In a positive development for the cannabis industry, recent reports indicate that an increasing number of banks and credit unions are providing banking services to cannabis businesses. The Financial Crimes Enforcement Network (FinCEN) revealed that 812 banks and credit unions have filed reports, the highest number since they began tracking cannabis banking activity in 2014. However, this is still just a fraction of the thousands of banks that could potentially cater to the industry. This article highlights the urgent need for the Secure and Fair Enforcement (SAFE) Banking Act, which would grant cannabis companies access to critical banking services. Despite progress, the industry is still burdened by the lack of traditional financing, payroll services, credit cards, and other essential banking services that are crucial for growth. The article explains that many banks are hesitant to enter the cannabis space due to compliance costs. Overall, the article emphasizes the importance of SAFE Banking in addressing the banking challenges faced by the cannabis industry.
Cannabis Banking Ticks Up, But the Industry Needs SAFE Banking
The cannabis industry has seen a recent increase in banking activity, but there is still a crucial need for the Secure and Fair Enforcement (SAFE) Banking Act. According to the Financial Crimes Enforcement Network (FinCEN), a total of 812 banks and credit unions filed reports in the 2nd quarter of 2023 stating that they are actively providing banking services to cannabis industry participants. This is the highest number since FinCEN began reporting on cannabis banking activity in 2014. While this increase is promising, it is important to note that these 800 or so banks are only a small fraction of the thousands of FDIC banks that could be providing services to the cannabis industry. The industry continues to face challenges in accessing traditional financing, payroll services, credit cards, ACH, and debit services, which are vital to the success of other consumer packaged goods industries. The cost of compliance and other factors have deterred many banks from entering the cannabis space. The implementation of the SAFE Banking Act would provide the cannabis industry with much-needed access to critical banking services.
Overview of Cannabis Banking Activity
The increase in cannabis banking activity is a positive development for the industry. The report from FinCEN indicates that more banks and credit unions are willing to provide their services to cannabis industry participants. This includes offering banking services such as account opening, wire transfers, and electronic fund transfers. It is encouraging to see that there is a growing recognition of the legitimacy and potential of the cannabis industry.
FinCEN Reports on Cannabis Banking Growth
According to the recent report from FinCEN, a total of 812 banks and credit unions filed reports in the 2nd quarter of 2023 stating that they are actively providing banking services to cannabis industry participants. This is an increase from previous years and the highest number since FinCEN began reporting on cannabis banking activity in 2014. However, it is important to note that this number is still relatively low compared to the total number of FDIC banks. There is a significant gap between the current level of cannabis banking activity and the potential for more banks to enter the space.
Challenges Faced by the Cannabis Industry
Despite the increase in cannabis banking activity, the industry still faces significant challenges in accessing essential financial services. One of the key challenges is limited access to traditional financing. Cannabis companies struggle to obtain loans, lines of credit, and other forms of financing that are crucial for business growth and development. Without access to traditional financing options, many cannabis businesses are forced to rely on alternative sources of funding, such as private investors or venture capitalists.
In addition to limited access to traditional financing, the cannabis industry also experiences difficulties in utilizing payroll services and credit services. Most payroll service providers and credit card companies are hesitant to work with cannabis businesses due to the federal illegality of cannabis. This makes it challenging for cannabis businesses to pay their employees and manage their finances effectively. Furthermore, the inability to accept credit card payments limits consumer access to cannabis products, and impacts the industry’s ability to compete with other consumer packaged goods industries.
Impact on Payroll Services and Credit Services
The cannabis industry’s limited access to traditional banking services has a significant impact on payroll services and credit services. Due to the federal illegality of cannabis, most payroll service providers are hesitant to work with cannabis businesses. This creates challenges for these businesses in paying their employees and managing their finances effectively. Without access to reliable payroll services, many cannabis businesses are forced to navigate complex payroll processes on their own, which can be time-consuming and inefficient.
Similarly, the lack of access to credit services poses obstacles for cannabis businesses. Most credit card companies are hesitant to work with cannabis businesses due to the conflicting federal and state laws surrounding cannabis. As a result, many cannabis businesses are unable to accept credit card payments from their customers. This not only limits consumer access to cannabis products but also impacts the industry’s ability to compete with other consumer packaged goods industries that have seamless credit card payment options.
Effect on Consumer Packaged Goods Industries
The limited access to traditional banking services has a significant effect on the cannabis industry’s ability to compete with other consumer packaged goods industries. Consumer packaged goods (CPG) encompass a wide range of products, including food and beverages, personal care items, and household goods. These industries rely heavily on banking services such as credit card payments, automated clearinghouse (ACH) transactions, and debit services to facilitate their operations and drive sales.
In contrast, the cannabis industry faces barriers in accessing these essential banking services. The inability to accept credit card payments, for example, limits consumer convenience and hinders the industry’s ability to compete with other CPG industries. Moreover, the lack of access to ACH and debit services makes it challenging for cannabis businesses to efficiently process transactions and manage their finances. Without access to these critical banking services, the cannabis industry remains at a disadvantage compared to other CPG industries.
Banks Considering Entry into the Cannabis Space
Despite the challenges and risks associated with serving the cannabis industry, banks are increasingly considering entering the space. Many banks recognize the potential for growth and profitability in the cannabis industry and are exploring opportunities to tap into this market. However, several factors, including the cost of compliance, taxation issues, and reputational risks, have deterred many banks from fully embracing the cannabis industry.
Cost of Compliance and Other Factors
One of the key factors that banks consider when deciding whether to enter the cannabis space is the cost of compliance. The cannabis industry operates in a complex and heavily regulated legal landscape, which requires banks to implement robust compliance measures to ensure adherence to applicable laws and regulations. This includes thorough due diligence processes, enhanced reporting requirements, and comprehensive anti-money laundering practices.
The cost of compliance can be substantial for banks, particularly smaller institutions with limited resources. Implementing the necessary compliance measures may require significant investments in technology, staff training, and ongoing monitoring. These costs, coupled with the operational risks associated with serving the cannabis industry, make it challenging for banks to justify entering the market.
Taxation Issues
Another factor that banks consider when contemplating entry into the cannabis space is the issue of taxation. Due to the federal illegality of cannabis, businesses operating in the industry face unique challenges when it comes to taxation. Cannabis businesses are subject to Section 280E of the Internal Revenue Code, which prohibits the deduction of business expenses related to the trafficking of controlled substances.
This means that even if a bank were to serve the cannabis industry and generate revenue from providing banking services, the bank could face limitations on the deductibility of expenses incurred in relation to those services. The potential impact on profitability and tax liabilities further complicates the decision for banks to enter the cannabis space.
In conclusion, while there has been an increase in cannabis banking activity, the industry still faces significant challenges in accessing critical banking services. Limited access to traditional financing, payroll services, credit services, and the ability to compete with other consumer packaged goods industries hinders the growth and development of the cannabis industry. Banks considering entry into the cannabis space must carefully weigh the cost of compliance, taxation issues, and reputational risks associated with serving the industry. The implementation of the SAFE Banking Act would provide much-needed access to essential banking services and help address the challenges currently faced by the cannabis industry.
