Since marijuana remains classified as an illegal drug by the Drug Enforcement Administration, traditional financial services are out of reach for the nation’s nascent cannabis industry as Federal Deposit Insurance Corp.-backed banks are barred from doing business with dispensaries, growers, distributors and wholesalers. In New Jersey – which is among the 24 states that have legalized the substance for medicinal and recreational use – there is growing interest in the banking community about whether to serve the market.
“Banks and credit unions are rightfully becoming less wary of doing business with cannabis-related businesses (CRBs),” said Ryan Magee, a partner at McCarter & English LLP. “While regulatory compliance has long been the cited reason for banks declining to do business in the space, I believe reputational risk has also played a role. To actively do business with cannabis businesses means to voluntarily invite further scrutiny from industry regulators—even if you are going about it in a compliant way.
“In the past, particularly prior to adult-use legalization in the state, the regulatory risks and attention typically outweighed perceived business benefits,” explained Magee, whose specialties at the Newark law firm include cannabis law. “That has changed in recent years, however.”
“Legalization of adult-use cannabis in New Jersey has created myriad aspiring cannabis businesses in sudden need of deposit accounts and other financial services. Seemingly overnight, the business upside is now there. I think financial institutions have also been guided by trends in federal legislation, such as the SAFER [Secure and Fair Enforcement Regulation] Banking Act, which recently passed the Senate [Banking Committee], [and is] intended to reduce many of the regulatory risks associated with doing business with state-sanctioned cannabis businesses. There is a paradigm shift happening with respect to cannabis banking and financial institutions and regulators alike are taking notice,” he said.
Right now, licensed cannabis businesses have few options when comes to banking services like handling payroll, opening a checking account, and borrowing money in a safe and secure manner. That means many have been forced to operate exclusively in cash, which makes them vulnerable to violent crime and affects the ability of federal regulators to monitor activities like tax evasion and money laundering.
The current restrictions also make it challenging for state agencies to collect taxes and oversee businesses effectively. “It’s important to remember that cannabis banking doesn’t just impact licensed cultivators or dispensaries,” Magee said. “It can impact landlords, security companies, accountants, and other professionals who necessarily provide services – and derive income – from cannabis businesses.
“With that being said, deposit accounts are the most common service we see offered by local banks and credit unions to licensed cannabis businesses or businesses intending to apply for a state-issued license. We are also starting to see expanded offerings, like consumer payments, electronic tax payments, and payroll services. But a gap still remains when it comes to institutional lending. Cannabis businesses cannot simply walk into their local bank and obtain a small business loan to start their business, like other businesses can,” he continued.
It’s important to remember that cannabis banking doesn’t just impact licensed cultivators or dispensaries. It can impact landlords, security companies, accountants, and other professionals who necessarily provide services – and derive income – from cannabis businesses.
– Ryan Magee, McCarter & English LLP
According to Jason Gross, a member of Sills Cummis & Gross PC and co-chair of the Newark-based firm’s cannabis industry practice group, “In New Jersey and other states where cannabis is lawful, banks may offer to cannabis businesses any banking services that such banks would offer to non-cannabis businesses.” Gross went on to list checking and savings accounts, ACH/wire services, loans and cash management services as options some banks may extend to cannabis-related ventures.
“It is important to note that, since under federal law, cannabis remains illegal, banks must evaluate the potential consequences of providing services to cannabis companies, as permitted under state law, where such action is not permitted under federal law,” he added.
Gross noted that credit unions and banks based in New Jersey that are solely intra-state seem to be “more inclined to provide banking services” to cannabusiness than inter-state banks “because such entities are less concerned” that the substance remains illegal under federal law.
He also pointed out that while more U.S. banks are starting to serve the sector, those institutions “tend to focus on the larger, more well-established and multistate operators.”
That means the many cannabis businesses that are “owned and operated by individuals without significant financial means are at a disadvantage when seeking financing from traditional banks,” Gross said. “For many of the other cannabis businesses, in order to obtain loans and banking services, they often end up using smaller banks, credit unions and non-bank financial institutions with stricter terms and conditions and higher fees.”
As more and more states legalize the use of medical and recreational cannabis, pressure is growing on federal lawmakers and banking regulators to provide the cash-dependent cannabis sector with access to regulated banking services.
The Washington, D.C.-headquartered American Bankers Association – the largest banking trade association in the country – says the rift between federal and state law has left banks trapped between “their mission to serve the financial needs of their local communities and the threat of federal enforcement action.”
In a statement posted online, the ABA said that while it takes “no position on the moral issues raised by legalizing marijuana,” it believes “the growing number of states that allow its sale and use raises practical issues that must be addressed.”
