As Cannabis Markets Mature, Businesses Look to Financial Institutions for Transparent Banking
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As Cannabis Markets Mature, Businesses Look to Financial Institutions for Transparent Banking

How should a business owner best navigate the banking landscape?

January 18, 2019

Tyler Beuerlein, executive vice president of business development at Hypur and the vice chair of NCIA’s Banking Access Committee, says that the legalization and opening of new cannabis markets in the U.S. brings myriad new banking institutions into the space. For now, though, finite markets—even large ones, like California’s adult-use marketplace—beget a limited number of institutions willing to transparently bank cannabis clients.

“There are unequivocally less than 35 total [institutions] in the entire U.S. truly banking this market,” Beuerlein says. “When I say that, those are a combination of banks and credit unions that have … north of 10 plant-touching tier-1 accounts. They have [a] dedicated marijuana business program, and they’re actively pursuing growth. Many of those institutions are the only option in their state, but because they’re limited-license markets, they bank the entire state.”

For example, GFA Federal Credit Union announced last fall that it would be the first financial institution to wade into Massachusetts' adult-use cannabis market. “We’re looking at a cannabis business as a legitimate business that wants to be recognized as such and that, without banking services, presents a tremendous public safety issue in our communities,” Tina Sbrega, GFA’s chief executive, told the Boston Globe. “Otherwise, you’re talking millions and millions of dollars of cash on the street.”

But much like the trends that stakeholders and industry observers are seeing in both the political and M&A arenas, Beuerlein says that more of those institutions will step up and begin working with cannabis companies. This will be a clearer trend in certain larger markets, as opposed to others.

“With California expanding rapidly, that market is fluid,” he says. “There are at least five institutions that have come into the market to bank it. That number should at least double, if not triple, during the course of this year.”

So, in the meantime, what’s a cannabis business owner to do?

While the early history of regulated cannabis has been riddled with stories of cash-only transactions, that norm is quickly changing. Business owners and executive teams interested in forming a relationship with a financial institution must be fully prepared for the level of engagement that the banking industry demands.

“Operators that have been operating in a cash environment prior to procuring a relationship with a bank or credit union—those operators need to understand that unless they have a forensic audit for those monies or a very clear trail of where those monies came from, they are never going to get them into a bank or credit union,” Beuerlein says.

This is the key: Clear bookkeeping is the foundation of a productive relationship with a financial institution.

“[Businesses] need to be prepared to provide ultimate transparency on beneficial ownership,” Beuerlein says. “Never lie to a bank or credit union; if they’re asking you questions, in a lot of cases they already know the answers to them. They just want to know that you’re going to forthright as an operator.”

Beneficial ownership refers to the sum of the owners of a business—individuals who may not be included in business registration itself or who may hold some sort of voting power through equity or shares. When another company acquires your company, that constitutes a change of beneficial ownership. The acquirer will then need to reapply to the financial institution and go through the same underwriting and vetting process.

In many ways, taking on a banking relationship is a lot like adding another seat at the board of directors table. There’s a new set of interests and parameters that must be factored into business decisions.

“If the institutions ask [businesses] to do something specifically from an operation standpoint, they need understand that that is not optional,” Beuerlein says. “In most cases, they're asking for those things because the regulators asking for those things. So, by cutting corners, or doing things against the wisdom and the institution, that puts everybody in jeopardy.”

In his role on the NCIA’s Banking Access Committee, Beuerlein considers it vital to share accurate banking information with the cannabis market. The entire fragmented marketplace is maturing rapidly, and the matter of safe, efficient banking will only become more pronounced and important for businesses owners—small and large.

“Banking in the state-legal cannabis industry has been one of the most misinformed topics, really, in any space right now,” he says. “We’re really trying hard to identify the best actors in the space, provide resources for the industry so that they can make solid decisions that are not going to harm them in any way shape or form going forward.”

The sheer pace of the cannabis market’s day-to-day, month-to-month development is a unique element that will contribute to how business owners adapt to transparent banking demands. Fortune, as always, will favor the prepared.

“We’re seeing mass consolidation on the operator side, which is a good thing, in a way, because the operators that are coming in to acquire are very sophisticated,” Beuerlein says. “They understand what’s needed, and their first priority is compliance, which makes things easier on the institution. … As new markets mature, we expect more institutions to enter to transparently bank markets, especially in a market like California, because it’s such a large market. Then, from a regulatory compliance and banking standpoint, as regulatory bodies become more comfortable examining institutions banking this space, there are standards being set of how this industry can and should be banked. Those types of things help everybody at the end of the day."