Banking in the Cannabis Industry
February 02, 2021
In this inaugural episode of CannaCast, Eric Altstadter, Partner and leader of EisnerAmper’s Cannabis and Hemp Group, speaks with Peter Su, Managing Partner at BNB Bank, about banking in the Cannabis industry.
EA:Great. Peter, the first question is, how did you get involved in the cannabis space?
PS: Well, I can give you a fancy answer or I can tell you the truth, which is I kind of fell into it. When I came over here, I knew that they were starting a cannabis program, that is to say, BNB was, and I kind of thought that I couldn't really compete in the wide open space. And I guess after a bit they recognized the talent, and they asked me to run it.
EA: By the way, we always like the true answer, I always think that's the way to go. The next thing is, there's been a lot of banking regulation being proposed of late. The two big ones are the Secure and Fair Enforcement Act, known as the Safe Banking Act, which was first introduced in 2019. What is the status of that Safe Banking Act?
PS: Sure. Yeah. At the moment, I guess, it's stalled. So, it's hard to say which way it's going to go. And with politics, who knows, right? I think there's a lot of optimism with the new administration and the key personnel that we see sort of moving into place and/or moving out of place. I would say most people are very optimistic that that may go through.
EA: And Peter, if the Safe Banking Act is passed, how will that affect the cannabis industry and how will it affect the banks within the industry?
PS:Sure. Honestly, my view might be slightly contrarian. I don't necessarily think that any number of these measures, Safe Banking included, will have that profound of an impact. If you think about how we, meaning the banks, get into, or not, for that matter, into this space, we mainly follow guidelines. So, FinCEN guidelines are available. So, any bank today that wants to bank cannabis certainly can. And they've already made that decision, obviously. So, Safe Banking would just be another band-aid on top of the situation.
So really, unless it's something like federal deschedulization, I don't know that yet another band-aid move would necessarily move the dial. Now, obviously I say that without knowing what the final language would be. Because if it has something like, I don't know, credit cards, for example, if credit cards suddenly become available, that would be a sea change because I think a lot of banks don't jump in right now because of the overabundance of cash in the industry.
EA: Peter, you also spoke about deschedulization. That's an interesting term, especially for cannabis companies, and there is often discussions about whether or not cannabis can be deschedulized. What is your view of the next four years under the Biden administration? Do you see cannabis being deschedulized? And by that, I mean coming off Schedule I or even Schedule II.
PS:Yeah. Here, I guess, we really get nuanced. If it becomes rescheduled, so, to your point, it comes down one notch or two, that might actually be disastrous for the current industry as it exists. So, for example, it goes full medical. Then, really, it becomes a pharma kind of product. So, to be clear, we're talking about descheduling, right? Like, it's going to completely come off of sort of federal/illegal lists, if you will? For me to prognosticate that, that I'm not sure about. But, again, looking at sort of the key players that we already know, or we believe, Biden will have in place, yeah, a lot of optimism around serious movement of that in this administration.
Timeframe? That's hard to say. Politics has its own pace. I know that here in New York State, we've been talking to Norman Birenbaum's office as well as State Senator Sanders on the banking end. And they're very bullish here in New York about us being able to put some sort of program together and/or just putting a lot of legislation around it to make the industry more fluid.
EA:Right. And besides the Safe Banking Act, what other legislation is needed for cannabis to be like, say, alcohol or any other commercial enterprise?
PS:Yeah. Well, specifically on the banking end, honestly I think just more guidance. I don't necessarily think any legislation has to do... I don't think we have to go crazy and reinvent the wheel because, if you look around, the reality is that the industry is banked. Now, the question is how, and how many banks are involved, and how much?
And if there was simply just more and clear guidance from our primary regulators, FinCEN, OCC, if there was just simply more of that, I think you would see a big difference in banks being able and being willing to jump into this space. From my perspective, it really doesn't need to go as far as propose legislation and "let's create another act."
