If there was a clear winner in this month’s election, it was cannabis. With strong majority support for ballot initiatives legalizing recreational cannabis in Arizona, Montana, New Jersey, and South Dakota, 15 states will now have adult-use programs. Mississippi and South Dakota also passed medical legalization measures bringing the number of states with some form of legal marijuana to 35.
The prospect of federal legalization, or federal recognition of state-level programs, however, is still unclear. A divided Congress could mean that the passage of bills that would help normalize the banking environment for cannabis, most notably the SAFE Banking Act, is unlikely in the near term, even under a Biden Administration.
Yet, the cannabis industry continues to experience exponential growth. The five new legal states are projected to add nine billion dollars in revenue between 2022 and 2025, according to New Frontier Data, making the U.S. legal cannabis market worth $33 billion in the next five years.
The coronavirus pandemic is also fueling interest in this industry. As month-over-month sales figures show, the industry appears to be largely recession- and pandemic-proof. As a result, many state and local governments see cannabis programs as a way to raise new tax revenue.
Similarly, many credit unions are turning to cannabis banking as a new growth source during a down economy. While most initially entered the market to increase low-cost deposits and non-interest fee income, lending appears to be the next big opportunity to generate earning assets and gain a competitive advantage.
Although lending to cannabis businesses can be tricky considering there is no universal standard on collateral for this industry, many bankers are finding that compliance processes implemented on the deposit side that enable them to pass exams and onboard new members can be leveraged to mitigate credit risk with little additional work. This is because they have a crucial advantage: a deep insight into the companies they serve.
The added layer of transparency and data-sharing required to bank this industry enables credit unions to apply judgmental decision making to evaluate lending requests and make informed decisions that support the member’s business goals while protecting the financial interests of the credit union.
Deirdra O’Gorman, CEO of DX Consulting and Empyreal Logistics, is an expert on banking and compliance for highly regulated industries. She works with banks and credit unions across the country and offers her perspective on the lending opportunity.
How much interest is there in lending to cannabis companies?
We are seeing an increase in requests to assist banks and credit unions build out their commercial lending programs to offer credit to cannabis companies. Most of these requests come from institutions with a seasoned cannabis banking program and are ready to deepen the account relationship. Many of these financial institutions are already doing some consumer lending, such as loans to employees or owners. We recommend financial institutions work on consumer and commercial cannabis lending programs in parallel to ensure policies and procedures work together to deliver a better experience and greater program efficacy.
What types of lending are credit unions offering?
Most financial institutions are starting their programs with real estate lending. Equipment financing is of interest but less common. Another newer concept in cannabis lending is factoring. Third parties are entering the cannabis space with accounts receivable/factoring lending programs, but most of them are not affiliated with a financial institution.
How should credit unions deal with the issue of collateral?
Most states do not allow financial institutions to take the plant or plant-derived product as collateral, even in default scenarios. As a result, some credit unions price for risk and treat these loans as unsecured, whereas others take on additional collateral or co-signers to mitigate exposure. A best practice is to review each loan on its own merits and work with your internal team, consultant, and legal counsel before embarking on your first cannabis loan.
What is motivating credit unions to add lending to their cannabis programs?
In our experience, most credit unions look at lending as a natural progression of their cannabis banking programs. Once they get a comfort-level with their members, they want to help them expand their businesses. Also, with cannabis banking comes new deposits. Therefore, many credit unions are providing lending as a means of balance sheet management.
As the cannabis industry continues its rapid growth trajectory, the demand for banking services is also rising. While in years past, only two or three banks or credit unions would have launched a program in a newly minted legal state, we are now seeing that number double or triple. This means a first-mover advantage may no longer be an option in some markets. If you are considering developing a cannabis banking program, we recommend engaging early on with experts to create a compliance and operational model that works for your credit union and the industry.