A talk with the authors of Cannabis Financial Services: Opportunities and Challenges
Those in the cannabis industry who have “history” with financial services (banking, payments, insurance, etc.) know that it can range from challenging to downright dangerous. But that may be changing as cannabis becomes mainstream. To explain how today’s cannabis companies can benefit from financial services, Kirsten Trusko of Emerging Markets Coalition (EMC) and Kelly Whyman of Cann Do, LLC, have joined together to explain how the time is right for cannabis and banking to succee together. TRICHOMES.com sat down with Trusko and Whyman to learn more about the force behind their whitepaper.
TRICHOMES.com: After years of nothing but push back, cannabis legalization has suddenly taken off like a runaway train. I mean, Chuck Schumer, the Senate Majority Leader, wants to own cannabis decriminalization and legalization as his issue. Kirsten, if legalization happened this year, and cannabis became just like any other emerging market, would the banks be prepared?
Trusko: Bankers look at this trend to de-schedule as moving fast. Everybody at EMC is excited! Because for a long time in the industry, there has been misinformation, which has been used against the businesses. Information, transparency, and data are powerful.
Once it’s federally de-scheduled, however, the banks will still see cannabis as a high-risk market. In my experience, financial services operators will still treat it as high-risk, like liquor is presently treated. There’s a limited number of banks, insurance companies, payment companies and investors who serve the liquor industry. De-scheduling at the federal level will make things better for the cannabis industry, but it still won’t be like if were a coffee shop.
For example, we have payroll cards that have gotten popular in recent years. Payroll is also regulated at the federal and state level. In order for any bank issuing those, they have to know that they are 100% compliant with both sets of regs – and if the bank is operating in multiple states – it’s expensive.
Whyman: One of the challenges, when we talk about legalizing at the federal level, is still having varied state regulations and expectations. None of the states are exactly the same nor is there uniformity in the regulations from state to state. Having these state programs under a federal umbrella could really be a hard transition for licensed cannabis businesses.
We see some of these challenges with hemp. It’s been very difficult for operators to be able to move from a state-regulated industry into the federal regulation.
TRICHOMES.com: So like hemp, if you’re in cannabis, you have to be in compliance of both federal and state regulations. And sometimes they work together, and sometimes they don’t.
Trusko: Yes, and that there’s a lot of cost in keeping up with that compliance – on the cannabis side and the financial services side. That’s part of what we’re trying to do in jointly writing the whitepaper – having expert voices from both the cannabis and financial services worlds. Getting all these things in order going forward can drive the industry to have more normalized financial services.
TRICHOMES.com: There are so many aspects to cannabis. For example, it starts as an agricultural product. So, we’re talking about banks that traditionally lend to farmers. Are there banks at that point that are ready to deal with cannabis?
Trusko: One of the ways that many of the community banks have gotten into cannabis has been because one of their longtime banking clients who own commercial real estate, now has a cannabis business in their strip mall. Or a farmer who has been farming something else and is now farming hemp or cannabis. A client of long-standing, who happens to now be in the cannabis industry in some form, gives the banker an increased level of comfort and trust given the long-standing relationship.
There are tiers of risk. Tier One is “plant touching,” like agriculture. Tier Two is direct services, like if you’re an air-conditioning company and much of your business is cannabis related. Then Tier Three, if you’re an air-conditioning company, but cannabis is only one smaller part of your businesses.
Some banks are more comfortable saying, “I would be okay with you being a cannabis-related business that doesn’t sell cannabis but rather software or some other service” versus a bank that’s comfortable having a licensed business operator with all revenues coming directly from the sale of cannabis.
TRICHOMES.com: You talk about legacy cash in your whitepaper. How might decriminalization affect that?
Trusko: There are two levels of legacy cash: One is cash that came in before a business is properly licensed to sell. The other is money that came in after licensing and before a business had a bank account.
Banking can be a very personal business. The relationship that businesses or owners have with the bank can be fairly intimate. With banking, it’s not just that you have cash, it is that you may not have had a transparent banking relationship and the account was terminated. You have a large amount in your bank, your bank shuts you down. Now you’re holding the cashier’s check, and what do you do with it?
Whyman: The challenge with legacy cash is that without the auditability and transparency all the way back to where the funds came from, it’s very challenging to do anything but spend it or store it.
At this point in time, my clients don’t have challenges with legacy cash. So I feel really lucky. But that was not the case in 2013-2014, when we made the shift from medical to adult use. I would say that in the last 12 months, I’ve seen a lot of my clients be able to get into transparent banking relationships, so there has been a shift.
TRICHOMES.com: In the whitepaper, there’s one sidebar that is kind of mind-blowing. It’s as follows:
Miscalculation of banks proactively serving the cannabis-related industries:
While many have interpreted the FinCEN (Financial Crimes Enforcement Network) report to say that there are over 300 banks in this space, this is not what their reported number means. The FinCEN number is how many banks file Suspicious Activity Reports (SARs). This means any transaction that fits a SARS trigger is reported by the bank who spotted it. This does not mean that the bank is actively serving this market.
