The Financial Frontier: Addressing the Cannabis Industry’s Banking Challenge

A detailed review of the cannabis banking landscape for investors to assess the present realities and future opportunities.

Cannabis Industry’s Banking Challenge

The global cannabis industry offers investors a thriving market to consider due to its growth in recent years. However, the sector continues to grapple with a significant challenge in accessing banking and payment services from financial institutions. Could the SAFE Banking Act and other government initiatives transform the industry in 2024? We discuss the opportunities in this article. 

The Banking Barrier: Cannabis Industry’s Financial Dilemma

The American marijuana industry is the largest and fastest-growing cannabis sector in the world. However, this does not mean that it is devoid of challenges. Currently, the industry’s most significant challenge is regulation. 

In America, the federal illegality of cannabis makes the sector’s regulatory landscape unclear to market participants, including businesses and investors. Though states like Colorado, Arizona, Massachusetts, California, and Washington have friendlier laws permitting the legal cultivation and consumption of cannabis and marijuana-infused products, these laws are only effective at the state level. 

In other words, trading legal cannabis is tricky because most banks refrain from working with marijuana companies. These businesses face difficulties getting payment providers for transactions and have to deal with barriers to securing loans and other financial services. 

These challenges are not only peculiar to the U.S. market, as cannabis-focused companies in Europe and other parts of the world also have stringent financial restrictions from global payment providers and e-commerce platforms like Shopify and Stripe. 

These restrictions do more damage to the already struggling cannabis industry, as its growth is hampered, and many companies struggle to stay afloat. Small and medium-scale marijuana enterprises often bear the brunt of these financial hurdles, forcing many of them out of business and leaving investors with marijuana stocks with little to no value. 

The SAFE Banking Act: A Beacon of Hope 

The Secure and Fair Enforcement (SAFE) Banking Act offers the U.S. cannabis industry players a beacon of hope despite the challenging financial landscape limiting its growth. The new bill aims to create a safe environment for banks and other financial institutions to service state-regulated marijuana companies. 

With the Banking Act, cannabis companies in supporting states can access payment services, loans, and other financial opportunities without the institutions existing in fear of penalties or marijuana businesses paying outrageous fees and interests. 

Though the SAFE Banking Act was first introduced in 2017, a new version of the bill was introduced in 2023. The new SAFER Banking Act comes after months of negotiation among senators with diverging views on the provisions of the original SAFE Banking Act. 

However, as of the time of writing, the SAFER Banking Act is still pending in the Senate because its Committee on Banking, Housing, and Urban Affairs recently held a hearing on the bill. With the committee yet to reach a uniform agreement on the bill, it’s uncertain when the President will assent to it and make it a law. 

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Market analysts anticipate the Senate’s approval of the SAFER Banking Act in 2024, which will see marijuana-focused companies being treated equally by financial service providers after making financial rules that treat the industry like others. 

The Senate’s Stance: Progress and Hurdles

Despite 2023 being challenging for the global marijuana industry, one of the beacons of hope for businesses and investors is the proponent of marijuana reforms that may transform the industry. The political and social momentum, especially the recent Secure And Fair Enforcement Regulation (SAFER) Banking Act, provides market players with a decent regulatory progress. 

The SAFER Banking Act is a notable bipartisan bill by the Senate Banking Committee, which is an amendment of the initial SAFE Banking Act that has more considerations for the opposition. 

Like the SAFE Banking Act, the amended bill aims to provide a clear and regulated environment for licensed cannabis-focused businesses to easily access financial services, including payment solutions, bank accounts, credit cards, and loans from banks and other financial institutions. 

The new act has progressed through the Senate reading stage, and a floor vote is now pending. The previous SAFE Banking Act passed the US House of Representatives on seven previous occasions since 2019, so the newer bill’s senate advancement is causing optimistic feelings among cannabis businesses, banks, lenders, credit unions, and other related companies. 

