Editor’s Note: This is the fourth in a series in which Denise Wymore and Lou Grilli debate issues before credit unions. In this installment, Wymore, membership & advocacy development officer with NACUSO, and Lou Grilli, AVP-product development with Trellance, debate the pros and cons of pot banking.
Background: There are 633 financial institutions in the U.S. serving the cannabis industry – some are state-chartered and community credit unions. The list of states legalizing businesses that grow, distribute, and sell cannabis (i.e. marijuana-related businesses or MRBs) is rising. But since the product remains a Schedule 1 drug, there remains a risk in providing banking and loan products to MRBs. There is a path for credit unions to serve this cash-intensive business. The authors debate whether this is in the members’ best interest.
Wymore: Lou, MRBs have a very dangerous problem on their hands – it’s cash – a whole lot of cash. That much cash is dangerous – it’s tempting for criminals, susceptible to internal pilfering, and useless when it comes to paying bills and payroll. The very few banks that have ventured into this space charge these unique and legal businesses thousands of dollars a month in fees. Credit unions are the best solution to help out these local businesses.
Grilli: But Denise, cannabis banking comes with very high costs. There’s a reason why banks are charging high monthly fees. Operating in a cash environment creates additional costs. There’s a limitation as to how much cash the credit union can deal with before it impacts capital ratios. There’s a lot of labor-intensive AML and BSA forms to be filled out, including required suspicious activity reports. Plus, onsite inspections are required.
All of this leads to the need to hire additional staff. I’ve heard a ratio of one additional staff for every eight MRBs. Armored car service to transport the cash, legal counsel to set up the products and ongoing education costs pile on. You have to agree that it’s not fair to make ordinary members subsidize this very expensive business line.
Wymore: Yes, but those costs are worth it to keep the business and their employees safer, and provide them with needed banking services! And credit unions are passing most, if not all, of that additional cost onto the cannabis businesses that are all too happy to pay. This is a great source of non-interest income for the CUs that serve.
Grilli: Not if the members don’t agree. And I bet most, if not all of the credit unions that have moved into cannabis banking have never asked their members if they approve. Not every member of a credit union is going to approve of their credit union providing products and services to MRBs, whether or not it is legal in that state. Credit unions are supposed to be not-for-profit cooperatives owned and operated by its members. But what does that really mean if the members are not being asked if they want to be in that business?
Wymore: I heard that argument recently and at first agreed, but then the more I thought about it, we don’t ask members if we should sell our Visa portfolio to a bank, for example; that’s what the credit union’s board of directors is for – to represent the members’ best interest.
Grilli: Even if the board believes serving local businesses that happen to be in the cannabis industry is good for the community and for the members, I doubt that they are aware of the risks to the credit union. According to NAFCU, there are huge risks to the credit union. If the NCUA finds any anomalies in tracking and accounting, the NCUA could pull the credit union’s charter or terminate the credit union’s share insurance account, which could force the credit union to be absorbed into another credit union (forced merger). If the business owner is prosecuted, their funds at the credit union could be tied up in asset forfeiture proceedings, impacting the credit union’s balance sheets and incurring legal fees for representation.
Wymore: I have heard this argument, as well, and although these risks exist, give me an example of a credit union that lost its share insurance account because they were banking cannabis. I think we are going to look back on this five, 10 years from now as we did Prohibition. Marijuana will someday be legal in all 50 states; it’s not going the other way.
And with it comes a great opportunity for credit unions to not only attract these business accounts but to attract younger members as well. These businesses are also good for state economies. Colorado, the first state to legalize, has now generated more than $1 billion in total state revenue. I applaud the credit union pioneers that have taken the risk for the sake of safety for members in their communities.
The Last Word: North Bay Credit Union is an example of being completely transparent to its members regarding their intention and rationale for entering into cannabis banking business. They were forthcoming with the risks that this business entails. Credit unions that currently provide financial products and services to MRBs have not necessarily seen a membership decrease because of involvement with MRBs.
But too many credit unions do not advertise or broadcast this fact. It should not be a secret. Credit unions need to take into consideration account members' feelings about marijuana legalization when deciding whether or not to do business with MRBs. Credit unions need to be transparent with the risks they face, and the additional costs that will be incurred. Members, who are, after all, the owners, need to have a say into policy matters like this.