As cannabis sales become legal in an increasing number of states, the prospect of offering financial and payment services to these businesses is both a rare greenfield opportunity for banks and credit unions and a potential risk management minefield.
For many years, cannabis dispensaries—legal in states like Colorado, California, and Washington—still dealt primarily with cash, as most financial institutions and payment providers wouldn’t work with these businesses, which were still considered illegal in many states and at the federal level. Financial institutions that are federally licensed probably couldn’t do business with these firms even if they wanted to. The potential for abuse of network security by cybercriminals, who could view cannabis businesses as less secure and less likely to fight back if attacked, is also a concern.
However, now that cannabis has been legalized for medical use in 39 US states and the District of Columbia, as well as for recreational and medical use in 18 states and the District of Columbia, the prospect of working with the fast-growing industry is often too attractive for many banks. to refuse—especially since opening up entirely new small business banking opportunities isn’t common these days.
One bank executive spoke about their bank’s efforts to proactively reach out to the cannabis business at a recent Financial Crimes Webinar hosted by banking industry service provider Jack Henry. Mel Barnes, director of the cannabis program at West Town Bank & Trust, pointed out that the start of any such program is a conversation with the bank’s board of directors about “do we want to do this.”
Barnes, who has overseen cannabis banking programs for more than five years, was tapped by Raleigh, North Carolina-based West Town Bank & Trust earlier this year to launch its cannabis banking program, officially launched in April 2022 .(The slogan of the program is “A bank with higher standards.”)
“It’s important to educate yourself, your management team and your board,” Barnes said. “We have to ask, ‘Why do we want to do this?’
On the plus side, especially as more and more states legalize cannabis, there are still many of these businesses that remain “unbanked” due to a history of financial institutions and payment providers choosing not to work with them in the early days. On the other hand, in addition to potential compliance and legal issues, many traditional financial and payment companies feared the possibility of attracting the attention of hackers who might see these businesses as easy prey, as they are relatively nascent and may not be willing to to fight back given their relatively new legal status.
“There may still be some social stigma” in dealing with the cannabis business, Barnes added.
“[Cannabis business] it’s growing and growing fast, and regulations are constantly changing,” Barnes pointed out. “But banking and cannabis are two of the most regulated industries, so they can be very powerful and very striking. … This means you have to be ready and willing to put the resources into a cannabis banking program … balancing user experience with compliance and security.
As for compliance concerns, Barnes acknowledged that financial regulatory auditors may have more questions for banks working with cannabis companies than for “the guy selling Nikes down the street.” While Barnes said those problems are starting to dissipate, “they’re never going to go away.”
West Town Bank & Trust works with a number of third-party technology partners, including IT security company RiskScout, in serving its cannabis business customers.
“Legal cannabis businesses should have access to the same financial services as other industries,” Barnes said in an April press release.