The Bank of Cannabis: Coming Soon to the Bay Area?

It’s no secret that California’s cannabis industry — especially dispensaries — is currently an all-cash business.

That’s because financial institutions are obligated by the Bank Secrecy Act of 1970 to report suspicious activity, which (at least until Jan. 1) includes marijuana transactions.

As a result, the state’s dispensaries have been prevented from using traditional banks because highly-regulated financial institutions are strictly prohibited from accepting cannabis-generated accounts.

So what do cannabis business owners do?

Introducing the concept of “The Public Bank of San Francisco,” a publicly-funded financial institution that would be owned and operated by the City of San Francisco and its taxpayers.

Alternative to Profit-Driven National Commercial Banks

Recently advanced by two San Francisco politicians — Supervisors Malia Cohen and Sandra Fewer — the idea has the overarching goal of ending San Francisco’s reliance on profit-driven, large, national commercial banks for its banking services.

What’s more, public banks would be able to legally accept accounts generated from cannabis businesses and customers — solving the problem of all that cash just laying around without a safe haven.

“In our long cannabis discussion,” said Cohen, “we have barely acknowledged that cannabis is currently an all-cash business — cash payroll, no banking, vaults of bills on the floors of retailers.”

The once-daring concept also has the full support of State Treasurer John Chiang, who recently recommended that California create a public bank to handle the influx of two major cannabis industry revenue sources — $7 billion in sales and $1 billion in taxes.

Even with the change in marijuana sale and possession laws on Jan. 1, the state’s dispensaries will have no legal option for keeping track of essential transactions such as credit card payments, checking accounts and electronic tax payments.

“A Target on the Back of Cannabis Operators”

“It is unfair and a public safety risk to require a legal industry to haul duffle bags of cash to pay taxes, employees and utility bills,” said Chiang. “The reliance on cash paints a target on the back of cannabis operators and makes them and the general public vulnerable to violence and organized crime.”

Chiang also thinks armored cars should be deployed to collect taxes on the industry.

Unlike privately-held banks, a public bank is not for profit, which means it can provide lower interest rates on loans. By design, the return of profits would go back to the city, not to private shareholders.

Currently, the only public bank in the U.S. is the state-owned Bank of North Dakota, which dates back to 1919 and remains sustainable.

Recently Proposed Across the Bay Area

The concept of public banks has also been recently proposed in Oakland, as well as in Santa Fe, New Mexico, and Philadelphia. In addition, 10 other cities are in the process of considering public banks.

Aside from the positive impact on the cannabis industry, public banks would conceivably free up more funding for affordable housing loans, and to support small business development, as well as low-interest loans to low-income households. Such transactions are not easily available from traditional banks.

Public cannabis banking would offer a safe and secure banking haven, something long-sought by the cannabis industry. And for everyone else, creating public banks would likely generate increased social responsibility and funding for social justice issues – causes traditional banks tend to shy away from.

High Start-Up Capital Costs Required

On the downside, some experts point out that creating a public bank, even one specially designed to accept cannabis business deposits and provide merchant services, requires a lot of start-up capital.

Recent estimates put the figure at between $125 million and $250 million, to launch a bank with at least $1 billion in assets.

According to Amanda Ostrowitz, a former bank examiner with the Federal Reserve who later founded the cannabis industry database CannaRegs, here’s what lies ahead

“The number of different things a bank has to pass through; it’s not just simple stress tests,” Ostrowitz said. “It’s safety and soundness exams, consumer lending compliance — there are so many different factors that go in.”

Still, Ostrowitz prefers the bright-side scenario, that the banking system will adjust to the rapidly growing cannabis industry rather than the other way around.

“There are a lot of these [trends] in history,” Ostrowitz said. “They were built to solve one problem, and then they balloon and become the new way. If it works and it makes sense, then who knows? Maybe this is a model that goes all the way through, but we’ve got to look at the costs, and the general impacts on society.”

The Financial Future of the Cannabis Industry

Finance and accounting compliance will be a major test for all dispensaries moving forward. Dispensaries and other cannabis businesses need to be aware of the options available.

Pioneers in the new industry will continue to develop new solutions and technology, specifically to address the needs of cannabis businesses.

In the meantime, cannabis dispensary operators and prospective owners should develop business plans, and comprehensive cannabis marketing strategies. These strategies should take into account important resources, like public banking opportunities.

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