“ABA believes the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where marijuana has been legalized for medical or adult use. Those banks, including institutions that have no interest in directly banking marijuana-related businesses, face rising legal and regulatory risks as the marijuana industry grows,” the group said. “Current proposals in both the Senate and the House that seek to provide greater clarity and bridge the gap between state and federal law provide a solid starting point for discussion.”
Nearly two dozen attorneys general – including New Jersey’s Matthew Platkin – are also calling on Congress to pass the SAFER Banking Act, saying it will enable economic growth, facilitate state oversight of tax obligations and reduce public safety risks associated with high-value, cash-based businesses.
They also argue that establishing a safe harbor for banks to service licensed cannabusinesses in states where marijuana is legalized would ensure greater accountability in the industry.
Additionally, the attorneys general contend that an effective safe harbor could bring billions of dollars into the banking sector, enabling law enforcement; federal, state and local tax agencies; and cannabis regulators to more effectively monitor and ensure compliance of cannabis businesses and their transactions.
Approved Sept. 27 by a bipartisan group of senators, the SAFER Banking Act now moves to the Senate floor for a full vote. If passed, it would provide protections from federal prosecution for institutions offering services to state-legal marijuana businesses, curing many of the financial management issues that licensed ventures face because owners would have access to deposit accounts, insurance and other financial products.
An earlier version of the bill, the SAFE Banking Act, failed to secure a Senate vote despite the House of Representatives passing it seven times.
Though Capitol Hill insiders believe the odds remain good that the Senate will pass the SAFER Banking Act, the measure does face hurdles as nearly all business in Congress is frozen until the House selects a replacement for ousted Speaker Kevin McCarthy.
Once normal functions resume, lawmakers have several priorities to handle before considering cannabis banking reform – including passing another spending bill to avoid a government shutdown before a mid-November deadline, as well as addressing the escalating war in Israel.
New Jersey’s legalized cannabis industry received some relief after Gov. Phil Murphy signed a law in May decoupling the state’s corporate business tax provisions from federal rules prohibiting such deductions and credits for cannabis businesses.
According to Section 280E of the Internal Revenue Code, cannabis-related ventures are blocked from deducting typical business expenses on state and federal tax returns, since marijuana is classified as a Schedule I narcotic. New Jersey joins a growing number of states to decouple from the provision – including New York, California, Hawaii, Michigan, Colorado and Oregon – and allow licensed cannabis companies to deduct certain expenses on state tax returns.
Three months later, officials with the U.S. Department of Health and Human Services recommended that the DEA move cannabis to a lower risk category under the Controlled Substances Act.
Currently a Schedule I drug – meaning it’s deemed to have no accepted medical use and a high potential for abuse – the HHS believes marijuana should be reclassified as a Schedule III drug following a review by the Food and Drug Administration.
If marijuana were moved to a Schedule III substance, it will be considered to have some medical uses and a moderate-to-low potential for physical and psychological dependence, joining a category that includes certain opioid-based pain medications, testosterone and anabolic steroids.
Reclassifying it could eliminate some of the hurdles faced by cannabis-related ventures – such as access to banking services, capital and tax breaks – and ultimately better position the emerging sector for success, stakeholders believe.
Gross said, “Assuming cannabis is rescheduled to Schedule III, that would eliminate the effect of Tax Rule 280E on state-regulated cannabis companies and allow such companies to deduct their costs of selling cannabis for federal income tax purposes.”
Until the regulatory environment is more clearly defined, most institutions are opting to wait before jumping into the industry, with around 11% of banks and 4% of credit unions providing some type of banking services to cannabusiness, according to the ABA.
“The cannabis industry has long been fighting with one hand tied behind its back,” Magee said. “It’s simply unprecedented for an emerging state-sanctioned industry to lack access to traditional financial services and institutional lending, not to mention the unfavorable tax realities of 280E and the ever-looming risk of criminal enforcement at the federal level.
“The reality is that these hurdles have disproportionately impacted small businesses seeking to enter the space, as they are most likely to either struggle to secure private investment, or if they do, end up striking deals with unfavorable business terms due to lack of leverage. I do think we will see a less restrictive federal approach to cannabis banking in the near future, but in the interim, smaller players seeking to break into the space will continue to proceed at a considerable disadvantage,” he explained.
Fear of penalties or forfeiture for violating federal cannabis laws has dissuaded many banks and credit unions from doing business with cannabis companies in New Jersey, with only a handful of institutions choosing to do so, according to Zach Rosenberg, an associate with Bressler Amery & Ross PC in Florham Park.
The attorney – who is a member of the firm’s cannabis practice group – believes the SAFER Banking Act “should help eliminate these fears by offering banks a safe harbor.”
