If you are wondering if or when to have the conversation about cannabis banking with your board, wonder no more. The time is “now,” says Ruth Razook, the founder and CEO of RLR Management Consulting. Ruth and her team advise financial institutions across the U.S. on various topics, including technology, operations, regulatory compliance, mergers and acquisitions, and training. Over the past few years, RLR has also developed various cannabis banking programs that help financial institutions fully understand the regulatory environment and implement best practices for banking this industry.
I have had the pleasure of working with Ruth, joining her in cannabis banking webinars and other forums, and am always impressed by her thoughtful insights. A topic she addresses quite often is board education. Here is what she had to say about when to engage your board, what information to share, and how the board can help your credit union gain the benefits of a cannabis banking program.
Shield: Why is it important for credit unions to engage their boards around cannabis banking, even if they have not decided to bank the industry?
Ruth Razook (RR): Because cannabis is classified as an illegal substance at the federal level, and because the industry still lacks clear guidance from regulators, credit unions can expose themselves to risk without even being aware of it. I often say, ‘there’s risk in not knowing what you don’t know.’ To get ahead of this potential risk, we advise credit unions to start the conversation with their boards early – now, in fact – to increase their awareness about this industry long before they are asking their boards to review and approve a policy. We have found this to be a conversation that is lacking amongst most credit union boards today.
Shield: What should the board’s role be when it comes to making decisions about cannabis banking?
RR: A key function of the board is to determine how much risk the credit union can and should take on. To establish a clear policy, the board needs to understand what it means to bank the cannabis industry. This includes knowing who the potential members are across the cannabis ecosystem, how to vet potential members, and how to use technology to manage compliance and facilitate new member underwriting and onboarding. This information is critical for enabling the board to put guardrails in place regarding what percentage of the credit union’s portfolio will be cannabis-related businesses (CRBs) and determine when and if to expand this line of business. Much of this conversation happens at the management level, but boards need to have more knowledge and awareness on an ongoing basis about what it means to bank cannabis so they can give more informed guidance about their risk appetite and how far they are willing to go.
Shield: What type of information is critical for boards to have when evaluating this opportunity?
RR: Market analysis is critical because it paints a clear picture of the potential within the credit union’s footprint, how many other financial institutions are in the space (or may be entering the space), and the potential dollars that could be banked. Boards should also understand the impact of the cannabis industry on the credit union regarding concentration levels and the different products and services financial institutions are willing to take on when serving CRB members.
Shield: If the credit union has decided to serve CRBs, what does the board need to stay informed?
RR: Most boards are data-driven, so I would make sure they see the metrics: actual CRB members and account balances versus projections. We recommend reporting any new members brought on board and any additional risk factors that would need to be incorporated into the credit union’s risk assessment based on those new members. In short, we suggest the board receive an overall status update of where the credit union is and if the projections need to change based on actuals to date.
Shield: In closing, what do you think boards need to know about the cannabis industry?
RR: I think most boards know that cannabis is not federally legal, but what they may not fully understand is that there is great potential in this line of business, and it is possible to build a program with the right people, processes, and technology to bank this industry safely. Many credit unions are successfully banking this industry today. It is a huge market, and quite frankly, in my opinion, there is simply not a reason boards should not take every opportunity to learn about and embrace this opportunity.
Partnering with experts to inform board members, assess risk, and evaluate and implement compliance technology will help credit unions create the foundation for an effective and competitive cannabis banking program.