Marijuana industry banking woes: Here’s how some states are struggling to address them

U.S. cannabis companies are forecast to bring in as much as $10 billion in retail sales this year, according to the Marijuana Business Factbook 2018. But much of that money will go unbanked by financial institutions wary of possible sanctions for servicing businesses considered federally illegal.

However, as more states legalize cannabis, regulators and lawmakers are scrambling to address the banking issue. Proposals around the country include:

  • Privately funded banks just for the marijuana industry.
  •  “Closed-loop payment processing systems” that would function similarly to prepaid debit cards.
  • A state-owned bank.

A significant challenge is that banks that serve marijuana businesses – both recreational and medical – must follow a complicated patchwork of federal guidance, memos and costly compliance rules. Otherwise, they risk losing their charter.

That’s left many banks sitting on the sidelines, said James Thurston, a spokesman for the Ohio Bankers League.

“We do have many banks that have an interest in banking these businesses,” he said, “but as long as there remains this conflict with federal policy, they remain very reticent to go near marijuana businesses because there is just too much risk and work.”

Whether proposals being floated by lawmakers are the answer remains to be seen.

“The bottom line is that compliant cannabis banking requires full transparent supervision by a regulated financial institution,” said Nathaniel Gurien, founder and CEO of Fincann, a Manhattan-based payment solutions firm. “No solution is sustainable otherwise.”

Here’s a look at where some state banking proposals stand:

California wants banks just for the cannabis industry

Lawmakers in California will begin meeting this month to mull a proposal that would create privately funded banks just for the MJ industry.

In May, Senate lawmakers passed SB 930, a measure proposed by Democratic Sen. Robert Hertzberg that would create a state charter bank license for this purpose.

“The key goals of the bill are to start getting some of this cash off the street and to make it safer, easier and more efficient for government to collect it,” said Katie Hanzlik, press secretary for Hertzberg.

The state’s Department of Business Oversight would regulate the charter banks, and operations would be limited strictly to licensed cannabis firms and cannabis-related businesses.

The banks would be able to issue checks to account holders only to:

  • Pay state and local taxes and fees.
  • Pay vendors from California for goods and services provided to cannabis businesses.
  • Pay rent.
  • Purchase state, local bonds and debt instruments.

The measure is headed to the general assembly and will likely be referred to committees that meet throughout the month.

Ohio’s closed-loop payment plan stumbles

When Ohio’s first medical marijuana laws went on the books nearly two years ago, lawmakers touted plans to launch a “closed-loop payment processing system” that would function much like prepaid debit cards.

Under the legislation, medical marijuana patients and caregivers would have been able to deposit money to an account held by the state’s general revenue account.

Medical marijuana dispensaries, growers and testing facilities would also have accounts to pay bills, employees, buy products and pay taxes.

But that measure was voted down in committee in May, much to the appeasement of Ohio bankers.

“We were very skeptical from the beginning,” said Thurston of the Ohio Bankers League. “We knew Colorado had tried a similar approach, but it basically came down to the legal opinions that this system would put the state in direct conflict with a bunch of federal laws.”

The proposal’s failure in Ohio should be a signal to other states, Fincann’s Gurien observed.

“The challenge now is primarily just to get the word out so states stop wasting their time and resources on unfeasible public bank proposals and unsustainable short-term payment workarounds,” he said.

Banking woes in West Virginia could delay MMJ program

In West Virginia, the cannabis banking conundrum could force regulators to pump the brakes on the launch of the state’s newly adopted medical marijuana program, which is supposed to be underway by July 1.

Banks that work with the state “are unwilling to accept medical cannabis funds,” according to a May 10 letter from state Treasurer John Perdue to Gov. Jim Justice.

Perdue has proposed that legislators consider adopting either a closed-loop payment system or open a state-owned bank that would be operated by the state Treasurer’s office. Both options require legislative action.

Perdue noted in his letter that “each of the options are complex and have positive and negative attributes.”

Neither Perdue nor officials in Justice’s office could be reached for comment.

Michigan regulators hunt for help

Michigan’s newly regulated medical marijuana program has yet to fully launch, but regulators have said they want to keep the new businesses from operating on an all-cash basis.

In April, the chair of Michigan’s MMJ licensing board, Rich Johnson, said the state would begin meeting with vendors that offer payment solutions.

Among other groups, state regulators have said they plan to meet with the Michigan Bankers Association, Community Bankers of Michigan and Michigan Credit Union League to discuss “the needs of the banking industry in order to feel comfortable establishing business relationships” with cannabis firms, said David Harns, a spokesman for the state’s Department of Licensing and Regulatory Affairs.

Those meetings, however, have yet to be scheduled, Harns noted.

Lisa Bernard-Kuhn can be reached at [email protected]

11 comments on “Marijuana industry banking woes: Here’s how some states are struggling to address them
  1. Renee P. on

    Will the CA cannabis-related-business-only banking solution address employee payroll needs? If not, why was that payment type excluded from the “special checks” permissible uses? Is direct deposit the only option?

    Reply
    • Cruz Bustamante, California Lt. Governor (Ret.) on

      There is no banking solution for the cannabis industry. There is nothing that you can call or describe as a bank due to federal laws. There are financial services which can be properly assembled intra-state, which can give significant ability to businesses in an all cash economy to pay bills, employees, taxes, etc. But anyone trying to put together a bank… is on a fool’s errand. There is a company called Growth Group or “G2” who has created an interim solution and is now in the process of securing funding for an initial rollout. Again, this process will be interim until the federal government permits states to determine the legal, operational, procedural and enforcement challenges of the cannabis industry, including banking.

