unions have decided to take the risk and offer banking services to legal cannabis businesses, hoping to gain access to cheap deposits and loyal customers. But as more financial institutions enter the cannabis banking space, the existing players are feeling the pressure to differentiate themselves and offer more value to their clients.
Risk-Based Pricing May Not Be Enough
One of the strategies that cannabis-friendly banks have used to justify the high cost and labor associated with banking the sector is risk-based pricing. This means that they charge higher fees and offer lower interest rates to cannabis businesses, reflecting the higher risk and compliance burden of serving them. However, this approach may not work well when there is more competition in the market, as cannabis businesses may look for better deals elsewhere.
For example, North Bay Credit Union, a Santa Rosa, California-based institution that has been offering accounts for marijuana-related businesses since 2017, decided to launch interest-bearing cannabis accounts in order to differentiate itself from competitors. The credit union pays 2.75% interest on those accounts, which in some cases offsets the monthly account fee. The credit union’s CEO, Chris Call, said that risk-based pricing does not always work when trying to compete with the bank down the road. He added that the interest earnings on the accounts are much appreciated by their customers and contribute to their loyalty.
SAFE Banking Act Could Change the Landscape
Another factor that could affect the cannabis banking industry is the potential passage of the Secure and Fair Enforcement (SAFE) Banking Act, a bipartisan bill that would make it easier for financial institutions to serve legal cannabis businesses without fear of federal sanctions. The bill has passed in the House seven times but has yet to pass in the Senate, where it is scheduled for a committee vote on Sept. 27.
The bill has been supported by both cannabis and banking industry stakeholders, who argue that it would improve public safety, increase tax revenue, and provide more access to capital for cannabis businesses. However, some lawmakers have been at odds over some of the bill’s details, such as a provision that would prevent regulators from cracking down on bad actors who pose actual risks to banks.
If the bill passes, it could open the door for more banks and credit unions to enter the cannabis banking space, which could increase competition and lower prices for cannabis businesses. However, it could also create new challenges and opportunities for existing players, who may need to adapt their business models and services to meet the changing needs and expectations of their clients.
Innovation and Customer Service Are Key
As the cannabis banking industry evolves, banks and credit unions that serve the sector will need to innovate and provide more value-added services to their clients, such as lending, cash management, payment solutions, and advisory services. They will also need to maintain high standards of customer service and compliance, as well as build trust and loyalty with their clients.
Some examples of innovation in the cannabis banking industry include:
- Silvergate Bank, a California-based bank that serves over 1,000 digital currency and fintech clients, launched a pilot program in 2020 to offer banking services to select cannabis businesses using its proprietary payment platform, Silvergate Exchange Network (SEN). The bank said that SEN enables real-time transfers of U.S. dollars between participating SEN account holders 24/7/365.
- Shield Compliance, a Seattle-based compliance management platform for financial institutions serving legal cannabis markets, partnered with ZSuite Technologies, a digital tools provider for financial institutions serving niche markets, in 2020 to offer a fully integrated banking solution for cannabis businesses. The solution combines Shield Compliance’s automated compliance platform with ZSuite’s digital escrow products for rent payments and cashless transactions.
- Abaca Banking, a Little Rock-based fintech company that provides banking and payment solutions for the cannabis industry, launched a digital banking platform in 2019 that allows cannabis businesses to access FDIC-insured bank accounts, debit cards, ACH payments, bill pay, remote deposit capture, armored cash transport, and merchant services.
These are just some of the examples of how banks and credit unions can leverage technology and innovation to serve the cannabis industry better. As more states legalize cannabis and more financial institutions enter the market, the competition will intensify and the expectations will rise. Cannabis-friendly banks will need to stay ahead of the curve and offer more than just basic banking services to their clients.
