Scaling Cannabis by embracing Financial Services
Imagine opening a business that only accepts cash . . . like that lemonade stand you and your sister had when you were growing up. Since you didn’t take credit cards, you had a cash jar that you would split up before dinner. You would carefully count the money and make sure no cash “fell out” of the jar when you took those bathroom breaks. And before you go to bed, you put your share in the shoe box under your bed with the rest of your earnings—minus a little running around money. That system worked pretty well for a $15 a day business. Now, let’s apply that business model to a $15 billion a year industry.
See any problems?
Financial Services is important
In the post-industrial era, banking, saving and investment, insurance, and equity financing have been core to building America’s economy. It helps businesses begin, increases their operational efficiencies, and helps them scale. It is remarkable that Cannabis has grown to its current size without the help of financial services. To the extent financial services is integrated in the Cannabis industry, it will accelerate its growth and help stabilize it.
Financial Services is entering Cannabis
The SAFE Banking Act seeks to do just that—exempting financial services (e.g. banks and insurance companies) from federal prosecution for engaging with legal Cannabis businesses. It also guarantees institutional banks and lenders priority in secured transactions with legal cannabis industry that would otherwise be subordinate to the federal government due to Cannabis being a Schedule 1 controlled substance.
Charlie Wilson, the CRO for Greenbits said at a recent CannaGather event in Los Angeles "For cannabis to grow into $80b, it needs to have financial services. It gives banks the ability to service the industry. It brings greater safety, efficiency, and security for operators."
Let’s say SAFE Banking becomes law tomorrow, the biggest winners in financial services are going to be smaller to mid-sized banks and credit unions. Large, institutional banks like US Bank or BMO Harris are old, formal, and highly bureaucratic. It will take a lot of time and effort for these institutions to decide to start servicing Cannabis. Plus the compliance issues METRC requires to track dollars from seed to sale is so rigorous that large institutions may not view the financial upside significant enough yet to add Cannabis to its portfolio.
Why the Cannabis Industry should embrace this
Financial services integrating into Cannabis is a cosmic-level event for the Cannabis industry. It would turn thousands of operators running lemonade stands into Minute Maid and Whole Foods. Operators will be able to borrow, bank, and insure their companies and products from loss or other events. I met with one of the most successful cultivators in California and asked what happened if a warehouse or truck is robbed, and their answer now must be that whatever is stolen is de minimum compared to their entire inventory. That will change.
Less obvious is how this will contribute to normalizing the legal Cannabis industry in mainstream American culture. Middle-aged suburbanites using their AMEX at a well curated dispensary would decouple public perceptions of Cannabis sales from night-time, cash purchases in the parking lot of a closed Chinese restaurant off the highway.
The pro-Cannabis community’s next steps
The pro-Cannabis community needs to engage on a regulatory level to help create a framework that encourages legitimate operators to continue to operate legitimately and further deprives oxygen from the black market. This means the cost of regulatory compliance must not be so asymmetrical in value to financial services to dissuade them from entering the industry. And also the cost of compliance on the Cannabis industry must not be so heavy to make margins on the black market a rational business alternative.
The government and the legal Cannabis industry share a real concern of cartels profiting. METRC, which has been adopted by a number of states, puts forth a rigorous seed to sale compliance framework that in theory prevents that. But practically it dissuades many financial service players from entering the market.
The pro-Cannabis community, the Financial Service industry, and the Federal Government must come together to create a regulatory framework that accomplishes a shared goal: bringing financial services into the Cannabis industry in a way it is integrated with almost every other legal industry. The benefit of engaging at a federal level means it can draw on what has worked well at a state level and what hasn’t. The outcome would preempt current state standards, and it would create a predictable environment for legal operators to scale across America.