      Reply
  2. Brett Roper on

    I suspect the banking issue will be much more broad than CA’s suggestion of a Cannabis Only Bank. Banks rely on a wide variety of services as well as products so just banking deposits and payments does not a business make. The well positioned as well as forward thinking group will look at the overall value of the banking relationship including setting up products and services for related as well as ancillary players. Mortgages, commercial property lending, insurance, personal loans, checking and savings accounts, etc. etc. should become a part of that landscape to anyone wanting to enter the banking side as a whole. I think the opportunity here in the US for a well funded and thoughtful startup could run the table in any given state or states … they will just need to make sure they have adequate industry resources. Just a thought.

    Reply
    • Nathaniel Gurien on

      In view of the admittedly theoretical risk of asset forfeiture bank regulators charged with supervising risk, safety and liquidity prohibit lending to the cannabis industry and with rare exception cannabis-friendly banks feel bound by this prohibition. Private equity has moved to fill the gap, providing commercial mortgages and real estate financing, equipment financing and working capital loans. However costs are well above traditional banking rates, often in the range of 12% – 18% and more. Regrettably, the pending SAFE Banking Act (which may pass Congress next year) offers more but ultimately inadequate indemnification to overcome this prohibition. Although depository accounts and legitimate merchant processing solutions are becoming more widely accessible, institutional lending will remain unworkable until legalization. That said, as individual states and Congress re-kindle their enthusiasm for hemp and derivatives, economic development financing and grants as well as institutional lending is coming to life across the country.

      Reply
    • Brett Roper on

      Many of the banks here in Colorado (Fed) will be shunned once this issue is dealt with for the way they treated the industry up to this point. I suspect there will be a good bit of business for those that did not go our of their way to make things even tougher than they are … like closing an account the day before your federal taxes are due and make you scramble to contact the IRS to let them know the check you posted will not be honored, etc.

      Reply
  3. EBW on

    Least they’re working the problem and trying to find a way that we can turn this into a fully legitimate and cost-effective tax-paying process.

    Reply
  4. Patrick McCartan on

    The banks and financial service providers who are first to market with this will see exponential growth in the long run.

    Reply
  5. Nathaniel Gurien on

    The bottom line is that compliant cannabis banking requires full transparent supervision by a regulated financial institution. No solution is sustainable otherwise. Further any newly-established financial institution, public or otherwise cannot properly function without a master account with the Federal Reserve to provide check clearance, ACH, wire transfers and debit cards.
    In order for account holders to trust in the integrity of their deposits, the bank must be insured. Conventional deposit insurers, e.g., FDIC, OCC or NCUA limit the bank’s ‘high risk’ portfolio to 10% of the bank’s account holders. If one establishes a new bank (public or otherwise), it will be bound by this restriction unless it is covered by alternative credible deposit insurance. The State of California could insure the accounts of its public bank, but after the 12-24 months it will take to clear all the regulatory hurdles and actually be ready to open such a bank, the Federal Reserve won’t grant a master clearing account (i.e. routing number) to any cannabis-centric bank and probably not to any financial institution disclosing its intention to bank the cannabis industry to any extent. Based on the trajectory of banks looking favorably at entering the market, by the time California even most optimistically could open such an institution the issue will be moot since many of us on the front lines believe 2018 will be the year this issue will no longer trouble our industry, and there will be good access to depository banking and merchant processing for all compliant operators.
    Closed-loop processing can be compliant only when tethered to a transparent supervisory checking account from a bank that performs initially and ongoing all required due diligence, and reporting to ensure that there are no ‘bad actor’ owner/operators, that there is no co-mingling of funds outside of monitored licensed operations, and no diversion of products outside of state and federal guidelines. However, until digital currencies go mainstream, the overwhelming majority of buyers prefer using MC/Visa accounts, and no solution will gain long-term acceptance that does not permit convenient use of one of these. The good news is that right now, legitimate MC/Visa payment solutions are coming out of beta for licensees, ancillaries, and CBD online that when tethered to a transparent, supervised checking account are both compliant and sustainable.
    The further good news is that this is now sufficient banking bandwidth to provide transparent, compliant checking accounts with real banks to cover at least 10% of the current industry in all legal states including CA & NV with more on the way.
    Contrary to conventional wisdom the solution to banking for our industry does not lie with politicians or the Federal government. Simply stated, the banking industry is still generally opposed to associating itself with what it considers a disreputable trade. The solution is the persistent lobbying and education we along with our ‘happy warrior’ colleagues present to both the banking industry and individual banks every day, combined with the accelerating growth of mainstream acceptance of first medical and industrial, then adult-use.

    Reply
  6. Vin on

    Worse case scenario, All 50 states could have their own version of cannabis banking laws. This hot-mess can only be resolved at the federal level.

    Reply
  7. Silverado on

    Under no circumstances should legal and lawful cannabis use these criminal banks for their financial transactions. And should instead either invest in themselves and do it themselves and stay as far away from conventional banks as possible. They’re crooked, dishonest and prone to criminal acts if left to their own devices. Instead use the services of a credit union or help in chartering that state bank. Anything’s better than being involved with the scum that’s involved in this fractional reserve banking scam that’s about ready to implode because of too much debt. Maybe these cannabis business people could take that cash and bring into banks in big duffle bags through the back door like they used to accept when they (the banks) were involved with the cocaine problem in south Florida back in the 80’s for example?? Hey whatever it takes, huh??? And now they have…morals and scruples about accepting legal and lawful cannabis money??? Please…they should be FORCED to do business with the cannabis industry. Not because they don’t want to. But because WE INSIST that they do because it’s legal and lawful. Unlike their past behavior in a number of arenas…

    Reply

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