When Noah Carey founded his company in 2015, no banks worked with the cannabis industry. But now he is seeing financial institutions that once balked at the underserved market have a change of heart — in part because of the recent banking crisis.
Carey’s company, Shield Compliance, develops compliance software that manages regulatory and operational risks for banks providing financial services to the cannabis industry. The company has seen over 5,000 cannabis businesses receiving financial services from the banks the company works with, which is twice the number it experienced last year.
Overall, there’s an increase in banks providing financial services to the cannabis industry, said Carey.
Part of the reason: With the recent banking crisis, financial institutions are looking for sources of deposits. The cannabis sector, which has long struggled to access basic banking services, is suddenly an attractive target.
“When I started Shields, you couldn’t even get a bank to answer the phone to talk about this [cannabis banking],” said Carey, who is now an executive chairman of the Seattle-based company. “Banks are realizing that there’s business opportunity to bank these clients…it’s a way for banks to make money, plain and simple.”
Access to banking services has been a longstanding struggle for the cannabis industry, making it difficult for companies to safeguard their money and pay their bills. Even now, the majority of financial institutions still do not provide any services to cannabis companies because the plant is still federally illegal.
There are over 10,000 financial institutions across the country, but only about 200 of them offer banking accounts to the cannabis industry, according to Peter Su, who was a senior vice president at Green Check Verified–a software company similar to Shield Compliance–until its acquisition last month of Payqwick, an electronic payment provider for the cannabis industry.
However, Su has witnessed a rise in financial institutions becoming “aggressive”, offering banking services because of the availability of software that alleviates the compliance burdens banks are responsible for; and, most importantly, the cannabis industry’s ability to provide new deposits to banks that might have liquidity issues.
“A lot of banks are saying, ‘We need capital. We need new business, we need new deposits,’” Su said.
Doing business with cannabis companies poses high risks for most banks because the federal government would view it as an illegal drug operation. Plus, the resources that are needed to create a cannabis banking system aren’t worth the hassle for most banks. Therefore, the biggest challenge for the cannabis industry is the lack of banking options and competition among banks vying for cannabis businesses.
Unfortunately for cannabis entrepreneurs, the scarcity of financial institutions in the space creates less incentive for banks to compete for their businesses. This is manifested in the high banking fees, high-interest rates on loans, and low rates of return on savings accounts. In some cases, cannabis companies still struggle to find a basic banking account–like safeguarding their money to protect it from criminals.
The banking crisis may have changed the equation, however. When the third largest banking failure in American history occurred in early March, people began to fear their regional and smaller financial institutions might collapse too. Consequently, some people took their money out of them and put it into too-big-to-fail banks. This left these financial institutions scrambling to find new deposits and capital.
In order for financial institutions to take in new deposits and bank with the cannabis industry, they need a compliance operating system, which is where a company like Shield Compliance or Green Check Verified comes in and provides that service for them. Hence, cannabis software companies like these offer a glimpse into which banks are dipping their toes in the industry.
In the last two years, the number of banks taking in deposits has doubled, said Carey. The uptick in clients is due to the increased confidence among banks that the cannabis industry is a legitimate sector: it has physical stores, farms, and manufacturers. Also, the cannabis industry is becoming more accepted among Americans as nearly half the country has legalized the recreational usage of marijuana.
Another recent reason banks are offering banking services is that smaller financial institutions are realizing the cannabis industry can be used as a vehicle to take in new deposits. By acquiring cannabis businesses’ deposits, banks could then use that money to lend it out at higher interest rates, which is how they make money.
In exchange for their deposits, cannabis companies are able to obtain standard banking accounts that would allow them to pay their suppliers, their payroll, and their monthly bills, said Jason Olemada, vice president of Ponce Bank, a certified New York City-based community development financial institution.
Ponce Bank launched a cannabis banking program in July 2022 and began offering standard business checking accounts. It works with a handful of cannabis companies and expects that number to increase by the end of the year, according to Olemada. Ponce Bank is continuing to take in cannabis deposits so that it could eventually enter the lending space.
“Your deposits have to be able to sustain your lending,” said Olemada. “[If] we’ve increased our reserves enough that if a loan goes bad, we know how to treat it.”
Despite an additional increase in financial institutions getting into the cannabis industry, the cannabis banks in New Jersey and Maine aren’t experiencing any meaningful impact from the banking crisis.
For example, there are four financial institutions that serve Maine’s cannabis industry and they have a waitlist of cannabis companies that are trying to get a banking account, according to Matthew Hawes, founding director at Maine Cannabis Industry Association. And there doesn’t seem to be a sense of urgency among the four banks to offer cannabis companies financial services.
“It’s not a competitive market yet,” said Hawes, who has worked in the cannabis industry for 23 years.“I don’t think banking institutions in Maine feel like they’re competing for [cannabis] business.”
Altogether, the banking turmoil and the tightening of credit could only entice so many banks to serve the cannabis industry. Until the federal government legalizes cannabis or the Safe Act passes, which is a bill that would prevent federal regulators from penalizing banks for providing services to cannabis companies, the industry will continue to experience headwinds in accessing financial services compared to other sectors, said Su.