Category: Banking and Cannabis

As the cannabis industry expands state by state, so too has its need for banking services – but stigma surrounding marijuana still prevents many financial professionals from offering their expertise to marijuana businesses.

Sundie Seefried stands out as an exception: She founded an FI dedicated to serving the cannabis industry.

Investing

As New York’s legal cannabis market expands, companies are creating products showcasing rare cannabinoid varieties while conducting clinical trials. Women like Brie Emerson, COO and co-owner of Level, are taking a leading role in cannabis research.

Even as more states legalize medical and recreational marijuana use, federal law remains the guiding force in the industry, making cash payments illegal and creating risks for banks that work with state-legal marijuana operations. Prosecution for money laundering poses another barrier if funds can be linked back to cannabis businesses.

Congressional lawmakers are working hard to change this reality. One bill called the SAFE Banking Act would prevent federal regulators from punishing financial institutions that work with state-legal marijuana businesses; it has passed both Houses but stalled in the Senate. Banks have also devised their own solutions: some have introduced programs designed to assist weed companies without fear of prosecution and allow debit card use.

Financing

As many marijuana-related businesses (MRBs) primarily operate using cash, it can be challenging for these businesses to secure banking services. But should federal legislation change and pass the SAFE Act (Secure and Fair Enforcement Banking), this could open the doors for these firms to access traditional bank loans as well as other financial products.

There are only a handful of banks willing to provide banking services to MRBs; those willing to do so, can build strong relationships that extend far beyond basic depositary services and deposit insurance, offering lending options as well as advisory services that tap their knowledge of this emerging industry.

Stealth approaches may include quietly accepting direct cannabis deposits while setting up a program that outlines that any indirect accounts tied to the industry – like electricians, accountants and landlords – but not those directly related to cannabis can be banked through indirect accounts tied to indirect accounts connected with it – could provide another means of evading regulatory scrutiny while satisfying examiners if policies, monitoring and reporting practices are in place.

Accounting

Financial forecasting plays an essential part in helping cannabis businesses optimize their cash flow management and mitigate risk in this highly-regulated industry. Financial forecasting helps predict cash inflows and outflows to enable sound capital investments as well as decrease insolvency risks.

Treasury Management processes are critical to effectively overseeing working capital, an essential factor of business profitability. This may include setting up credit lines, providing consistent and accurate month-end reporting and using cash management software for more effective fund sourcing.

Abaca offers banking, payments and treasury management directly to cannabis industry firms through partnerships with FDIC-insured financial institutions. Abaca provides services including ACH/wire transfer, armored cash pick-up services, high yield savings/money market accounts with guaranteed yields/escrow services/escrow agreements as well as relationship banking/deposit account control agreements designed specifically to meet their unique needs and industry regulations.

Taxes

Cannabis business owners face complex federal and state taxes as they cultivate, transport, sell and consume their product. Due to this financial strain combined with Schedule 1 status of controlled substances, it may be more challenging for cannabis businesses to secure banking services.

Financial institutions willing to provide banking services for cannabis companies must dedicate significant resources and time in compliance. Monitoring cannabis customers’ activity while managing potential risk issues requires dedicated time and resources, which may result in higher fees for those banking with traditional institutions.

New technologies can reduce costs while streamlining and automating compliance processes, including customer applications, account underwriting and risk evaluation. By investing in cannabis programs for financial institutions, revenue growth opportunities will emerge through diversification, revenue diversification and strategic differentiation opportunities; additionally increasing low-cost deposits can bolster long-term profitability while protecting against future economic cycles.

Cannabis dispensaries that process large sums of cash put themselves at risk for theft and criminal acts. Banking solutions provide essential security and efficiency.

Yet only approximately 700 depository institutions work with cannabis businesses, fearing violating Bank Secrecy Act laws and anti-money laundering regulations enforced by FinCEN guidelines. With passage of SAFE Banking Act would come relief for banks in regards to these restrictions.

Financing Options

As cannabis continues to gain widespread acceptance across multiple states, banks are beginning to recognize the immense business opportunity it represents. Unfortunately, federal prohibition and a lack of clear regulations surrounding marijuana businesses prevent many depository institutions from working with these businesses.

Cannabis businesses find it challenging to secure the funds necessary to expand their operations and meet state-specific security measures, necessitating them to seek short-term financing from alternative lenders. As a result, cannabis businesses often require short-term funding solutions from alternative lenders in order to meet state requirements and maintain security measures.

Pre-loaded card systems and ACH vending are temporary solutions similar to debit cards that are loaded up with funds before use; although not ideal in terms of long-term solutions, these tools can help cannabis businesses cover expenses until banks provide solutions. Lack of banking solutions also forces cannabis businesses to operate cash-only, leaving them susceptible to theft and increasing security risks.

Point of Sale (POS) Options

POS systems enable cannabis businesses to track sales and inventory, organize information for taxation purposes, observe customer purchasing patterns and initiate loyalty programs. A quality POS system also facilitates fast payments which reduce wait times while creating an enhanced customer experience.

An advanced cannabis POS system offers seamless integration with state compliance systems like Metrc, automating reporting and reducing compliance violations – offering substantial time and cost savings for cannabis retailers.

