The cannabis industry is alight with rescheduling ruminations. Schedule III status could free the plant up for clinical trials and research. Once more insight into how weed works is gleaned, wider patient access could follow. While rescheduling may benefit patients, it won’t solve all the problems facing industry operators—specifically banking.
With rescheduling, companies will no longer have to adhere to 26 U.S. Code § 280E, commonly referred to as 280E. The section of Internal Revenue Code excludes businesses associated with Schedule I or II substances from deducting ordinary business expenses like payroll. Being free from 280E will open doors for tax write-offs and other financial moves that could save cannabis companies lots of money–but finance woes will likely remain.
Cannabis companies currently bank in various ways, but the threat of account shutdowns looms. Few brands and retail shops have reliable access to checking accounts and payment processing, let alone traditional lending opportunities. Lawmakers have attempted to address the ongoing issue with bills like the SAFE and SAFER Banking Acts, but traction has yet to manifest.
Rescheduling will not make banking cannabis a sure bet for all large U.S. financial institutions. What it will do is chip away at fears that stop big banks from working with weed. First Citizens Bank, the 19th largest bank in the U.S., recently became the biggest financial institution to add cannabis and hemp services to its public offerings. This could be the start of a trend.
Josh Radbod, co-founder and CEO of the yearly cannabis banking summit, the PBC Conference, expanded on the nuanced reasons rescheduling will and won’t make banking easier for cannabis operators.
“Deciding whether to onboard a cannabis operator or not is all about the risk appetite of each bank or credit union. So, it’s kind of tricky to predict how rescheduling would affect their choices across the whole industry,” Radbod disclosed. “Overall, we might figure more banks and credit unions would be open to the idea, but even if cannabis gets the official ‘green’ light from the feds, it’s still going to be a risky game, and not every bank or credit union will want in on the action.”
There are some banks with a heavy risk appetite serving the industry right now, the volume of which varies depending on who’s reporting.
Financial institutions banking cannabis
The Department of Treasury Financial Crimes Enforcement Network (FinCEN) has reported how many banks have served cannabis customers since 2014. FinCEN started tracking this number with the first adult-use legalization laws and issuance of the Cole Memo, which called the feds off spending government funds pursuing state-compliant cannabis operations.
Last year’s report says that 812 banks are currently serving cannabis customers. That is roughly 16 percent of banks in the U.S. Insiders often claim this number is far higher than the actual banking landscape.
Peter Su has worked at financial institutions large and small since the early aughts and serves as a board member of the Asian Cannabis Roundtable. He spoke with GreenState about the state of cannabis banking in the U.S. He agrees that the FinCEN number is likely inflated.
“Most insiders think that that number is way too high, and there’s a very simple reason for that. It’s how they track it,” Su explained. “They track something called SARs, suspicious activity reports. So keep in mind, the perspective is that financial institutions will always err on the side of caution. If there’s any question as to whether or not they should or should not file a SAR, they will almost always just file it.”
A Suspicious Activity Report (SAR) is a document filed by banks, credit unions, and other financial institutions whenever there is a suspicion of money laundering or fraud. SARs signal anything that seems out of the ordinary in hopes of stopping any illegal activity or harm to the public before it happens. Cannabis companies operating in compliance with state law often get dinged by these reports.
Since an institution will file excessive SARs rather than risk missing something, using these reports as a method to map banks serving weed has the potential to lead to inflated numbers. Luckily, PBC publishes a yearly Cannabis Banking Directory alongside the conference. The directory may not feature every institution willing to bank weed, but it does highlight the ones that are out and proud.
Their count has just over 70 ready and willing banks available to cannabis operators–a slight difference from the government tally. According to Radbod, the number rises year-over-year, with 20 percent growth from 2022 to 2023. Moves like rescheduling donate to this expansion.
Rescheduling and cannabis banking
Cannabis becoming Schedule III won’t open the floodgates of banking services, but it will widen the slow-dripping sieve of normalization. Federal acknowledgment that cannabis has medical potential is a proclamation to financial institutions that only seek to avoid risk.
Banks and credit unions that already had faint interest or partial board approval may make the move. When they do, the issues of how to bank cannabis, learning who the big players are, and understanding the industry will be at the forefront. This requires research and training, so PBC recently launched the Cannabis Banking Certificate.
“We heard from banks and credit unions at the PBC Conference and through the PBC community that they could not take on new clients because they did not have enough trained staff for cannabis banking. So, we created this Certification Program to fix that. It’s all about helping bankers and compliance professionals get the skills and knowledge they need so they can keep up with the demand from the growing cannabis industry,” Radbod said.
PBC hopes that the certification will expand the weed banking workforce, grow current programs, and encourage financial institutions to support the nascent cannabis industry. However, even with rescheduling, growth, and even passage of the SAFER Banking Act, simple pleasures like using a debit or credit card at the dispensary are still far off.
Expanding banking services helps operators and consumers
Merchant systems and terminals acting as ATMs are often implemented in medical and adult-use stores so customers can pay with debit cards, but these technically constitute fraud. In one case, the storefront is acting as a different kind of merchant, in another, it is running credit transactions but marking them as ATM withdrawals. Both of these systems often incur a fee from the customer similarly priced to ATM withdrawal fees.
The gray area systems help retail establishments get by, as having access to credit processing has been shown to increase profits. But these “solutions” pose a risk, creating a dilemma for store owners hoping to maximize profit in a volatile industry. Many retailers are struggling to stay afloat from the east to west coast, access to banking services would provide a floatation device.
Public messaging from major credit card companies like Visa and Mastercard has consistently stated that they will only open accounts to weed companies at the advent of federal marijuana legalization. However, rescheduling could open credit card transactions to pharmacies and dispensaries operating under federal oversight.
People prescribed steroids and other pharmaceuticals easily swipe a credit card at the pharmacy. The same would be theoretically true of cannabis products produced by federally regulated companies if the DEA rescheduled. As of now, the framework of such transactions is unclear.
The hum of rescheduling isn’t all excitement. Many are aware that moving weed to Schedule III is a double-edged sword. However, those seeking ease in accessing banking services, lending, and running credit cards will have to continue waiting even after a DEA scheduling announcement. While rescheduling may carve out space for research and pharmaceutical product development, it does little for the existing cannabis industry–banking and all.
