The Federal Reserve Bank recently announced its first interest rate hike since 2018 and financial institutions across the country are turning an eye toward new sources of low-cost deposits. The growing legal cannabis market offers a unique opportunity for credit unions to cultivate new business, grow revenue, and improve member engagement, all while supporting public safety and securing a competitive advantage for years to come.
The last few years have seen tremendous growth in the industry as more states recognize the benefits of legalization. The legal cannabis industry in the U.S. is projected to continue to grow over the next decade, from approximately $27 billion in retail revenue in 2021 to over $50 billion by 2026. But the economic impact of legal cannabis goes beyond sales. In fact, every $10 spent at a legal cannabis retailer adds $18 to the economy. Viewed this way, the economic impact could reach $99 billion this year and $155 billion by 2026. Clearly, there is a growing need for cannabis banking.
Here are four of the biggest upsides to incorporating cannabis banking into your credit union’s strategy now.
New Sources of Revenue & Growth
Serving cannabis-related businesses (CRBs) can be part of a long-term growth strategy to increase low-cost deposits and non-interest income. As interest rates begin to rise, low-cost business checking deposits become increasingly valuable.
Despite economic conditions, demand for financial services remains high and the additional compliance-related fees and service charges on CRB accounts can often fully offset the operational costs of cannabis banking. New technologies can further reduce operational costs by automating compliance processes and new member onboarding and underwriting.
Other fee-based services, such as digital payment systems, offer an additional opportunity to generate ongoing revenue. In 2019, adult-use cannabis generated $7.4 billion in cash-only transactions. Digital payment systems offer consumers a better retail experience, and financial institutions can generate non-interest income through transaction fees.
Finally, direct and indirect lending can be a source of earning assets that offer a yield premium for the financial institution’s willingness to provide services to CRBs and take on the unique credit risks.
Better Member Engagement
Cannabis banking requires a strong relationship between the financial institution and the member, with open communications and a clear line of sight into the business operations a necessity to fulfill compliance and reporting requirements. This is an area where credit unions, with their community-driven mission and strong member relationships, can thrive.
Establishing a point person or small team dedicated to serving cannabis business members and originating new business can help credit unions provide a quality member experience while also mitigating risk. Moving away from a generalist approach to a specialist approach enables bankers to become industry experts and trusted partners, developing a deep understanding of the cannabis industry and building experience helping members navigate data collection requirements.
This improves the experience of new and existing members, and, because the cannabis industry is still relatively small, insular, and highly networked, a strong relationship with a single member can yield valuable referral benefits.
Improved Public Safety
Many CRBs operate almost exclusively in cash. When paired with a lack of access to banking, this creates a significant risk for the business, its employees, and the community. By providing banking services, a credit union takes that cash out of the business and offers a safer venue to pay employees via check or direct deposit, reducing the risk associated with cash for all involved.
Reporting by financial institutions also helps law enforcement monitor and protect legal CRBs. By banking legal cannabis, credit unions can increase the amount of information available to law enforcement to keep communities safe.
A Competitive Advantage Today
Demand for cannabis banking services outstrips supply in many parts of the country, so there’s a significant first-mover advantage for those willing to participate in this line of business today. By establishing policies and procedures, implementing an effective technology platform, creating a scalable pricing structure, and developing expertise and relationships now, credit unions will have a competitive advantage when legalization eventually occurs, and more financial institutions enter the market.