By Ray Birch
ARVADA, Colo.–The approval by voters in five states in recent elections in favor of legalizing recreational marijuana could be a “tipping point” for financial services in servicing the cannabis industry, according to one expert, who also cautions it could tip certain-size CUs in the wrong direction.
Sundie Seefried, CEO of Partner Colorado CU—a pioneer among FIs in serving legal pot businesses—told CUToday.info the widespread approvals for legalizing pot businesses may be just the nudge needed to prompt more financial institutions to add add services for marijuana-related businesses to their portfolios, even as it remains illegal at the federal level.
But Seefried also cautioned that expanding to serve the cash-heavy cannabis operations at a time when credit unions are already flush with deposits requires an even more careful approach, and the compliance demands remain more than many CUs can handle.
On Nov. 3, five states—Arizona, Montana, New Jersey and South Dakota—passed medical or recreational legalization referendums, bringing the total number of states where marijuana is legal in some form, along with the District of Columbia, up to 16.
“This could be the tipping point,” said Seefried.
It isn’t just the spread of legalization making credit unions more comfortable serving cannabis-related businesses. As Seefried noted, doing so also means tapping a potentially strong revenue stream, which can be especially attractive to small and medium-size CUs struggling to grow net income.
What could further push along acceptance of marijuana businesses, too, said Seefried, is Democratic control of the executive branch of government.
“We now have a Democratic president, and I know the Senate isn't quite there yet, but we now have two arms of the government that are (Democratically controlled) and they're more willing to hear this argument—while the Republicans were not,” Seefried said.
Bill Before House
A bill that would remove federal penalties on marijuana and, if signed into law remove a major risk for some credit unions, will receive a vote on the House floor sometime in December, according to Rep. Steny Hoyer (D-MD). The bill would also clear the records of some people convicted of cannabis-related crimes.
“Momentum is growing on marijuana policy. More than a third of Americans now live in states with full legalization, and a record 68% support federal cannabis legalization, according to Gallup,” reported Politico.
“The SAFE Banking Act, too, could now move along a little bit further and a little faster,” Seefried said. Language in the SAFE Banking Act would reduce the legal risk for financial institutions serving legal pot businesses.
Not only is serving marijuana businesses highly profitable, with pot businesses willing to pay high fees to banks and CUs for taking on the risk in serving them, it opens new lines of business, said Seefried.
‘The Next Opportunity’
Sundie Seefried
“Once you get these cannabis businesses in the door, they're pretty pleased to have a bank account,” said Seefried, who had previously shared with CUToday.info that Partner Colorado’s own service to cannabis-related businesses has played a key role in keeping the credit union profitable during the current economic downturn. “Then the next opportunity comes at the consumer base—getting their employees if you have the field of membership to be able to sign them up. So it's a consumer growth opportunity as well.”
But Seefried emphasized a credit union has to have the sufficient resources to manage the BSA obligations brought on by serving pot companies.
“During this economic downturn a lot of the smaller credit unions may want to step up the fastest to serve marijuana businesses, because they are the ones most likely to get hit the hardest from this recession,” said Seefried. “But I am concerned whether they have the resources to handle the BSA obligations. They might just be setting themselves up for additional risk that could cause some problems in the end.”
Not For Smaller Asset CUs
CUToday.info has featured several reports on small credit unions turning to serving marijuana companies to grow. North Bay Credit Union in Santa Rosa, Calif., said it expects to grow from $50 million in assets to $500 million in the next five years because of its focus on pot businesses.
“But this business has to be managed correctly,” stressed Seefried. “I honestly don't think credit unions that are under $250 million should get into something like this. We think the opportunity really exists for the credit unions between half a billion and a billion dollars.”
The reason, said Seefried, is larger CUs have more staff available to address the additional work and compliance demands of serving the pot trade.
“Especially since other functions of the credit union are slowing down. These larger credit unions have the staff to move elsewhere. They are not making as many loans, for example, so they can move some of the lending staff over.”
An Example of the Challenge
Seefried shared an example of just how labor intensive serving pot businesses is for the $502-million Partner Colorado, whose assets can fluctuate dramatically as a result of deposits from cannabis-related businesses.
“For example, I am having to perform off-balance-sheet sweep management, which is an entirely new function which your credit union has to get used to,” explained Seefried, pointing out the flux in deposits affects performance ratios. “We have to manage those ratios because of the money coming in. It can't sit in the account and that's a lot of sweeping to do every single month—and that's just to maintain our safety and soundness. I heard there's a small credit up north that’s gotten themselves in a bit of trouble because they can’t handle all of the deposits that are coming in now from marijuana businesses.
“I would say really do your homework and understand the pressures you're going to feel on the balance sheet at this point in time,” said Seefried. “Again, a lot of people think they can just take the money and loan it out, but it's not a big lending market now. Investments are going down, too, so what are you going to do with all that money? You can't make enough money fast enough to cover the growth, and if you do and try to do it that fast you're going to put your safety and soundness at risk.”