However, Rosenberg doesn’t think there will be “an immediate uptick in cannabis banking, particularly from a lending standpoint.”
“It is still an inherently high risk, heavily regulated industry, and other than the large MSO’s, the majority of cannabis license holders in New Jersey are startups which lack the strong financials and credit typically needed for a traditional bank loan,” he explained.
In the interim, some companies are stepping up to offer solutions in New Jersey, where the legal marketplace is forecast to hit $2.4 billion in annual sales within the next three years.
After Mastercard ordered a halt in July on all cannabis transactions involving its debit cards, retailers were left scrambling for ways to compliantly process cashless payments at an affordable price. The move came a few months after Visa cracked down on its ATMs at dispensaries, shutting down a popular workaround to the banking system.
With concerns that more financial institutions may follow suit, an East Brunswick-based venture aims to help cannabis merchants reduce their reliance on cash, as well as make the shopping experience more convenient, secure and cashless.
Zenco Payments – a three-year-old minority-owned and operated business – also works to assist companies with increasing the safety of their assets, raising customer satisfaction, boosting revenue and improving banking relationships. “The Mastercard shutdown is one more hurdle for compliant cannabis businesses that are already navigating a complicated banking system and oftentimes being gouged by bank fees and limited cashless options,” said Dev Nath, Zenco’s chief revenue officer.
Nath, who spent more than 25 years in banking – specifically in risk management consulting – went on to say, “Our vision at Zenco is to help cannabis companies by offering them an affordable payment solution that helps increase their sales and improve the shopping experience for their customers.”
He continued, “At Zenco, we take our years, our mainstream banking expertise and tailor that knowledge and connections to offer compliant and affordable cashless banking solutions to cannabis retailers nationwide.”
Built by banking industry experts exclusively for the cannabis payment ecosystem, Zenco offers compliant payment options for businesses to help them remain cashless in a regulatory compliant manner at some of the lowest rates in the industry. Through Zenco’s closed-end loop payment solution, customers can use their cellphones to process an ACH payment, thus skipping the use of debit cards completely.
Considered to be one of the fastest-growing cashless payment solutions nationally, Zenco offers an easy-to-use app that allows consumers to purchase cannabis without cash. It also gives cannabis suppliers access to a free B2B e-commerce platform to sell merchandise to retail stores and dispensaries.
In addition, since Zenco is a web-based application, it does not need to be integrated with clients’ existing POS systems and can be used by merchants for their in-store, delivery and online sales.
According to Nath, the platform is used in over 60 locations, with several startups waiting to finish their build out. For now, the company is focusing on the East Coast, where the opening of retail stores has been “abundant” but “really slow.”
Meanwhile, Affinity Federal Credit Union, the state’s largest credit union, is teaming up with Green Check, a leading fintech connector and technology provider in the cannabis market, as it seeks to further develop a banking program to serve the emerging sector in the tri-state area.
Earlier this year, the Basking Ridge-based financial institution began offering banking services and financial tools to a range of legal cannabis-related businesses, including dispensaries, cultivators, wholesalers, manufacturers and ancillary ventures.
On its website, Affinity explained that while some institutions “may choose not to serve CRBs,” the credit union “exists to improve the financial wellbeing of our members and the communities we serve by making their unique dreams a reality.”
“As an emerging industry, we believe legal cannabis businesses and their employees deserve access to competitive financial products and services to grow and succeed in this rapidly expanding market,” the message said, noting that the SAFER Banking Act “further reinforces a financial institution’s ability to service legal cannabis businesses.”
Through its partnership with Green Check, Affinity has received guidance in developing and maintaining a compliant CRB community program — from receiving industry insights and back-end support to offering a simple risk assessment process and extensive educational resources, according to Bryan Watkinson, Affinity’s assistant vice president, Risk Operations.
“We look forward to advancing our community-based approach and providing all of our members with a comprehensive roster of modern financial services and products they need to thrive in a 21st-century economy,” he added.
Green Check, which continues to expand its footprint across the U.S. – including on the West Coast and in the Northeast – has now onboarded over 140 financial institutions and more than 7,000 CRBs on its platform.
Kevin Hart, the founder and chief executive officer of Green Check, told NJBIZ, “While the legal cannabis industry in the tri-state area holds enormous potential for economic growth and local job creation, cannabis-related businesses still struggle to access the same financial and business services bolstering other businesses. The result? A missed opportunity in a market that generated roughly $180 million in sales so far this year in New Jersey alone.
“By expanding cannabis banking offerings at our financial institutions – such as through Green Check’s recent partnership with Affinity Federal Credit Union – we can empower banks and credit unions in New Jersey and beyond to confidently, compliantly, and profitably serve CRBs. That’s a win-win for both commerce and our communities.”