Dama Financial is looking to more than double its portfolio of sponsor banks by as early as the end of the year, said CEO Patrick O’Boyle, who joined the cannabis banking-focused fintech in February.

The company, which has sponsor bank partnerships with five financial institutions, helps businesses in the cannabis industry, such as dispensaries and cultivation centers, secure banking and payments services.

Dama Financial’s network of sponsor banks hold the deposits for cannabis-related businesses which, due to conflicting state and federal laws, often operate outside of the banking sector.

While 21 states and Washington, D.C. have legalized cannabis for recreational use and 37 states allow it for medical use, cannabis is still listed as a Schedule 1 drug under the Controlled Substance Act, along with ecstasy, heroin and LSD. The illegality of the drug at the federal level means most banks are reluctant to service the industry.

But, for the banks that are open to serving the space, Dama Financial helps facilitate what can largely be a compliance-heavy and high-risk program.

“We have a fintech and compliance layer that we can wrap around the bank to take on and manage the majority of that risk,’ said O’Boyle, who, prior to joining the San Francisco-based company, was the senior vice president of Talus Pay’s banking partner division. “We interface with the customer and offer that expert customer support, so that the bank can benefit from still getting the depository piece of the relationship.”

Dama Financial has three levels of bank relationships: payments, sponsor and referral, O’Boyle said. Through a payments partnership, Dama Financial uses its relationship with a particular bank to ride the Federal Reserve’s payments rails. 

Sponsor banks agree to hold deposits from Dama Financial’s cannabis clients. By contrast, referral banks — firms that do not bank cannabis clients — point cannabis-related businesses toward the fintech’s services. 

“[Referral banks] want to be able to work within their community and they want some benefit from having that relationship, but they're not ready to park deposits right now,” O’Boyle said. 

Part of Dama Financial’s strategy to grow its network of sponsor banks is through its existing referral relationships, O’Boyle said.

“That’s the evolution: Start as a referral bank and move to sponsor bank,” he said.

Dama Financial’s plans to expand its sponsor bank network come after it made the decision to pare the network from seven to five several years ago, mainly due to a scaling issue, O’Boyle said.

“We found a solution that was a little harder to scale from a payments perspective. But we're getting that much more scalable,” he said.

Meanwhile, O’Boyle, like many other stakeholders in the cannabis and banking spaces, are eagerly awaiting the passage of legislation that could make the idea of banking cannabis firms more palatable to some financial institutions. 

The bipartisan Secure and Fair Enforcement (SAFE) Banking Act would make it easier for banks to serve legal cannabis-related businesses.

The bill has passed in the House seven times, but has yet to pass in the Senate, where, according to Politico, Republican and Democratic lawmakers are in a stalemate over some of the text’s details. 

“I think [SAFE Banking] gives us much more opportunity to be involved with more banks and grow our banking relationships even more,” O’Boyle said. “They're still going to need a compliance layer that helps to isolate or insulate them a little bit from this risk area. Look at how few banks support the liquor industry. I think it's always gonna be an area of high compliance and I think it plays extremely well for Dama’s one piece of our business, our banking and financial service access piece.” 

Beyond banking

Dama Financial was founded in 2017 with the aim to help cannabis businesses gain access to banks, an issue that has plagued the industry since California became the first state to legalize the drug for medical purposes in 1996.

But Dama Financial’s ambitions extend beyond just facilitating the depository relationship for cannabis firms, O’Boyle said.

The longtime payments veteran said he wants the fintech to become a complete business solution provider for the cannabis industry. 

“Our goal is to provide not only access to banking services, but integrated [point of sale], both a retail and wholesale seed-to-sale solution,” he said. “[Cannabis businesses] don't have to play integrator themselves. ... We can handle it all.”