Banking Fears Have Put Billions of Dollars in Weed Profits in Limbo… Until Now

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Think about the last time you ran out for a bottle of wine or stopped someplace after work for a few groceries: Did you have to swing by an ATM first? Did you make sure you had plenty of cash in your wallet to cover the cost?

If you’re like most Americans in 2018, the answer is probably… of course not.

It’s more likely you used a debit or credit card, or even iOS, Android, Venmo, or PayPal. A debit here, a credit there, all effortlessly unfolding in the ones and zeros of cyberspace.

I’m simplifying here, but the cashless, convenient transaction between you and the merchant took place via computer – your bank, the merchant’s bank, the clearinghouse – everyone involved used the U.S. communications network and financial system to “settle up” and get business done.

Now, I’m going to ask you to imagine something completely ridiculous – just for a second.

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Legal Cannabis Is Banking in the Twilight Zone

Now, imagine if that simple electronic transaction – for chardonnay, or almond butter, or paper towels – left the merchant, and the participating financial institutions were exposed to very stiff federal money laundering or racketeering charges.

As for you: You could be up for an unfriendly visit from some stone-faced G-men yourself.

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And all because, in this weird story, paper towels are perfectly legal where you live, but are prohibited by federal law. And the digital money used to transact business not only crossed state lines, but was “touched” by federally chartered banks.

If that sounds completely outrageous to you, it’s a scenario faced by millions of otherwise totally law-abiding marijuana consumers every single day, in every single state in the Union where marijuana is legal for medicinal and/or recreational use.

In 2018, legal marijuana is largely a cash business because there’s no alternative, save for a few scattered “homebrewed” third-party apps and payment portals where factors like security and cost are still open questions.

That brings a whole host of problems and headaches to consumers and retailers alike. Customers often have to pony up an extra 1% or 3% to use onsite dispensary ATMs. They face the added security risks of carrying dollar bills.

For retailers, it can be even worse, dealing with the sheer volume of cash. It’s not unrealistic to think that, somewhere out there in America right now, a legitimate marijuana business owner or employee is literally stuffing greenbacks into mattresses or under floorboards because their bank won’t touch their business proceeds with a ten-foot pole.

As you can see, it’s a huge, costly problem – and a drag on the entrepreneurship that keeps the American economy going.

It’s tough to blame the banks here. They’re largely risk-averse organizations, and cannabis is still illegal at the federal level. A bank taking on a cannabis business client runs the risk of violating federal laws by doing so.

The pressure on banks in this regard was ramped up by former Attorney General Jeff Sessions, who rescinded the Obama-era Cole memo that prohibited the federal government from interfering with the laws in cannabis-friendly states.

But that’s about to change in a big way. There have been some incredible developments in Alaska, of all places…

The 49th State Could Be No. 1 for Marijuana Banking

Credit Union 1, an Anchorage, Alaska–based credit union with branches across the entire state, just announced its new pilot program to begin coordinating financial services for marijuana-related businesses (MRBs), including a few cannabis dispensaries.

In a press release, the company stated that by setting up this pilot program, it’s not taking a political or moral stance on marijuana, but is simply seeking to meet the needs of all its members.

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For starters, Credit Union 1’s program will offer accounts allowing deposits and withdrawals to a few marijuana businesses. Eventually, the bank would provide them payroll operations.

“When it comes to our members, we always seek to meet the financial needs of those we serve without judgment or prejudice – and as a state-chartered credit union that only serves Alaskans, we are in the best position to provide this service for MRBs,” the bank stated.

That’s great news for Alaskan cannabis businesses who’ve come, as they have in other jurisdictions, to run cash-only operations.

And Credit Union 1 isn’t the only bank looking to launch such a pilot program. Nor is Alaska the only state looking for solutions.

Buckeye State Bud Businesses Bullseye Banking Buddies

Wright-Patt Credit Union, headquartered near Dayton, Ohio, has said it will be offering “limited banking services” to the state’s medical marijuana companies.

While the Wright-Patt Credit Union hasn’t outlined what specific services it will offer, its move here is still a positive step forward for cannabis companies that are longing to transition away from a cash-only business model.

In just about every case, it will be community banks stepping in to fulfill the surging demand for cannabis, much as Severn Bancorp Inc. (NASDAQ: SVBI) did for Maryland’s medical marijuana businesses, allowing “MRBs” that became clients to easily make payroll and use wire transfers to pay for product.

These banks are largely under the radar of federal regulators, too, and generally only have cause to worry if they fall afoul of the various state cannabis regulations. They sport smaller market caps and can be a touch more volatile than the big national and global players, but these small entities have a potential lock on billions in revenue coming their way from state cannabis operators.

Plenty of these community banks are publicly traded, but one way to play this trend easily is the First Trust NASDAQ ABA Community Bank Index (NASDAQ: QABA) exchange-traded fund. It’s down around 9% for the year, which isn’t surprising given the state of the broad markets, but as a rule, these small banks are very aggressive growers with whip-smart leadership focused on putting money in shareholder pockets. Their outreach to the marijuana business is really “icing on the cake.”

The bottom line is this: Whether you seek out individual community banks to buy or go the “one-stop shop” route with QABA, there’s plenty of upside in store as small banks and legal weed businesses take the first tentative steps toward more durable relationships.

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The 2018 midterm election was a turning point for the cannabis industry.

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