While risks and costs associated with banking a federally illegal drug have kept most financial institutions away from the cannabis industry, Connecticut’s rollout of retail recreational sales is giving banks and credit unions a growth opportunity at a time when the rest of the economy is slowing down.
Connecticut launched retail sales of recreational cannabis last week, with seven of the state’s existing medical marijuana facilities expanding into hybrid facilities that offer recreational products as well.
The coming year – and beyond – will see prospective retail shops and other related businesses applying for licenses to operate in Connecticut. These businesses will need established banking relationships even before applying for a license, giving banks and credit unions opportunities to work in the cannabis landscape before businesses start handling marijuana.
“There may only be seven operating now, but there are literally hundreds in the wings waiting,” said Paul Dunford, co-founder and vice president at cannabis compliance software company Green Check Verified, which has an office in North Haven. “And they need banking services now.”
Laws Present Challenge to Finding Customers
Before the state started issuing licenses last year for adult-use recreational sales, financial institutions had few opportunities to get involved with cannabis banking. Medical marijuana dispensaries first opened in Connecticut in 2014, with only 18 dispensaries and four producers receiving licenses.
Since cannabis remains federally illegal, large national banks like Chase and Bank of America do not offer products and services for the industry. Instead, community and regional financial institutions have provided banking services in states that have legalized recreational and medical marijuana sales.
In addition to retail shops, Connecticut’s new recreational industry includes licenses for other types of businesses that were not part of medical marijuana sales, including delivery services, food and beverage, product packagers and manufacturers.
These businesses face high costs throughout the process, including application fees, but financial institutions have often hesitated to work with prospective cannabis businesses without a state license, Dunford said.
“One of the things that’s often forgotten in cannabis banking is that you actually need a bank account before you’re licensed,” Dunford said. “If [financial institutions] are wary about licensed cannabis businesses, they really held what we call ‘seedling’ accounts at arm’s length, because they’re getting involved in cannabis, but they’re not actually licensed or vetted by the state.”
Banks Can ‘Audition’ Marijuana Firms
Dunford said Green Check Verified has been encouraging financial institutions to start working with these businesses during the application process. Without a license, these businesses cannot yet work with marijuana plants, he said, limiting the risk for financial institutions.
“It’s a great way in a way to audition a potential customer or a member,” Dunford said. “You get them when the risk is relatively low; you see how they operate; you develop that personal relationship; you have this moment when the license is issued where you can decide: Do you transition them into a full cannabis bank account or do you reevaluate the relationship?”
While Connecticut does have financial institutions providing cannabis banking services, none of the ones that use Green Check Verified’s software have gone public about providing services in Connecticut, Dunford said.
Because the retail industry differs from the medical market, both experienced and potential cannabis bankers have had to learn a new program, Dunford said.
Mass., NY Banks Look to Compete in CT
The start of recreational sales has brought more interest from financial institutions around the state considering launching banking programs, Dunford said, noting that Massachusetts and New York banks and credit unions are also exploring Connecticut’s industry. While marijuana itself cannot be transported over state lines, in-state businesses can still use out-of-state banks.
Springfield, Massachusetts-based Freedom Credit Union is among the out-of-state financial institutions providing banking services in Connecticut – and doing so publicly. The $683 million-asset credit union is a founding member of the Connecticut Cannabis Chamber of Commerce. The credit union has a field of membership that includes Hartford and Tolland counties and recently opened a loan production office in Enfield.
Freedom Credit Union decided in 2021 to launch a cannabis banking business after seeing other types of businesses – like electricians – looking to offer services to cannabis-related businesses. Given how relatively few institutions provided cannabis banking services, Freedom Credit Union also saw an opportunity to work with cannabis-related businesses, said Susan Crum, who joined Freedom Credit Union in 2021 as business development officer for cannabis business services.
In creating its program, Crum, who previously worked at Southington-based core technology provider COCC and Massachusetts-based MountainOne Bank, spoke with business owners to develop a sustainable pricing model that would be affordable to businesses while still producing income for the credit union. Crum said these businesses need the same types of banking services that any business would need.
“This is just banking,” Crum said. “It’s just a little bit higher level of compliance and due diligence.”
Lending Products Present Additional Challenges
Freedom Credit Union uses Shield Compliance as its software partner, including monitoring all financial activities.
“We monitor every single cent that goes in and account for it,” Crum said. “We have more transparency into their businesses than we do in any other business.”
Freedom Credit Union signed up its first Massachusetts dispensary in 2022. The credit union recently brought on its first Connecticut-based business, a start-up involved with cultivation.
While not currently offering lending, the credit union will consider developing a lending product for these businesses, Crum said.
Dunford, with Green Check Verified, said more institutions offering cannabis services have started launching loan products to help business access capital, including to pay application fees or build out facilities. The facility is often used as collateral, Dunford said, since the product itself cannot be used for collateral.
“There is still some hesitancy around lending because there aren’t established underwriting models,” Dunford said. “Every financial institution in a way kind of has to invent their own criteria, but they know that it’s necessary, so more and more of them are getting into it.”
