OFFICIAL PUBLICATION OF THE ARIZONA BANKERS ASSOCIATION

Pub. 11 2021 Issue 4

Cannabis-Market

Are You Ready to Serve Arizona’s Fast-Growing Cannabis Market?

In November, 2020, Arizona joined a growing number of states legalizing cannabis for adult use. While Arizona has had a medical marijuana program in place since 2010, the move to welcome recreational marijuana represents a significant expansion of the market. With 73 dispensaries already approved to sell recreational marijuana, Arizona is on track to surpass $1 billion in total annual sales of medical and recreational cannabis. Some analysts predict the state will top $2 billion in annual sales after recreational sales have been in place for a few years. As a result, cannabis companies from around the country have been exploring expansions and acquisitions in Arizona, and existing companies are planning to grow.

As we’ve seen in other states, a new legal market for adult-use cannabis brings with it a surge of new businesses and new capital. To ensure they have the processes, procedures, technology, and trained staff to serve this industry, bankers need to have a plan in place. Luckily, there is a playbook to help bankers understand both the opportunities and risks of serving cannabis-related businesses (CRBs) and the tools they need to successfully navigate this new market. Here are a few points from that playbook to keep in mind.

Understand the Realities of Cannabis Banking


While banking in this industry offers compelling financial benefits, such as new low-cost deposit growth, non-interest income, and the potential for earning assets, banks need to make sure they are grounded in the realities of the cannabis industry and their business reasons for getting involved.

Having a clear understanding of what is required to serve marijuana-related businesses and minimize risk to the financial institution will help bankers determine if this industry is a good fit for their bank. If so, prepare for the associated upfront costs, educate your board and partners, and begin developing the policies and procedures needed to hit the ground running.

Update Policies and Procedures to Operate Compliantly


Banks will need to update their existing policies and procedures to reflect the compliance and regulatory requirements of this industry or to develop new ones, if necessary. Cannabis banking will touch almost every aspect of your business, from audit requirements and insurance coverage to transporting and processing cash payments and the attendant branch security. As new businesses enter the industry, you’ll need to have rigorous risk assessment standards and procedures in place to ensure you’re banking legal funds and have a clear line of sight into the business and its beneficial owners.

Part of being prepared to meet compliance requirements means developing systems, applications, and onboarding processes that allow you to vet potential customers and access critical customer and transaction data, all while delivering a positive customer service experience.

Support Compliance Staff with Technology


Investing in specialized compliance technology will help your bank operate more efficiently by automating your processes and engaging your cannabis customers as active participants in their own compliance. Automation also allows your compliance staff to focus their time, energy, and brainpower on judgmental decision making, analysis, and customer service, rather than mundane compliance tasks. Your investment in a compliance platform will also allow your cannabis banking program to scale as the industry grows and new competitors enter the market.

Provide Specialized Resources


While technology will help make your staff more efficient, you’ll also need to hire or train employees as specialized cannabis bankers who have a deep understanding of the industry. This knowledge will help them better evaluate customers’ cannabis-related business activity to ensure compliance while deepening their customer relationships.

Both bankers and customers should expect high levels of transparency in their operations and interactions, which can pay additional dividends down the line, as strong, open relationships yield positive referrals. As a banker, you’ll have a responsibility to ensure your cannabis clients are operating within state guidelines. Having systems and processes to help you reconcile data from multiple sources can help you do that efficiently and accurately.

Be Prepared to Scale


As an emerging industry, banks should anticipate ongoing market changes and adapt to remain competitive. Specifically, there is significant interest in how changes to federal cannabis policy will impact banking. While we do not believe the passage of national reform, such as the SAFE Banking Act, would change the compliance and due diligence required for this industry, it would be an important step toward removing the regulatory uncertainty in the market. It would open the door for more financial institutions to serve the industry.

With the U.S. cannabis industry projected to reach $41.4 billion by 2025 and strong growth projected for Arizona, you can be certain more financial institutions will be entering this market in the coming years. Increased competition typically comes with more competitive terms for the customer. For bankers thinking about the economics of a cannabis banking program, it is important to consider the upfront costs associated with serving this industry while making sure you are implementing an operational cost structure that allows you to gain the financial rewards of this industry. Most importantly, you’ll want to be ahead of the curve when the business changes and more competition enters the market.

As President and Chief Operating Officer of Shield Compliance, Tony Repanich leads day-to-day operations and is the company’s principal product architect. Having served as a senior executive at a Washington State-based community bank for over 25 years, Tony has in-depth knowledge of the banking industry and the regulatory and compliance requirements for high-risk industries. Today he brings that knowledge to financial institutions serving and considering serving the legal cannabis industry.