B2B Payments

Risk's All Around When Banks Service Cannabis

The conundrum of cannabis banking in the U.S. is both a headache for legal marijuana businesses and an intriguing case study for the financial services industry.

But the cannabis market that struggles to access banking services is not limited to small dispensary storefronts (although they are undoubtedly affected by such legal hurdles). The legal marijuana industry in North America, which handled an estimated $9.7 billion in B2C sales last year, includes a complex ecosystem of cultivators, logistics providers, lawyers, accountants, contractors and more — meaning an entire supply chain of B2B service providers is impacted when a legal marijuana company cannot get banked.

The situation is improving, however: According to the latest FinCEN Marijuana Banking Update report, the number of banks and credit unions providing services to the cannabis industry in the U.S. has steadily grown since 2014, now reaching about 400.

According to Kendell Lang, CEO of Fusion Bank, even with the rise in access to financial services for this sector, major service gaps remain.

Financial institutions (FIs) that service the industry, he recently told PYMNTS, “don’t have the compliance people, processes or automated tools in place to meet the required guidelines — and are unknowingly putting their clients at risk.”

“This is not like opening an account for a gift shop,” he warned, noting that such a business opening a bank account will not see that institution scrutinize every single product for compliance. “Traditional banks are not required to verify that the source of the products being sold is legal from the moment of production until it reaches the display case and is sold. Traditional banks are not required to know that you are selling Hallmark cards to minors. The cannabis industry is an entirely different animal and needs an entirely new kind of compliance model to be taken seriously and to mitigate the risks for everyone involved.”

Fusion Bank targets the legal cannabis market with its cash and treasury management solutions. Licensed under the Sovereign Friendly Society, a Bahamas-based Friendly Society providing banking, insurance and other membership services to medical marijuana players, the members-only FI is particularly focused on compliance, an ever-evolving and complicated topic for this sector in the U.S. today. According to Lang, traditional FIs cannot meet this regulatory compliance and reporting need.

At present, Fusion Bank facilitates bill payments, staff payments, tax payments, wire transfers and transfer receipts for its customers; the FI also integrates with some third-party platforms like Bill.com, though Lang mentioned that every third-party integration has to support its focus on transparency, “which means visibility across the entire ecosystem of vendors up and down the product lifecycle.”

He noted that moving forward, Fusion Bank aims to introduce added features that are commonly requested by customers, including “debit card facilities, ATM withdrawals, insurance and investment opportunities” — each subject to rigorous compliance initiatives before services can be made available.

Marijuana companies must be a member of the Sovereign Friendly Society to apply for a bank account, he explained, adding that Fusion Bank is compliant with the FinCEN guidelines drawn out by U.S. policymakers in 2014.

“The guidelines are rigorous and expensive to adhere to,” he said. “They require due diligence, background checks and on-sight inspections before a new member can be approved. They’re exhaustive but necessary, and we are willing to do the work in order to serve the cannabis community, where many other banks prefer to steer clear.”

The regulatory hurdles involved in this sector aren’t just a challenge for financial service providers; they’re also a headache for the businesses operating in the industry.

But there are signs the regulatory landscape is easing. Big names like PayPal and HP have shown support, while FinTech innovators have introduced a slew of new offerings for the industry.

Lang said that when it comes to the cannabis market’s journey toward financial services, “it’s not a matter of if; it’s a matter of when.”

“Every day, the news is inundated with small victories at the city and state level — new legislature and new bills being passed that make it easier and easier for cannabis businesses to establish a foothold and conduct their business without interference by the Feds.”

He pointed to proposed legislation that would provide federal protection to financial institutions that service legal cannabis companies: Earlier this year, a bipartisan group of 18 lawmakers petitioned Congress to legalize marijuana banking, but the White House remains cold on the subject.

“Of course, the industry is still riddled with challenges,” continued Lang, “many, if not most, of which stem from the drug’s Schedule I status. We believe, however, that it’s inevitable that financial services will become freely available to cannabis businesses — it’s a booming industry that’s not going to lose momentum.”

Lawmakers have a long road ahead, he added, particularly when it comes to keeping pace with changing legislation and drafting new laws to ease marijuana players’ access to financial services. And while the number of financial institutions that service industry players has steadily increased, Lang noted that they remain only a small fraction of the nation’s banking sector overall.

“We believe there is demand in California alone that will require 200 banks, so there will eventually be many more options than exist today,” he said.

As financial service providers navigate the legal cannabis market and regulatory potholes that come with it, Lang said there are several key focuses firms like Fusion Bank should have: “One, the public safety issue — getting cash off the streets — which is a major concern,” he said. “Two, the need for medicinal research. Three, free patient access to medicine they need; and four, the enormous ‘give back’ value this industry offers in terms of tax.”



The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.