Harmony Dispensary, a medical marijuana cultivator and dispensary in Secaucus, New Jersey, has a Zen-looking shopfront with light green walls, clean glass shelves showcasing various offerings, and a line of modern-looking cannabis-related products — a pipe, herb grinder and stash jar — all emblazoned with the Harmony logo.
Since its opening in 2018, the dispensary has serviced thousands of customers, but it has struggled to hold on to a bank account. "We approached six institutions to support our banking needs and were eventually dumped from all three that agreed to work with us," Shaya Brodchandel, chief executive of Harmony Dispensary, said. In each case, Harmony received no warning from the banks, just a check in the mail, forcing them to scramble for solutions to pay suppliers, bills, staff and conduct general business.
Harmony is far from alone. This is a common problem in the cannabis industry. Though medical or recreational use of marijuana is now legal in 33 states, marijuana is still classified as a schedule 1 substance under federal law, putting it in the same category as heroin, LSD and ecstasy. Most financial institutions, such as banks, Visa and Mastercard, will not work with the cannabis industry, fearing federal prosecution.
The SAFE Banking Act, which passed the House of Representatives on Sept. 25, was a milestone step toward making banking more available to the growing industry. The legislation would prevent federal financial regulators from punishing financial institutions that provide services to legal cannabis businesses. But now it's up to the Senate, where a similar version of the legislation has been introduced. Senate Banking Committee Chairman Mike Crapo, R-Idaho, has said the chamber will vote on the legislation before the end of the year. Views are mixed on how the Senate will act.
Meanwhile, banking options for the industry are few and far between. Though national banks won't touch the industry, some state-chartered banks or credit unions have tentatively dipped a toe in. But, as Harmony Dispensary found, banks sometimes change their mind, forcing companies to scramble for alternatives. The industry is full of anecdotal tales of companies changing bank accounts every six months. In the absence of traditional banking, a host of services — mostly unproved — are popping up to fill the financial needs of the cannabis industry.
As the cannabis industry grows, the shortage of financial services for cannabis companies has become more of a headache. Research firm New Frontier Data estimates that the legal cannabis market was worth $10.3 billion in 2018. Total legal sales of cannabis are projected to grow at 16% CAGR over the next six years, reaching $29 billion by 2025.
Business owners and industry consultants can recount numerous stories about businesses operating primarily in cash to pay staff, rent, equipment and taxes. The influx of cash tax payments has become an inconvenience to state tax offices, some of which have had to hire extra security or fortification to ensure safety. In Colorado alone, cannabis businesses have raised more than $1 billion in tax revenues, according to New Frontier Data.
The difficulty of obtaining bank accounts is not limited to cannabis dispensaries or cultivators. Those in ancillary businesses — such as cleaning services, landlords and consultants — are also affected. Steve Hawkins, executive director of the Marijuana Policy Project, which works on marijuana-related laws, said the organization had a bank account closed with only 30 days' notice.
It's in this environment that alternative financial services are popping up. Dispensaries now often use cashless ATMs, which allow customers to use a debit or credit card at a machine but receive a voucher that is turned in to the store instead of cash. For cannabis businesses that are having a hard time opening a bank account, there are omnibus bank accounts that co-mingle funds from multiple companies into one.
There are also payment networks that connect credit unions and state-chartered banks that are already servicing cannabis companies. One such company, CanPay, says it is now working with more than 50 financial institutions and more than 400 operators, said Dustin Eide, chief executive of CanPay.
There also have been creative solutions such as gift cards, which let customers use their credit or debit card to buy a gift card that is then exchanged for marijuana. Those typically rely on Visa or Mastercard, which actively seek out and shut down such operations. There's the use of cryptocurrencies like bitcoin, as well as some marijuana-specific cryptocurrencies such as PotCoin and CannabisCoin.
The difficulty with many of these solutions is that they are untested. Traditional banking "has had a lot of time to get it right," said Shay Shnet, chief executive and director of Nabis Holdings, a Canadian investment firm that invests in the cannabis sector.
"Cannabis is already a risky environment, and you face additional risk when engaging in new solutions that are brought into the market and not necessarily backed by solid financial institutions," said Jennifer Briggs Fisher, partner at Duane Morris in San Francisco, who leads the firm's cannabis industry group.
To service cannabis clients, banks typically have to hire additional staff to handle the steep regulatory requirements. Dispensaries, for instance, must keep careful records of all customers, including name, age, ID, and relevant verification that they are a legal purchaser. Banks then need to scrutinize all transactions quarterly.
One banker can usually manage about 15 to 30 cannabis customers, said John Sullivan, former president and CEO of First Security Bank of Nevada, which was one of the first banks to work with medical marijuana companies. Sullivan now works with banks that are interested in working with cannabis companies.
Compare that to business as usual, where one Bank Secrecy Act officer can ensure that operations at the bank comply with the bank secrecy act and anti-money-laundering act. The additional work translates into higher cost. Banking fees can range from $500 a month to $2,500 a month or even 1% of gross revenue every month.
"Sometimes [banks] think they can follow the regulations but reach the point where it's so expensive, it doesn't make sense," said Nabis' Shnet.
Businesses usually rely on referral or word of mouth to find banks that are willing to take on cannabis clients. "There are not that many of them, and they are not marketing their services to the industry," said Fisher. Many banks already have taken on the maximum number of cannabis clients they can handle.
Much depends on the Senate. "Banking is so intertwined. Financial services are the lifeblood of the economy, and all of that is done digitally these days," said Hawkins of the Marijuana Policy Project. "The normalization of banking will bring other investors into the space."