Could marijuana banking, fraught with legal uncertainty, improve in 2021?

For Standard Wellness, a vertically integrated marijuana business in Northeast Ohio and budding multistate cultivator, reform of marijuana-related financial regulations could mean reduced fees on banking accounts, access to federal tax deductions available in other industries and better access to credit.

Such benefits afforded to other businesses could have catalytic impacts on the young company and others like it in the marijuana sector. Standard Wellness would benefit from a business loan in particular, said CEO Jared Maloof, noting how Small Business Administration funding and stimulus efforts like the Paycheck Protection Program are not available to a federally illicit industry.

Marijuana-favorable banking regulations would also benefit banks and credit unions that want a piece of the industry. It’s why banking trade groups push for legislation like the SAFE Banking Act, which is designed to protect firms providing banking services in states where marijuana is legal in some form. That, coupled with descheduling, could truly open up banking services to the benefit of finance and marijuana industries alike.

Until then, mere access to a bank account to deposits funds and manage payroll will carry high fees, and credit likely will remain unavailable.

Stakeholders are hopeful the climate for marijuana banking could improve in the coming years under an incoming administration that has signaled openness to federal legalization. And if Democrats retake the Senate in runoff elections, the odds of marijuana-friendly laws passing through Congress greatly improves. It’s unlikely a Republican-controlled Senate looks favorably toward marijuana.

Absent of passage of something like the SAFE Banking Act, the industry will continue to be held back compared to other businesses not subject to a quasi-legal regulatory environment, and banks won’t get to participate in the industry’s financial upside.

“The current disjoint between state and federal law makes no sense on a federal level, be it from a crime reduction perspective, a business perspective or an economic perspective,” said James Thurston, a spokesman with the Ohio Bankers League.

He said that disconnect is among the myriad factors keeping many conservative Ohio banks and credit unions on the sidelines of a state-approved marijuana industry.

“Banks of all sizes are concerned about reputational risk associated with serving cannabis-related businesses,” echoed Aaron Stetter, vice president of policy and political operations for the Independent Community Bankers of America. “And there’s concern with the potential regulatory backlash. With your field of examiners, what is acceptable today may not be acceptable tomorrow.”

While many businesses languish during this economic downturn, marijuana has been in generally high demand. In Ohio’s burgeoning industry, medical marijuana retail sales have picked up amid the pandemic in part due to telemed visits for patients getting or renewing cards, the option for curbside pickups, and a new way of calculating a medical customer’s purchasable allotment of marijuana over a given period of time. With public sentiments regarding cannabis only continuing to improve, the industry has increasing potential to grow.

Some estimates project the U.S. marijuana industry to top $30 billion in value by 2025.

Many banks and credit unions want a piece of that, especially when their margins are under pressure amid a depressed economy and rock-bottom interest rates.

At Cortland Bank, a community bank with less than $1 billion in assets, marijuana businesses could be a low-cost source of deposits and, in theory, a new piece of the loan portfolio. The company has opted to steer away from cannabis for now but with passage of marijuana-related reforms, that perspective might change.

“With this new administration, if marijuana becomes legalized on a federal level, it’s a game-changer,” said Cortland president and CEO James Gasior. “Every bank possible would look to bank these customers.”

Among marijuana companies in Ohio that are banked, there’s an expectation to not talk about it publicly because of the repercussions that might bring. The secrecy speaks to how much they want to protect their banking relationships and the surrounding sensitivities.

There are some firms providing basic treasury services. They include Wright-Patt Credit Union in Dayton and Atomic Credit Union in Southeast Ohio. There were 677 known marijuana banking institutions in the country as of September, according to FinCEN. There seem to be but a few in the Buckeye State.

Those providing accounts charge a premium due to the increased scrutiny and monitoring those accounts require due to connections to a federally illicit industry.

And credit is simply not on the table.

“When you have a business that’s growing, you have incredible profits, and the bank holding your checking account won’t lend you money, that really is frustrating,” said Kevin Patrick Murphy, an attorney with Walter | Haverfield and an adviser to Standard Wellness.

In the company’s experience, Maloof said financing is mostly available only through private lenders, like family offices, hedge funds and real estate investment trusts. And it tends to come at exorbitant costs, making it a lucrative investment for early investors but exceedingly expensive for potential borrowers.

Maloof described a private loan offered with an annual interest rate of 13%, roughly double that of a more traditional bank business loan. But that’s just the coupon.

With other costs added in — like payment-in-kind interest, original issue discount and monitoring fees — the final interest rate is more like 20% to 23%. And there would be no tax deduction available on that, of course.

“So that is all really, really frustrating,” Maloof said. “There is a lot of predatory financing out there. We pay a lot of fees (for banking services), there’s the onerous tax code, and none of these fees are deductible. But by far, the access to capital is the number one thing we hope for.”

That one offer was exceptionally expensive. On average, the private loans come out more in the 10% to 15% interest range.

If banks were better enabled to participate, the rates would be much better. Fees on accounts would seemingly come down as well.

In the case of one Ohio credit union, there’s a $1,500 to $2,000 fee for a marijuana business to apply for an account. Then there’s the regular monthly fee of another $1,000 to $1,500 and other incremental fees associated with different services, like picking up cash in armored cars.

And then there’s the safety issue of many dispensaries still dealing largely in cash. Card transactions would be of less issue if marijuana was no longer classified as a Schedule 1 drug.

A lack of access to credit and exorbitant costs on basic bank accounts will remain the norm until reforms are passed. But the odds of that have never seemed greater than they do under the coming Joe Biden administration.

“Until cannabis is legalized and de-scheduled from the Controlled Substances Act, it has a heightened level of oversight and scrutiny no bank can get around,” Stetter said.