Flowhub, for instance, is an attractive POS provider with excellent customer support and cashless payment solution specifically tailored for retail and delivery businesses alike. Flowhub features crypto, mobile customer queuing and branded gift cards among its array of features – as well as built-in analytics designed to integrate with online cannabis marketplaces – plus offers special compliance systems like METRC as well as COVA tailored specifically for the marijuana industry.

Payment Processing Options

Due to cannabis being illegal under federal law, credit card processing companies do not work with cannabis-related businesses (CRBs). Luckily, there are alternative solutions which may provide assistance.

ACH (Automated Clearing House) payments are another popular payment method, working by directly transferring funds from customer’s bank accounts into merchant’s. This type of transaction provides greater security than cash transactions and can be combined with POS solutions to ensure seamless, safe customer experiences.

PIN debit payments offer another popular alternative to ACH payments, enabling customers to authenticate transactions using debit cards with merchants providing dedicated PIN pads for this purpose. Like ACH, this method provides added security, while it can be integrated seamlessly with point of sale solutions for an unhindered, secure experience for consumers as well as helping prevent fraud by verifying if each transaction matches up with a customer’s identity.

Security

Cannabis may be legal in most states, but the federal government still classifies it as a Schedule I controlled substance, restricting their access to banking and financial services such as loans or 401(k) plans. Therefore, cannabis businesses often operate using only cash payments, creating significant security and safety risks for employees.

Banks offer secure banking and payment processing solutions to industry, but must abide by strict regulations. This requires implementing comprehensive anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance programs, with enhanced monitoring procedures in place to detect suspicious activity.

In 2023, we anticipate an increasing number of financial institutions entering the cannabis market by opening new accounts and conducting transactions. To do this effectively requires having an in-depth knowledge of both state and federal money transmission laws as well as banking legislation and FinCEN guidance as well as being able to tailor policies and procedures accordingly to accommodate customers without incurring additional risks.

Cannabis-related businesses (CRBs) face specific financial and banking challenges that must be navigated within an increasingly complex regulatory landscape. As such, they require customized solutions in order to stay compliant and ensure regulatory compliance.

Spotting an opportunity, companies with expertise in banking services have emerged to provide innovative finance and banking offerings, providing CRBs with an easier, less risky, more cost-effective means of working with banks.

Cryptocurrency and Blockchain Applications

Cannabis-related businesses (CRBs) remain predominantly cash-based. While this helps mitigate risk and facilitate international transactions, complying with AML, BSA, KYC regulations can be costly and time consuming. Fintech companies have taken notice of this unmet need by creating innovative cryptocurrency-based systems that promise to transform supply chain management, compliance tracking and payment solutions for CRBs – with potential to transform the industry’s financial ecosystem.

As cannabis remains illegal under federal law, banks and credit card companies remain wary of working with its industry and many credit card companies will not provide services to cannabis businesses. Cryptocurrency- and blockchain-based solutions like Lightning network can provide an innovative solution by enabling cannabis businesses to conduct transactions using cryptographically secure digital tokens instead of physical cash – this reduces costs associated with transporting, settling revenue and secure its storage compared to using physical cash – while potentially persuading federal officials to de-risk banking institutions working with cannabis businesses and open an entirely new market of opportunity!

Non-Financial Transactions (NFTs) for Traceability

As cannabis companies expand, they are adopting various innovative financial management tools. One such example is seed-to-sale tracking systems which offer increased transparency and accountability across their supply chains, helping create greater responsibility while showing compliance with regulations reducing risks of illegal activity.

Non-fungible tokens (NFTs) have gained momentum in the cannabis industry for branding and marketing purposes, creating an exclusive experience and building brand loyalty with consumers. Furthermore, NFTs can also be used as rewards by rewarding loyal consumers with discounts or special event invitations.

Beird suggests that banks that specialize in cannabis invest in education to ensure their team has an in-depth knowledge of this complex industry.

Financing Options

Cannabis businesses historically had few options when it came to finding financing solutions. While banks may be unwilling to support this industry, other specialized financial institutions now provide cannabis operators with low-cost deposits, treasury management services and other banking solutions to expand their bottom line and increase profits.

Cannabis businesses need a secure place to store the cash they earn from sales, make tax and other payments electronically, as well as make employee direct deposit possible and gain other perks that come from having a strong banking relationship.

Without access to bank financing, cannabis businesses have often relied on private loan issuers that impose higher interest rates and stringent underwriting criteria as their financing source. Some have attempted to mislead banks into thinking their business is legitimate by creating false business names; this often only works until bank officials discover the true nature of the operation. Sale-leaseback deals may also provide access to financing; assets sold off and then leased back are another method that can provide essential financing solutions for continued operations.

Payment Solutions

Cannabis businesses face difficulties accessing financial services — such as loans and payment processing solutions from conventional banks due to federal rules regarding anti-money laundering, suspicious activity reporting and customer identification programs (KYC).

Cannabis businesses that depend solely on cash for transactions may face security risks and operational inefficiencies; however, fintech companies with cannabis expertise have developed solutions designed specifically for cannabis enterprises to handle payment processes more efficiently and empower their operations.

These solutions allow cannabis consumers to pay for products through digital payment options like QR code scanning at dispensaries or website payments, while retailers are able to more accurately track inventory while also avoiding compliance issues.

Before major banking reform is implemented at a federal level, innovative solutions will remain key components of banking industry success. But changing regulations could impede their effectiveness; to stay abreast of such policy developments is therefore paramount to effective solutions being provided to clients.