Gone are the days when cannabis dispensaries resembled derelict storefronts with barred windows and blacked-out glass, often located in less desirable parts of town. Today, the industry has transformed significantly, attracting a diverse clientele, including both recreational users and medical patients seeking legitimate, high-quality products and shopping experiences. This means that bankers can no longer rely on outdated stereotypes about the cannabis market. Instead, they must cultivate a deeper understanding of licensed cannabis businesses and their owners, their target customers, and the unique challenges they face in a changing industry.
As more states legalize cannabis, the consumer base is becoming increasingly reflective of society at large. This transformation not only highlights changes within the market but also underscores the need for financial institutions to adapt their strategies accordingly. Bankers aiming to stay competitive and provide new products and services, such as lending and payments solutions, must understand the needs of their customers and the industry.
Stoner Owner? Look Again.
Historically, banking conversations around cannabis have centered on compliance—questions surrounding licenses, beneficial owners, funding sources, and regulatory adherence. As the industry evolves, however, it is becoming evident that developing a solid understanding of the cannabis business itself is equally important. Bankers must inquire about what makes these businesses successful: How do they generate revenue? What are their growth strategies? Who are their customers? This approach and line of questions should be very familiar to any commercial lender. By moving beyond a narrow view focused solely on regulatory compliance and licensing, banks and credit unions can begin to develop strategies that more closely meet the needs of the industry and attract the most successful operators.
Underscoring this point, in our recent survey of licensed cannabis operators, we found that just over half of respondents (54%) are satisfied with the banking products and services available to them. At the same time, operators indicated that cash flow is a top concern, along with profitability and access to credit.
Having deeper insights into an operator’s business, along with appropriate BSA/AML controls, allows bankers to make informed decisions about lending to this industry. In fact, a financial institution’s existing commercial lending program can be extended to the cannabis banking space using nearly the same criteria that it would evaluate any other loan application.
Potential changes to tax code Section 280E that may come with the eventual rescheduling of cannabis could also have a significant impact on cash flow, making operators significantly more profitable and attractive targets for their enhanced creditworthiness. This may explain why nearly 80% of the operators we surveyed said they expect the profitability of the cannabis industry to be about the same or better over the next two to three years—and it represents a significant growth opportunity for financial institutions facing heightened competition in the years ahead.
Unlock a Competitive Advantage
As competition for cannabis businesses intensifies, bankers must leverage their understanding of the market and their customers to create more tailored financial solutions. A thorough comprehension of market dynamics can help bankers craft strategies that resonate with licensed operators and support their growth.
By bridging the gap between traditional banking practices and the unique needs of cannabis operators, financial institutions can not only boost their balance sheets but also contribute to the sustained growth of this market. As the landscape continues to evolve, the future of cannabis banking looks promising for those willing to adapt and engage.