Am I right in thinking it means you can’t trust the data you have?
Trusko: Not exactly. We’re saying that data must be accurately interpreted. The report says over 300 banks, but an informal survey of top experts in this space suggests it’s more like 135.
Banks are required to monitor transactions for certain activities that might indicate that there’s criminal malfeasance in their transaction pattern. The reports are called “suspicious activity reports”, or SARs. The fact that a bank files a cannabis SARs just means that they thought they had some suspicious activity that might have been cannabis related. It does not mean that they are actively banking cannabis businesses. Banks are required to file SARs with FinCEN for ALL suspicious activities, not just cannabis.
FinCEN aggregates, analyzes and learns from SARs. When FinCEN issues guidance or rules, then the financial services industry knows that by following these well, their bank examiners, investors, and insurance companies are more likely to respect that they’re following what’s required. Clarity from FinCEN enables a much greater number of financial services companies to enter/serve a market.
TRICHOMES.com: Why don’t more banks see the opportunity?
Trusko: Cannabis is a big revenue business, but it’s not like other businesses. So for the amount of work it takes to maintain the relationship, some banks don’t feel cannabis is worth it. Especially the ones who think they have to hire a whole new compliance department to manage it.
What they don’t realize is that there are all kinds of new compliance software based on cannabis track-and-trace that can greatly help the banks. They don’t need to staff up. And that’s part of the education that we’re focused on: understand that and the risks.
TRICHOMES.com: So how do you bring them together?
Trusko: We partner with the top experts in this emerging market to provide fact-based education to financial services, the cannabis industry and to the government sector. When there were live events for either cannabis or financial services, we would host what we called a “420 Financial Forum.” It was invite-only and timed the afternoon before a big conference. We’d have a panel to help the cannabis people get comfortable with financial services and vice versa, then a cocktail hour, and then lots of warm introductions. It builds familiarity and trust, oftentimes, with people who’ve never met each other and wouldn’t have been unlikely to meet without these introductions.
It helped to assure that there were always friendly faces in the crowd at the conferences – even when you were at the other industry’s conference. Some of those people have gotten back to us: “Those introductions are now my best clients.”
Whyman: This industry has transitioned from “tie-dye” to “ties.” The culture of cannabis has transitioned with more financial sophistication, which has rapidly evolved the industry since I began in 2010. Also, people are understanding that there’s a lot of similarities with other businesses.
Unfortunately, I think there’s been a tremendous amount of fantasy about cannabis. Instead all the operations are just like any other business, you control the supply chain, you manage people, you run payroll, you pay bills, you pay taxes. You pay a lot of taxes.
Taking away the mystique and understanding cannabis as a normal business is key to the success of the industry. This product is challenging not only because it is federally illegal, but also due to the many different facets of industry such as agriculture, manufacturing, distribution and retail operations. I think when people see that and understand how operations work, it makes them more comfortable to have relationships with the business.
TRICHOMES.com: What compelled you to write this whitepaper?
Trusko: In writing this paper, the first step was for people to invest the time and the resources in learning the facts and support organizations – like EMC – that drive education and collaboration. The second step was to meet with the good guys from the other players. The third step is to ask both industries about other areas or topics where they would like to see more education and collaboration.
One of the stories that seems to resonate well was told to us by one of our cannabis friends, who had been in the cannabis industry for a number of years (including before it was legal in California). He said, “Because I’ve had a business, a legal business, in this state for X number of years, I want to be able to sponsor the local Little League baseball team. I want my company’s name on the front of those jerseys, because I coach the team, my kid plays. The coffee shop can sponsor, the hamburger store, and the pizza store can sponsor, but they won’t take my money. They won’t let me have my brand on my kid’s baseball t-shirt.” That’s how normal I want this to be.
Whyman: That’s really important, because one of the things that cannabis businesses want to do is give back to the community. They want to give back and are often not allowed to participate.
Trusko: Especially now, in the economy, the way it stands, cannabis is one of the largest greenfield new market opportunities, financial services are seeing in decades.
TRICHOMES.com: Do you feel that the lessons learned and the tools created for regulating cannabis will make things better for everybody?
Trusko: Rather, what we’ve learned in other industries can be applied to cannabis. My co-founder of Emerging Markets Coalition and I both worked in other markets that were cash-based, high-risk. Lots of misinformation, vilified by many. So we had to learn how to normalize financial services in these markets in the eyes of many constituents – government, media, advocacy groups, consumers. But over time you learn how to do this. Today, EMC’s charter is about normalizing financial services in underserved markets. We’re applying what we’ve learned in other markets to cannabis, and what we learn in cannabis will apply to the next one.
Along with taking these best practices from other industries, we also need to form our own best practices because of the nature of how dynamic it is to work in cannabis – an industry so vast that it covers a lot more than just regulated cannabis with THC.
To receive a copy of the whitepaper, Cannabis Financial Services: Opportunities and Challenges, please visit EMCoalition.org.