For some banks, the decision to operate an expensive and compliance-heavy cannabis banking program has been rewarded with access to cheap deposits. 

With many banks still wary of the risks and compliance burdens associated with serving the sector, firms who choose to bank the industry have been able to justify the high cost and labor by implementing risk-based pricing and non-interest bearing accounts.

But as more banks and financial institutions are getting into the game, some banks are feeling the pressure to rethink their strategies.

“Risk-based pricing doesn't always work when you’re trying to compete with the bank down the road,” said Chris Call, CEO of Santa Rosa, California-based North Bay Credit Union.

Faced with growing competition, the credit union decided to launch interest-bearing cannabis accounts in order to differentiate itself from competitors, Call said during a panel session at the PBC Conference in Washington on Friday.

“Our credit union is probably one of the few institutions that actually pays interest on cannabis deposits,” Call said. “We sort of have a competitive situation where we need to have that extra edge to offer to our customers out in California.”

North Bay, an early entrant into the cannabis banking space, has been offering accounts for marijuana-related firms since 2017, shortly after the recreational use of the drug was legalized in the state in 2016.

The credit union has been offering interest on cannabis accounts for over a year now, Call told Banking Dive on Monday. North Bay has approximately 300 cannabis accounts and currently pays 2.75% interest on those accounts, Call said.

The credit union’s portfolio of cannabis accounts has grown steadily over the past couple of years, with interest on accounts being one of several factors contributing to the growth, Call said.

“It is certainly much appreciated by our customers and contributes to their loyalty in staying with us in the face of growing competition,” he said.  

In some cases, the interest earnings on the accounts offsets the credit union’s monthly account fee, Call said.

“Our philosophy has always been to treat our [marijuana-related business] accounts as much like any other business account as possible,” he said. “Greenbax Marketplace is our cannabis banking subsidiary and I think our range of services and the level of customer support we provide are also significant factors in our growth.”

More competition

With the majority of banks’ unwillingness to serve the cannabis sector, the industry’s financial services options have historically been limited. 

But a growing public acceptance of marijuana and lawmakers’ increasing support for legislation that aims to make it easier for banks to serve the sector, have made the space more palatable for institutions looking for new ways to grow deposits. 

According to the latest data from the Financial Crimes Enforcement Network, 812 banks and credit unions are actively serving cannabis business clients, based on cannabis business-related Suspicious Activity Reports filed in the second quarter of 2023.

The latest FinCEN report reflects an increase from 807 firms in the first quarter and 773 in the fourth quarter of 2022.

Meanwhile, legislation that would make it easier for banks to serve state-legal cannabis firms is set for a historic vote in front of the Senate Banking Committee on Wednesday. Proponents say the Secure And Fair Enforcement Regulation Banking Act is the solution to the largely cash-based nature of the cannabis industry, as it would encourage more banks to serve the sector.

As more banks become comfortable banking cannabis clients, firms will need to find ways to differentiate their cannabis programs to stay competitive, whether it be offering interest on cannabis accounts, or lowering monthly fees, said Tony Repanich, president and chief operating officer of Shield Compliance.

“We're already seeing that banks are doing a trade off between service charges and getting deposit accounts. We're seeing softening of fees as the bankers are willing to do that trade off,” said Repanich, whose Seattle-based firm provides financial institutions with cannabis-banking compliance software. 

Repanich said he’s also seeing banks use account analysis on marijuana-related accounts. 

Instead of paying interest, firms are giving their cannabis clients credit toward their service charges, and encouraging them to keep higher balances at the bank to cover monthly fees.

“Bankers have to look at their total deposit strategy,” Repanich said. “If I'm running CD specials at 5% for nine months, but I could instead get that next cannabis company and additional balances, and I only have to pay them 2% – that 3% is a lot.”

As more banks choose to serve cannabis clients, lenders will have to consider strategies for high-balance cannabis accounts if they want to retain those deposits, he said.

“If I'm the owner of a [cannabis] business and I have hundreds of thousands of dollars sitting in the bank, at some point, my board is gonna say, ‘Why aren't we at least earning some interest?’”

Differentiated services

But not all bankers are on board with paying interest on cannabis deposits, arguing the cost of operating a cannabis-banking program makes the prospect unfeasible.  

Bank Michigan Senior Vice President Brenda Brandom, who also spoke on Friday’s panel, said she doesn’t foresee her bank offering interest on cannabis deposits unless the entire market adopts the strategy.

“There is too much work involved,” said Brandom, who heads the Brooklyn, Michigan-based bank’s cannabis banking and treasury management programs. “It’s too time consuming and takes too many people doing manual work to get these customers onboarded.” 

Nicole Perry, vice president and senior treasury management officer at Mason, Michigan-based Dart Bank said her institution also does not offer interest on cannabis accounts, a decision the firm made when it first launched the program in 2018.

The bank’s cannabis customers, however, ask for it all the time, she said.

“They want to be treated like a traditional business, but it’s not traditional,” said Perry, who also spoke on Friday’s panel.

As competition increases in their market, Brandom and Perry said they are leaning on old-fashioned customer service to both attract and retain cannabis clients.

When a prospective client noted that a competitor was offering interest-bearing cannabis deposits and asked if Bank Michigan could do the same, Brandom said she persuaded the client to join her firm after making the argument her bank could provide a better service. 

Perry said her bank is facing competition from new entrants who are undercutting Dart Bank’s cannabis account fees. 

“There are tons of banks coming in the state of Michigan that are direct competitors, and they'll try and charge $50 a month. There's no way that you can manage a [cannabis] account for $50 a month,” she said. “You're not covering your costs. You're losing money in that aspect.”

Despite Dart’s higher fees, Perry said she has had several cannabis clients return to her firm after trying to save money at a competing institution that ultimately didn’t meet their expectations. 

“It's not only based on fees. It's based on the experience that you give your customer and your reputation,” she said. “While fees are an issue, it’s about selling yourself and being confident in your program.”