Ongoing momentum for state and federal legalization, coupled with the economic impacts of the coronavirus pandemic, are reshaping how many credit unions are thinking about the cannabis industry. While it is unclear when the cannabis banking floodgates will eventually burst open, credit unions that prepare to serve this industry now will be in a stronger position to weather the inevitable changes to the competitive landscape. Here are some of the industry drivers we are watching that will impact the cannabis industry in the new year and the years ahead.
Ongoing Momentum for State legalization
The November general election resulted in five states passing new cannabis legalizations measures, along with new projections that the U.S. legal cannabis market, now comprised of 35 states, could be worth more than $41 billion by 2025.
In 2021, we anticipate several other states will advance adult-use legalization. New York, Connecticut, Maryland, and New Mexico have plans to legalize recreational use through their legislatures, and several other states are expected to have ballot measures in November.
When it comes to banking cannabis, we have found that the level of interest in serving this industry follows the path of state legalization. On the medical side, when programs include a broad set of conditions, such as chronic pain, more bankers are interested in getting into the market. When you get to full adult-use legalization, the markets are quite dynamic, and this is where we see the most interest from bankers. This is particularly evident in states like New Jersey and Arizona, which are transforming their cannabis programs from medical-only to adult-use.
Eventual Federal Recognition
Based on the momentum at the state level, we believe federal recognition is inevitable. That said, it is unclear when that will be. Although bills aimed at normalizing the banking environment for cannabis, such as the SAFE Banking Act and the MORE Act, have passed in the House, they are unlikely to progress in the Senate under its current Republican leadership, even under a Biden Administration. A change in Senate control, which will be determined by the Georgia Senate runoffs in January, could accelerate progress.
As we talk to bankers, fears about federal action that would take the industry backward have declined considerably, especially compared to almost three years ago when the Trump Administration rescinded the Cole Memo. Now the concerns we hear most often are related to how pioneering banks and credit unions will set themselves up for cannabis banking success when there is, eventually, federal recognition and a rush of new financial institutions enter the market.
It is important to note that federal recognition will not eliminate the need for ongoing due diligence. Not only must banks and credit unions guard against legacy funds and illegal sales activity in this industry, but the patchwork of state legalization laws and regulatory systems necessitates that financial institutions maintain robust compliance programs.
Economic Impact of COVID
While other parts of the retail sector and businesses overall have struggled, cannabis companies, deemed essential businesses in most jurisdictions, have demonstrated strong growth and business expansion over the past year. Month-over-month sales growth in most legal states has made the industry an attractive target, as it appears to be largely recession- and pandemic-proof despite not being eligible for federal assistance. Even states like Illinois and Michigan, which launched adult-use programs within months of COVID hitting our shores, have seen impressive growth. As a result, many state and local governments are looking toward legal cannabis programs to raise much-needed tax revenue.
As the pandemic continues to put pressure on credit union earnings, cannabis businesses, which were originally seen as valuable sources of low-cost deposits, can now provide a steady stream of non-interest income in the current environment. And although credit unions have been generally flush on deposits due to the economic changes brought about by the pandemic, we still see low-cost deposits as a lucrative long-term business driver. We are working closely with financial institutions around the country on adapting their programs to meet their business needs today while building the scale and efficiency into their programs necessary for when the economy rebounds and more competition enters the market.
Cannabis Lending as a Competitive Advantage
Increasingly we see lending to cannabis companies as the next big growth opportunity. Whereas many regulated financial institutions have been reluctant to offer lending to cannabis businesses because of the BSA/AML risk, we are now seeing more maturity and more capital coming into these businesses, making them increasingly attractive from a lending standpoint.
Credit unions that initially decided to get into cannabis deposit-taking did so because they had a way to take in those deposits and invest them in loans or other investments to make a good spread. Under current economic conditions, cannabis lending is a way for credit unions to generate earning assets to replace loans that are paying off now or to fuel their sustained growth. Because these loans are deemed to be of higher risk, and there is less availability of traditional financing, credit unions can charge higher rates compared to similarly risked non-cannabis related transactions.
The issue of collateral on cannabis loans is somewhat tricky, however the added layer of transparency and data-sharing required to provide deposit services can be leveraged to give bankers the ability to evaluate loan requests using judgmental decision making. This enables the credit union to support their members’ business goals while mitigating credit risk and protecting the financial interests of the institution.
For more information, please watch our video, “3 Questions with Tony Repanich,” to learn about some of the biggest misconceptions credit unions have about cannabis banking and next steps for getting started in this industry.