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Financial Institutions Still Looking for Legal Certainty as the Cannabis Industry Grows
April 27, 2017

By Jim Daly

Whatever their personal feelings are about marijuana usage, the growth of the legal cannabis industry in many states will force bankers and payments executives to examine the business prospects of serving that industry, according to an executive with a regional automated clearing house association.

Image Credit: Salal Credit Union

Salal Credit Union’s home page for licensed marijuana businesses in Washington state.

While marijuana remains illegal under federal law, 29 states have approved for it for use by adults either medicinally, recreationally, or both, according to Governing, a magazine for state and local public officials. Eight states have now legalized recreational use of cannabis. In the November 2016 elections, voters in California, Nevada, Massachusetts, and Maine approved recreational marijuana while Arizona voters rejected it.

“It’s definitely something you have to consider,” said Jim Petkovits, vice president of education and training at San Francisco-based WesPay. Petkovits moderated “The Real Impacts of Marijuana Sales on Payments and Governments” session Tuesday at ACH governing body NACHA’s annual conference in Austin, Texas.

But with marijuana still classified by the U.S. Drug Enforcement Agency as a Class 1 narcotic and new Attorney General Jeff Sessions opposed to legal pot, the state-approved cannabis industry still remains in something of a limbo, especially when it comes to financial services and merchant accounts. Most banks and credit unions won’t serve legal marijuana businesses for fear of running afoul of federal regulators, which means the industry remains overly dependent on cash. And Visa Inc. and Mastercard Inc. won’t approve payment card merchant accounts for the businesses as long as marijuana remains on the Class 1 list, said panelist Carmella Houston, vice president of business services at Seattle-based Salal Credit Union.

Salal, however, began offering banking services to legal cannabis businesses about two years ago. While it doesn’t provide card processing, it uses a specialty vendor, CanPay, to provide the businesses with ACH services, and it sends armored cars to them to pick up cash. “Finding partners that are willing to play in this industry is a challenge,” Houston said. Still, “it is a profitable business for us,” she said.

Houston said about a half-dozen financial institutions in Washington openly serve cannabis businesses, but she believes Salal is the only one making loans to them. The credit union counts 350 of Washington’s approximately 1,700 licensed marijuana businesses as customers, she tells Digital Transactions News.

Salal keeps a tight rein on the businesses by strictly following “know-your-customer” regulatory guidelines and accepting only customers who have at least two years’ experience in the industry. The credit union also closely compares tax receipts reported by the state government from the businesses with Salal’s own sales records, and then follows up if it finds discrepancies, she said.

“We don’t work with businesses that want to try and hide what they’re doing,” Houston said.

Tax receipts from legal marijuana businesses are beginning to generate rivers of revenue for states. Washington state expects to collect $730 million in marijuana-related tax revenues for fiscal years 2018 and 2019, according to Petkovits. Washington levies a 37% “sin” tax on marijuana sales as well as a sales tax of about 10%, he said.

In Oregon, where the licensed recreational-cannabis industry is just getting under way, the marijuana tax is 17%, said another panelist, Cora Parker, finance director in the Oregon State Treasury. More than $60 million of recreational marijuana was sold in the first five months of legal sales, she said.

The panelists agreed that clarity on the federal level would benefit financial institutions trying to serve the growing industry, as well as the businesses themselves. Parker said Congress wouldn’t even need to legalize marijuana. Instead, it could create a carve-out that would clearly exempt banks and credit unions from penalties for serving marijuana businesses in states where they are legal. Many bankers consider the guidance issued by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCen) in 2014, which appeared to ease regulators’ hard-core stance against financial institutions serving the marijuana industry, to be inadequate.

“I think the biggest challenge is the lack of certainty,” said Parker.

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