The cannabis industry still has plenty of legal complications, but for banks seeking deposits, the upside could be worth it.
Adult use recreational cannabis is coming to Minnesota, and local banks and credit unions are figuring out how they're going to participate in the cash-rich, but highly regulated industry.
Because cannabis is still considered a Schedule 1 illicit substance under the federal Controlled Substances Act, it puts banks in the tough position of meeting their clients' needs while complying with federal law. That's made many institutions skeptical about getting involved.
However, in such a competitive market for deposits, brought on by higher interest rates, the banks and credit unions willing to pursue compliance — including working with regulators and meeting filing requirements — will get first dibs on an industry with a lot of cash and little competition. Ultimately, though, no bank will be able to sit entirely on the sidelines, experts say.
“The benefits are strong for the banks, in terms of deposit generation, low-cost deposits and fee income,” said Tony Repanich, CEO of Shield Compliance, a Seattle-based software company that works with banks to help set up their cannabis banking businesses.
Anton Moch, a community banking lawyer at Minneapolis-based Winthrop & Weinstine, echoed Repanich’s message.
“There are a lot of banks that are actively trying to look at what are new ways to generate deposits,” Moch said. “There's a bar to enter, there's a lot of work, but if you're one of the one or two or three that gets through it, you've got a market that you have access to that a lot of other banks may not.”
Right now, banks looking to get into the industry are primarily working on establishing relationships with potential clients, which could range from dispensary owners to growers to distributors, and working with their regulators to see if cannabis banking is a right fit for their institution. Initially, most banks will focus on providing basic products like business checking accounts for clients. Lending to cannabis companies is more difficult due to the fact that collateral the bank would receive is considered illegal by the federal government.
Which Minnesota banks are chasing cannabis business?
In Minnesota, community banks and credit unions are leading the cannabis-banking charge as they tend to have more personal relationships with clients compared to larger players like Chase or Wells Fargo.
"They have existing customers where they really value the relationship, who are starting to explore [the cannabis industry], which is spurring them to think through not only maintaining those relationship, but creating new ones," said Max Zappia, chief regulatory officer for Minnesota’s Office of Cannabis Management." Deposits are also always extremely valuable to community banks and credit unions."
Dean Wickstrom, president of Prior Lake-based South Metro Federal Credit Union, said his institution is looking at cannabis banking for all those reasons.
“For us, it's mostly just another business account that has a ton of cash. You can get a lot of inexpensive deposits," Wickstrom said. "There's not going to be a lot of competition for those accounts."
Right now, the south metro is preparing for the possibility that the Shakopee Mdewakanton Sioux Community, a credit union client, will open a dispensary, though the tribe said there were no concrete plans to do so.
However, to make the compliance work it's doing worthwhile, Wickstrom said the credit union will need to expand its marijuana banking business beyond a singular dispensary and land additional dispensary clients.
"We probably won't get back all our money if we do just the one dispensary," he said.
St. Louis Park-based Bridgewater Bank has been setting up its cannabis banking business for more than a year.
“We have spent 18 months on building our program in anticipation of recreational marijuana going online in 2025. I fully anticipate that we will onboard both direct and indirect cannabis clients,” said Lisa Salazar, the bank’s chief deposit officer.
To make all of the compliance work the bank has done to get to this point worth it, Salazar said she expects any cannabis customers to have their entire banking relationship with Bridgewater, which will help bring deposits to the bank.
“We're not going to do a small piece of the business and not ask for the whole relationship,” she said.
Over the past few months, Bridgewater has been working on building its client base in the industry, which includes cannabis-adjacent companies that will likely add recreational cannabis when it goes online next year.
"We've been working and onboarding clients over the last six months. It's a handful of customers, but we anticipate that it will continue to grow," Salazar said.
Regulatory hurdles
Joe Witt, president of the Minnesota Bankers Association, said he is advising banks to set up policies and procedures around cannabis whether they are looking to bank the industry directly or not.
“Even if you think you're not doing business with cannabis companies, eventually, a lot of your general businesses become involved in cannabis,” he said.
Zappia agreed. “It is not really going to be feasible for a bank to say they have absolutely no interaction with the market."
That’s because any money that runs through a bank and can be traced back to a cannabis company requires more compliance. For example, a bank is required to do more reporting on cash coming from a strip mall owner who leases to a cannabis company. And more compliance filings are required for any cannabis-adjacent company where more than 50% of revenue comes from cannabis clients.
The main law that governs banks' relationship with marijuana money is the Bank Secrecy Act, which established record-keeping and reporting requirements for banks. For marijuana, the law requires banks to file suspicious-activity reports when doing business with any cannabis operation and various auxiliary services.
“What I'm encouraging banks to do is understand the different levels of interaction. The first one being a direct cannabis business, and then as you go down the line, understanding your comfort level with interacting with this industry knowing that there's not really going to be an option to have zero interaction,” he said.
The other issue is the lack of federal guidance, Zappia said.
Outside of a now revoked Obama-era memorandum that directed the U.S. Department of Justice to focus less on marijuana banking and on serious criminal aspects of the marijuana business, like larger criminal enterprises, there has been little to no guidance from the federal government for banks to lean on.
While the SAFE Banking Act, which would provide safe harbor for banks operating in the cannabis industry, continues to stall in Congress, the Biden administration has proposed reclassifying marijuana as a schedule I to schedule III drug under the Controlled Substances Act.
That would likely make institutions more comfortable with banking the industry, Zappia said.
“I think the ultimate solution is going to involve a combination of a federal action and then joint agency, which means the states and the federal bank regulatory agencies putting out comprehensive guidance,” Zappia said. “We're still 10 years into this and at a place where there's very limited federal guidance on this issue.”
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This article was originally published in the Minneapolis/St. Paul Business Journal by Keith Schubert.