Cannabis banking reform has been stuck in the mud for years, at least at the federal level, and all signs point to a continuance of that status quo for the foreseeable future. Congress is not going to provide a legislative panacea any time soon, and most banks continue to avoid the industry. Here’s the current status quo: banking is widely available in Colorado and Washington to marijuana businesses. In these states, a number of relatively small banks and credit unions have carried the real weight in serving the market openly and in compliance with federal regulatory guidance. In other states where marijuana business is legal, like Oregon, Nevada, Illinois, and Massachusetts, there is scattered availability, but the access problem persists.
Throughout the country, small financial institutions that openly provide banking services to marijuana businesses aren’t the only competitors for pot dollars. Large institutions like Bank of America and Wells Fargo also end up banking a lot of marijuana businesses in direct conflict with the institutions’ stated policies. Sometimes these cannabis accounts are opened because marijuana businesses are not fully honest about the source of their funds, but there are also times when individual branches just don’t follow company policy. There are a lot of Bank of America locations out there, and the corporate overlords can’t monitor every new account as soon as it opens. Still, if you go into Wells Fargo today to open a marijuana business account, chances are high that you won’t get one.
We are hearing from people inside the industry, though, that change could be coming on that end. Ever since the Department of Justice released a February 2014 memorandum announcing that it did not intend to prosecute financial institutions for banking marijuana businesses (though it retained the right to do so), the chatter from industry has been the same. As long as federal law criminalizes possessing, distributing, and manufacturing marijuana, the risk is simply too great for most banks to get involved. It wasn’t worth it to JP Morgan Chase’s bottom line to get a few more dollars from cannabis businesses as long as it had the financial and reputational risk of being prosecuted.
But now, California legalization is on the horizon. And California is huge. Not only does California have the oldest and most entrenched cannabis businesses culture because of its early adoption of medical marijuana in 1996, but its demand vastly outstrips what is currently on the market. Its population is more than double the combined populations of Washington, Oregon, Colorado, and Alaska. And financial institutions, like other ancillary businesses in the cannabis industry, don’t want to miss out on the first mover advantage. The risk calculation for banks changes quite a bit when the potential revenue pool is as large as it is in California. Every single business wants a bank account.
Does that mean we will soon be seeing the Wells Fargos of the banking world openly courting pot businesses? Probably not. But we do anticipate seeing a shift in what financial institutions get involved. And we are actually hearing more chatter from some of our friends at these big banks (who contact us from time to time for our take on the cannabis industry) that they are at least looking more closely at how they might eventually start providing banking to cannabis businesses.
The banking industry can largely be split up into four groups: community banks and credit unions, state-wide banks and credit unions, regional banks, and national banks. Right now, you are seeing some direct cannabis banking at the level of community institutions and some state-wide institutions, but the regional and national players aren’t openly involved. Some regional banks are involved with businesses that are ancillary to the cannabis business as well as cannabis real estate financing. California’s opportunity, which will come with another couple of years of data that bankers aren’t getting arrested, will likely shift some of those services up. National institutions will take a harder look at getting involved with ancillary businesses and cannabis real estate financing. Larger regional banks may start banking cannabis businesses directly. And the number of small banks and credit unions will likely grow. It will be too hard for them to ignore the demand. Financial institutions have a reputation for being conservative, but we just can’t see them continuing to sit on the sidelines.