Despite fears about federal restrictions, some banks and credit unions in Connecticut are working with cannabis companies to provide services to the growing industry.But the public is likely unaware. That’s because regulated financial institutions aren’t publicizing their activities, concerned about the stigma that marijuana still carries, or because they don’t want to be inundated by […]
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Despite fears about federal restrictions, some banks and credit unions in Connecticut are working with cannabis companies to provide services to the growing industry.
But the public is likely unaware. That’s because regulated financial institutions aren’t publicizing their activities, concerned about the stigma that marijuana still carries, or because they don’t want to be inundated by calls from cannabis entrepreneurs looking for banking help.
Banks and credit unions mostly serve cannabis customers with cash management services like accounts and deposits, but federal restrictions prevent them from issuing loans. That’s forcing marijuana companies to turn to alternative financing sources like venture capital, private equity, state funds or even crowdfunding to raise money.
The evolving marketplace — including continued efforts in Congress to legalize cannabis on the federal level, or at least give financial services companies more leeway to serve the industry — will have big implications on Connecticut’s cannabis sector in the months and years ahead as companies, both established and new, begin to serve recreational users.
Federal restrictions
The state Department of Banking issued a report in December outlining some of the challenges banks have in providing services to cannabis businesses. In short, because marijuana is still a Schedule 1 drug at the federal level, it is illegal for banks and credit unions to lend to such companies.
Even if a state has legalized cannabis, federal law supersedes that.
“You cannot put a lien on something if it’s considered illegal at the federal level — the lien would not be valid and therefore the [loan] contract would not be valid,” said state Department of Banking Commissioner Jorge Perez.
The Secure and Fair Enforcement (SAFE) Banking Act, which has been introduced in Congress several times, would allow banking institutions to provide all services to legitimate marijuana businesses in states where cannabis is legal. Despite passing the House of Representatives six times, the bill hasn’t been able to get bipartisan support in the Senate.
In June, after the House amended the United States Innovation and Competition Act to include the SAFE Banking Act, the Senate removed the provision.
“If the SAFE Act were to pass I think … banks would trip over each other to provide lending and account services to the industry,” said Perez, adding he expects the bill to eventually get Congressional approval in the future.
Perez confirmed there are a number of banks and credit unions willing to work with cannabis companies in the state for cash management services, but declined to name them because they prefer to keep a low profile while federal prohibition still exists. However, they aren’t providing loan services.
One lender that isn’t shy about serving the industry is Springfield, Massachusetts-based Freedom Credit Union, which recently announced plans to open its first Connecticut branch in Enfield. The $651.8 million-asset credit union has a cannabis business services division that specifically focuses on the industry.
Freedom Credit Union Business Development Officer Susan Crum said cannabis provided a way for the not-for-profit cooperative to grow its commercial lending business, but she acknowledged many other financial institutions don’t want to be closely tied to the industry, at least not yet.
“I think the federal illegality and the stigma that is still around cannabis is causing financial institutions to hesitate to say that they’re even interested in it,” Crum said. “Banking is a fairly conservative industry, but we saw a need in our community.”
Credit Union League of Connecticut President and CEO Bruce Adams said there are other reasons banks and credit unions currently serving the industry have remained quiet.
“They know that their phone won’t stop ringing if they speak out publicly,” Adams said. “And not every credit union or bank is an expert at navigating the industry, so they need to be careful that they don’t end up drinking from a fire hose.”
He said some of the stigma about banking cannabis companies has dwindled over the past 10 years, and a lot of the risk now is institutions getting in over their heads. He encouraged more financial institutions to talk openly about their interest, or lack thereof, in the cannabis sector.
“Banks and credit unions need to start talking about this, it should not be in the shadows — no one expects you to be an expert, it’s a brand new industry,” he said.
Freedom Credit Union doesn’t have Connecticut cannabis clients yet, but Crum said she’s eager to recruit new business.
“We’re having fun learning about the nuances of the business and what cannabis entrepreneurs are looking for from their financial institutions,” Crum said.
Even with the credit union’s willingness to offer traditional banking services such as bill pay, debit cards, cash management, online banking and armored car service, federal restrictions still prevent lending.
“We’re not currently lending in the cannabis space, but we’re hoping changes in regulation and law will allow us to start exploring that,” Crum said.