Before now, most of these businesses have chosen not to serve the marijuana industries because of the risk of being prosecuted due to federal restrictions on cannabis. However, the advancement of the SAFER Banking Act will be a significant change to friendlier financial regulations that will make the marijuana industry bigger.

The Impact on Small and Minority-Owned Cannabis Businesses 

The entire marijuana industry is plagued by regulatory challenges, especially with regard to banking and access to financial services. However, small and minority-owned cannabis businesses feel the heat more than large-scale enterprises. 

Small-scale, independent cannabis-focused industries usually struggle to survive the harsh economic realities and other challenges facing the cannabis industry. This is because they lack adequate funding to weather the storm and can hardly get relief through loans or other kinds of investments. 

For instance, many banks, lenders, and insurers have decided not to service marijuana-focused businesses due to the fear of prosecution according to the US federal marijuana laws. 

Such businesses have no choice but to opt for solutions like consolidations through mergers and acquisitions (M&As), selling distressed assets, leveraging rescue financing options, or ultimately going out of business.

Conversely, the successful passage of the SAFER Banking Act will cause a major turnaround for such businesses and the entire cannabis industry. Banks, credit unions, and other financial institutions will get a clear regulatory framework that will resolve the tension between federal and state laws around banking, lending, and insuring cannabis businesses. 

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However, it’s important to note that the SAFER Banking Act will have strict guidelines for due diligence and continuous monitoring of suspicious activities to ensure compliance and the best results for all parties.

The Future of Cannabis Financing: Predictions and Preparations

As the name implies, the SAFER Banking Act provides a “safe” regulatory framework for cannabis businesses and financial institutions to coexist and work together. Currently, the strict federal regulations around the cultivation and consumption of cannabis or marijuana-infused products create a challenging hurdle for cannabis-focused businesses. 

On the one hand, these businesses can’t access payment services or get financial support through loans and other investments. However, the SAFER Banking Act is aimed at changing the status quo by allowing state-licensed marijuana companies to collaborate with financial service providers to support and grow their businesses.

The scope of the SAFER Banking Act cuts across payment service providers, insurers, mortgage lenders, banks, and other notable financial institutions that currently choose not to offer services to high-risk marijuana companies.  

But with the bill’s previous success at the House of Representatives and its impressive progress in the Senate, the market is shaping up for a successful transition into law. As such, investors are optimistic that stock pots will increase in value during the first few months of the new year.

On the other hand, marijuana-focused businesses are consolidating efforts via M&As and alternative measures to stay afloat ahead of the potential market boom.

 However, it’s important to note that while there are potential changes in banking regulation, there are no guarantees that the Senate will approve the SAFER Banking Act. Only time will tell what the future holds for the American marijuana industry. 

Conclusion

There’s currently a disconnect between the U.S. federal and state laws with respect to the legalization of marijuana production and usage for recreational and medicinal purposes. Due to the unclear regulatory framework, many banks and financial service providers refrain from providing services to cannabis-focused companies.  

However, new policies like the SAFER Banking Act could transform the industry and pave the way for marijuana businesses in the United States to access secure and fair banking, payment, financing, and insurance services.  

Upon its approval by the Senate, more financial institutions will open their doors to marijuana-focused businesses and help expand the market. However, marijuana will remain illegal under the SAFER Banking Act, as the law would only resolve the tension between federal and state cannabis banking laws. 

Tobi Opeyemi - Financial Writer

Tobi Opeyemi - Financial Writer

Tobi, a journalist and crypto writer since 2017, is renowned for his educational content in the digital currency realm. His journey includes a significant tenure with Stockbossup, an investment platform committed to enlightening the black community on financial matters. Before this, Tobi honed his skills as a copywriter at Turboxbt, a platform specializing in cryptocurrency trading. Notably, Tobi's insights are featured on Investopedia, where he contributes articles on a range of topics. He is also celebrated as one of the top web3 creators on LinkedIn, known for content that consistently drives engagement and sparks conversations in the industry. With a background in Pharmacy, he brings a unique perspective to his writing, especially in the Cannabis sector.

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