I think one of the things that's interesting is, if you look around, let's say hemp and/or CBD. So, hemp is legal, but you don't necessarily see the big banks jumping into this space. And why is that? Well, you've probably seen it's suffering death by agency. Now, it's trickling down to the various, FDA and DEA, and then everyone's got the proposed legislation.
EA: On your side, when you're dealing with a cannabis prospect, how is the client acceptance policies or the due diligence you go through before accepting a client different for a cannabis company, as opposed to any other commercial enterprise?
PS:That's a good question. It's not that much, actually. Really, I look at it, it's no different than any process, anyone coming in looking to open an account. We just simply do more. And what I mean by that is, well, in our case, we're doing background checks, we're running criminal checks. We are asking a lot more questions. We do get a lot more granular as far as what sort of transactions you might want to do. And certainly we drill down further in terms of the ownership, so actual beneficial ownership, of that business. So, much deeper than we would on a "regular account."
But aside from that, it's nothing crazy. It is just the normal corporate docs and IDs for the principles and stuff like that. Again, on the back end we are doing more. I'll put it this way: if it's a legit business with legit owners, no criminals or anything like that, it's going to be smooth sailing.
EA:Have you found in the last year or two that more and more banks are open to operating in this space? And by that, I'm not necessarily talking about lending, but just more operating in this space to allow companies to bank, therefore avoiding the danger of kind of operating day-to-day activities in cash?
PS:A little bit of both. Believe it or not, I've seen some banks drop out. And it's a little surprising, I guess, because you would think the pendulum was swinging the other way. So, yeah. On the one hand, obviously you see it, that there is a move in terms of acceptance overall, society, as companies. As recently as a few years ago, you couldn't go to a firm like EisnerAmper and get professional service, so I think the same thing with banking.
But oddly enough, you're seeing that certain banks that have jumped in in the early days are starting to jump back out. And I think that goes back to what I said earlier about guidance. The guidance that currently exists is not super clear, and what is there can be onerous. So, a bank might decide, "Okay, let's try it," and then realize, "Oh, my God. This is a lot of work," and "We can't charge for it," or "We can't charge enough for it." Or, it's just not worth it, or, hey, maybe they got fined.
So, I guess a little bit of both. I do see them more banks are having these discussions, I get inquiries sometimes, I've had other banks reach out to me. But at the same time, I also know on the ground that certain banks are actually jumping out of this space.
EA: Peter, you also touched briefly before on credit card processing. What do you see going on as far as the industry now with credit card processing? Is it moving in the right direction?
PS: It's not moving at all. Well, what's interesting is, it's actually a very simple reason, I guess. And Eric, you probably see this, that there's so many options out there, so many solutions, so to speak. But all of them are some form of workaround. Because at the end of the day, MasterCard and Visa has come out and they've said, "We don't want it. Don't put it on our rails."
And so anyone that is doing that, and let's be honest, you can walk into any number of dispensaries and see that they're taking credit cards, so it's one of those "world's worst kept secret" kind of thing. Anyone that is doing that in any location that you walk in that's offering a cashless ATM, a debit solution, credit solution, they're all violating their terms in some way, shape, or form. And they're violating it by employing some sort of a workaround.
Now, don't get me wrong. Most of them work, and most of them will work for perhaps a long period of time. At the end of the day, there is some form of lying going on. So, what do I see going on? I think you're seeing a lot of these solutions out there being employed and they work. At some point, they may get shut down. And you've probably seen, some time back there was a big lawsuit with Eaze where the guy's actually on charges for bank fraud, $100 million worth of bank fraud. So, yeah. I think that goes back to the same question in the beginning, which is until that gets more clarity on the federal level and the big networks decide, "Okay, here's how we can do it," anything that you seed out there is not sustainable.
EA:Great. Well, Peter, thank you for joining us this morning. It's been very interesting to listen to your thoughts on the industry. And thanks to all our listeners for listening to this episode of CannaCast, which is part of EisnerAmper's podcast series. Please visit eisneramper.com/cannabis for more information and podcasts. And please join us for our next CannaCast podcast where we'll discuss other budding issues.