Marijuana Banking: Don't Get Caught in the Weeds

Ah, cannabis. On one hand, it’s a source of relief for many people. On the other, it’s a sore subject, rife with negative ideology and uncertainty. It’s like a dandelion…a pop of color that has the appearance of a flower but is, nonetheless, a weed. Ironic, huh? For credit unions, cannabis is, indeed, an area where the weeds continue to grow and pose challenges to a potential market for new business – marijuana banking.

Now, marijuana banking is nothing new. Ever since the push for legalization began over a decade ago, cannabis-related businesses (CRBs), such as dispensaries, grow houses, etc., have been looking to a variety of financial institutions for funding. It’s been a hard road, however, since the big issue – legality – still remains a very gray area. As such, CRBs have been forced to remain cash-heavy, as credit unions, banks and alternative financial institutions have been hesitant to get involved. But recent changes and advancements in the cannabis world may be changing the game.

Cannabis is Growing

According to Investopedia, rapid growth is expected in the cannabis industry – both in terms of use and revenue. In fact, it’s reported sales are projected to reach approximately $149 billion by 2031. To put that in perspective, the industry was worth just $8 billion in 2018. In addition, with the rise in mental health issues since the beginning of the pandemic, the number of people using medically prescribed marijuana has increased worldwide. That trend is expected to continue for the foreseeable future, with an estimated 26.6 percent annual growth rate through 2027.

Beyond that, we’re also seeing an uptick in the number of states within the U.S. that have legalized cannabis in some form or another. As of December 2023, 25 states allow for recreational marijuana use, 48 allow for medical marijuana in some capacity and 31 have decriminalized marijuana. Since the beginning of 2024, however, four more states – Kentucky, New Hampshire, Wisconsin and West Virginia – have introduced bills to make recreational use legal, so that number continues to grow as well. At this point, Idaho and Nebraska are the only two states out of 50 that have not legalized marijuana use, although Nebraska has decriminalized it. Despite all of these changes in state laws, the U.S. government still has cannabis listed as a Schedule I drug, so it remains illegal on a federal level.

With all this potential for growth in the cannabis industry, it’s not difficult to imagine the areas where financial institutions could play a role. It’s no secret that CRBs have been limited in their attempts to expand or even get started at all due to financial burdens. Thus far, participation from traditional financial institutions, like credit unions, has been severely restricted thanks to discrepancies in legality.

That was, until the Secure and Fair Enforcement Regulation Banking Act – also known as the SAFER Banking Act – was introduced to U.S. House of Representatives in 2019. The act aims to protect financial institutions, insurers, etc. that elect to provide services to CRBs and outlines specific reporting requirements for business relationships of this nature. Here is a brief summary of the bill (H.R. 1595), which you can find at Congress.gov, along with the full written document and other related information:

“This bill generally prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate marijuana- or hemp-related business. Specifically, the bill prohibits a federal banking regulator from (1) terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate marijuana- or hemp-related business; (2) prohibiting or otherwise discouraging a depository institution from offering financial services to such a business; (3) recommending, incentivizing or encouraging a depository institution not to offer financial services to an account holder solely because the account holder is affiliated with such a business; (4) taking any adverse or corrective supervisory action on a loan made to a person solely because the person either owns such a business or owns real estate or equipment leased or sold to such a business; or (5) penalizing a depository institution for engaging in a financial service for such a business.”

In September of 2023, the Senate Banking Committee officially passed the bill within the House of Representatives. At this time, it remains with the Senate. However, it’s a big step for both CRBs and traditional financial institutions, as it offers the possibility of eliminating some of the red tape surrounding funding and providing momentum in a quickly developing industry. A note of caution, though – the SAFER Banking Act is still very much in the early legislation stages and even if it does pass the Senate, which remains to be seen, regulatory changes of this magnitude will take time to implement.

Then Again, So Are the Challenges

In the meantime, credit unions are left to work with, well, just the haze. And this seemingly endless gray area leaves us in a less than desirable position. Let’s take a look at the biggest marijuana banking challenges our institutions are facing in a time where both expansion and obstruction are squarely within view:

• Legality issues. If the majority of states have legalized marijuana – whether for recreation or medicinal purposes – and even decriminalized it, but it is still illegal under federal law, where does that leave us? From a state law perspective, the light looks green (or at least yellow) but it’s strictly red in the eyes of the federal government. While the SAFER Banking Act is still pending, there seems to be nowhere to get a clear answer, making the risks of reputational damage, charter revocation and even prosecution that much more significant.
• Lending risks. Beyond even the regulations standpoint, typical practices on lending can be skewed with it comes to CRBs. For example, if a credit union chooses to lend to a dispensary, where can they securely ensure collateral? Remember, these organizations are cash-heavy and prone to theft for that reason, so that’s not an option. Furthermore, investment in CRBs is prohibited. On a more granular level, some financial institutions are even having difficulty providing mortgage and other loans to not just CRBs, but also marijuana industry employees because they are utilizing income from employment that is teetering on the verge of legal. When it comes to lending policies and the cannabis world, the waters are about as muddy as can be.
• Inconsistencies among regulators and examiners. Let’s be frank – if the state and federal governments can’t even be on the same page when it comes to cannabis, how can we expect anything different from credit union regulators and examiners? At this point in time, the overall marijuana banking regulations have not changed – they are still firm on the idea that involvement with CRBs breaks federal law. And although it appears that some regulators have become generally less strict over the years, findings in this area are very subjective. Do you want to take the risk of banking with CRBs when you’re unsure of how regulators and examiners will view your participation?
• A cannabis recession? There are rumors circulating of a cannabis recession. While growth is expected on one hand, CRBs are also facing a slew of other issues. As we’ve already discussed, funding options are extremely limited. Compounding that problem even further is the rise in inflation and interest rates. Operations have only become more expensive and when it’s hard to get lending as it is, some CRBs have struggled to maintain their viability in today’s volatile market. And with even more states legalizing marijuana, there is a chance of overproduction, which could create an imbalance in supply and demand, driving down prices and ramping up competition among CRBs, where only the biggest brands will survive. All of these factors could contribute to a cannabis recession. That begs the question, are CRBs a reliable investment for your credit union?

When it comes to marijuana banking, the environment is rough. There is still very much a haze in the air, clouding the lines between what we as credit unions could be doing and should be doing when it comes to lending and investing in CRBs. Even as we get closer to the subject and make our way to the ground level, we find that the roots of this highly-debated issue are just as compounded by rocky terrain and thorny overgrowth as ever.

But thanks to the potential of the SAFER Banking Act and the changes in attitude toward cannabis, maybe, one day, we can start to untangle ourselves from wilderness and find a solution that benefits all parties – credit unions, CRBs and our communities. In the meantime, don’t get caught in the weeds of marijuana banking. Do your research, stay up-to-date on cannabis-related legislation and make decisions that are in the best interest of your institution.

Cindy Hagan works as the VP of compliance and fraud risk for Vizo Financial Corporate Credit Union. In this role, she administers and coordinates the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) program within the organization to ensure compliance with federal regulations, the NCUA and the industry standards of the FFIEC’s BSA/AML examination manual. She also provides compliance consulting and training services to credit unions.