Small banks are gaining confidence
Cannabis companies may not be able to work with the JPMorgan Chases and Citigroups of the world anytime soon, but that hasn’t stopped small banks from flooding into the space.
On the surface, it would seem that the industry’s prospects for being able to bank like normal companies has taken a hit. U.S. Representative Ed Perlmutter of Colorado, the biggest supporter of legislation that would liberalize rules for cannabis banking, just announced his retirement. The SAFE Banking Act he backed stalled late last year. Meanwhile, Visa Inc. sent a memo to banks saying that so-called cashless ATMs — a workaround used by some dispensaries to avoid dealing in cash — weren’t copacetic.
But those who specialize in helping financial institutions work with cannabis companies say that may all be moot: The number of credit unions and state-chartered banks venturing into the industry has been quietly accelerating.
“In the early days, no banks were willing to do this,” said Peter Su, a senior vice president at Green Check Verified, which offers software to banks that helps them deal with the added regulatory burdens of working in cannabis.
Green Check, which is among a handful of companies that have sprung up to fill the niche, announced last week that in 2021 the number of financial institutions that it works with grew by 270% to around 100 banks and credit unions.
Most big banks shun cannabis companies because marijuana is illegal at the federal level. Credit-card networks do as well. That has created a conundrum for any company that touches marijuana; they’re often forced to deal in cash and can struggle with basic operations like paying workers and buying inventory.
Shield Compliance, another company that helps financial firms do business with the industry, has also experienced strong growth.
“We’re seeing more and more bankers recognize that there’s a clear path to serving these customers,” Tony Repanich, the company’s president, told me.
“The playbook has been established showing banks and regulators how to work with the industry.”
Banks that work in the space agree there’s more competition for cannabis clients.
“More people are dipping their toe in this industry over the past year,” said William Hufnagel, chief executive officer of Dart Bank. The bank started in 2019 with one client in Michigan and now has hundreds in the state, including ancillary companies like testing labs and law firms, he said.
Todd Gunderson, CEO of Credit Union 1, said his institution — which like Dart, uses Shield’s software — started out in 2019 with one cannabis client in Nevada. It now works with around 150. “Our comfort level is very high with cannabis banking. I think we’re taking on more and more clients every day,” he said. He estimates his client base in cannabis has more than doubled in the last six months.
Other institutions that have publicly said they’re working with the industry include Valley National Bancorp, whose Valley National Bank subsidiary recently launched a new payment app for cannabis. Still, only around 700 depository institutions work with cannabis companies, according to a recent report from the Financial Crimes Enforcement Network, or FinCEN, a bureau of the U.S. Treasury that analyzes financial transactions. Such estimates may overstate the real number, many say, because they would include institutions that have only temporarily worked with cannabis companies.
Despite the extra work and challenges, Hufnagel said cannabis banking is worth it. Contrary to what some skittish big banks may think about the industry, he said many clients have an attractive financial profile.
“Most of the time they’re high-net worth individuals and serial entrepreneurs who’ve had success in other areas,” he said.
“It’s been a great opportunity to expand our relationships.”
While many small banks are still tight-lipped about their participation, Hufnagel said, he sees the recent growth as a sign such stigmas may finally be fading — even at his own institution.
“A year ago, I may not have even done this interview.”
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