Early adopter banks cultivate opportunities in burgeoning legal cannabis market

By Andrew Sanaghan, Chief Operating Officer, Validis

The legal cannabis market in the US is currently worth around $30bn per annum, projected to rise to $40bn by 2025 and a staggering $60bn by 2030. That’s a lot of cannabis and the market shows no sign of peaking any time soon. Indeed, a report by cannabis business intelligence specialist, New Frontier Data, suggests that the value of the market could rack up to $72 billion if the 18 additional states that are likely to legalize cannabis, go ahead.

The report also predicts that, as the US medical markets continue to expand, the number of registered patients is forecast to increase to 5.7 million in 2030 (1.6% of the adult population). And that assuming legalization in all 18 potential markets by 2030, 47% of total demand would be met by legal cannabis purchases, up from 27% in 2021.

Legislation is moving swiftly too, with the SAFE Banking Act, seeking to remove the ambiguities intrinsic to an environment of divergent state and federal cannabis laws. Whilst the legislation still requires Senate approval, there’s an optimism that, if not this year, then perhaps by 2023, there will be a path cleared for financial institutions to serve the cannabis industry with improved confidence.

The opening up of a new market on such a scale, is heady stuff indeed, and the scope of the legal cannabis sector is already beginning to be exploited with 400 or so early-adopter banks and credit unions across the US, such as the Oklahoma State Bank and Stearns Bank, already providing banking services to cannabis businesses.

Of course, whilst the opportunities are immense, there are also significant challenges for bankers, who must navigate their way through the current stringent regulatory state and federal requirements associated with the high-risk cannabis market. In an environment where most cannabis transactions happen outside retail stores – up to 70% in Michigan, according to a report by Anderson Economic Group – bankers need to be very much on their toes.

So how can financial institutions take advantage of the considerable opportunities to attract profitable new cannabis business customers and support existing customers diversifying into cannabis, whilst meeting the demands of the regulators?

The simple answer is data, monitored on a daily basis.

With the appropriate compliance technology, bankers can implement the controls that provide a package of hyper-vigilant monitoring of granular transactional data both for an individual cannabis business as well as across a portfolio of cannabis businesses.

At Validis we have a technology platform which allows a financial organisation to give their clients the facility to share their in-depth management accounts digitally at a keystroke, providing a bank or compliance company with access to an up-to-the-minute live feed of all transactions, which they can merge with open banking data if they choose. This transformative software has the capability to refresh management accounts data on a daily basis, a powerhouse of data capacity which far out-strips the current regulatory requirement for banks to report on their cannabis customers every 90 days.

For bankers wanting to onboard a cannabis business it offers seamless and immediate access to management account data to support decisioning and the reassurance, that once on-boarded, the SAR (Suspicious Activity Report) can be submitted with ease after 30 days, and all ongoing monitoring requirements can be met or surpassed.

The Validis platform is not simply a turbo-charged data resource, it has also been designed to help bankers and intermediaries analyse the data and, in particular, to identify suspicious or fraudulent activity. Our Quality Score feature measures the integrity of a business’s bookkeeping, assessing activity against previous activity and globally against other similar businesses in the portfolio, identifying unusual activity such as a spike in invoices or accruals, and immediately flags up the discrepancy. An even more granular early-warning system, using our transaction anomaly detection model, will pick up on a single journal entry identified as requiring a deep-dive investigation.

These are exciting times for bankers and compliance companies. There’s no doubt the cannabis market is a high-risk one but for organisations that protect themselves by putting the right technology in place, it’s set to be very lucrative indeed, and before long, mainstream.

We have clients who have been quick out of the blocks to seize the opportunities of the cannabis business market and get a head start on competitors. It will always be the agile, fleet of foot financial companies that are going to win prizes.

One of our clients, Shield Compliance, is a good example of a financial technology company that has been early to identify the opportunities to provide support for building a cannabis banking programme. Shield Compliance transforms how financial institutions manage risk, comply with regulations, and satisfy operational demands associated with serving the legal cannabis market across the U.S. Its purpose-built AML/BSA compliance management software solution sits behind the financial institution, powering its compliance and risk management operations in the background. This enables financial institutions to take advantage of the opportunity to grow their portfolios and gain an early mover advantage on new relationships and the income generated from these customers – all while protecting themselves from the risks associated with banking in this industry.

Tony Repanich, President and Chief Executive Officer of Shield Compliance said: “The demand by cannabis businesses for banking services outstrips supply in many parts of the country, so there’s a significant first-mover advantage for those willing to participate in this line of business today. Banks and credit unions have the unique challenge to ensure that every dollar flowing through the financial institution from cannabis businesses is legal sales activity. We support them by linking to data sources like Validis which validates that sales activity is accurately represented in deposits. That process of validation takes place across a range of banking activity including automated onboarding, underwriting, compliance, and ongoing, comprehensive monitoring, all of which is crucial for a financial organisation to protect itself and its clients. The technology is fundamental for a safe and effective banking service, but getting it right is also pivotal in achieving a substantial competitive advantage when legalisation is consolidated, and more financial institutions enter the market. By partnering with Validis, we believe we are not only setting the pace, but mapping out the road ahead too.”

This is a new market and people are likely to have comments, questions, and experiences to pass on. If you would like to participate in the conversation or share your business journey, we would love to hear from you. Please get in touch.

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