Margin Compression and Regulatory Challenges and Competition, Oh My! 

Just like Dorothy’s adventures as she followed the yellow brick road to seek help from the great and powerful Oz, bankers serving the cannabis industry are confronted by a myriad of challenges as market conditions change and new obstacles appear before them. Here are a few of the things we’re working on with our banking clients to help them meet the changing needs of their customers while gaining a competitive advantage in the marketplace. 

• Managing margin compression. Over the past few years, many cannabis markets faced serious margin compression, creating a challenging operating environment for licensed cannabis businesses. Fortunately, we seem to have reached a point where the market is leveling out, allowing operators to have more dependable revenue to manage their businesses and a better chance for long-term success.
• Improving operational efficiencies. Just as operators have felt the margin squeeze, bankers have, and continue to face a very challenging deposit market. Competition for high-value deposits, like those offered by the cannabis industry, is requiring bankers to be thoughtful about their service charge structure. There’s also increased pressure on banks and credit unions to control operational expenses and ensure that the time and resources they are spending on compliance is yielding the biggest bang for their buck. Leveraging technology to automate and improve compliance processes can be an accelerant to achieving these goals.
• Adapting to federal policy changes. With the possible rescheduling of cannabis from a Schedule I to Schedule III controlled substance, we are hopeful for a fix to the 280E tax code. This would have a material impact on profitability for operators, and, as they become more profitable, they will have more deposit balances and become better prospects for lending.

• Shifting to earning assets. With commercial real estate, retail, and mortgage markets all likely to face continued challenges in the year ahead, bankers may be thinking about where their next tranche of earning assets will come from. Cash flow, profitability, and access to credit were stated as the top concerns for licensed operators heading into 2024, according to our survey of licensed operators. The margin stabilization we're seeing in markets with some level of maturity compounded with the prospect of a 280E correction should make these borrowers much more attractive to financial institutions. With technology and strong compliance practices in place, bankers can leverage data to help mitigate some of the real or perceived credit risk posed by cannabis operators, and, best of all, there's still an opportunity to get a premium over similarly risked credit.

Free Webinar: Prospects for Federal Cannabis Reform in 2024 

Registration is now open for a webinar on February 13, 2024, at 3:00 pm ET featuring a discussion with Natalie Fertig, federal cannabis policy reporter at Politico, and Jeremy Berke, founder and editor-in-chief of Cultivated Media, moderated by Shield’s president and CEO Tony Repanich, about the prospects for federal cannabis reform in the 2024 election year. Tony will then discuss the opportunity for banks to provide critical access to credit financing and lending to meet growing demand, along with other key insights from Shield’s recent survey of licensed cannabis operators.

The free webinar is part of a new series launched by Shield and the American Cannabis Bankers Association (ACBA) called The Cannabis Bankers’ Quarterly. Designed for bankers already serving this industry and those who are “canna-curious,” this quarterly webinar series will cover topics of critical importance to bankers as they face increased competition in a rapidly changing industry.

Shield's Strong Momentum 

Since its inception, Shield has partnered with more than 65 financial institutions and monitored 8.7 million transactions including $37.1 billion in deposit volume. For the 12-month period ending December 31, 2023, Shield’s financial institution customers have earned $34.1 million in fee income. As of December 31, 2023, these financial institutions have $977 million in deposit balances and $286.6 million in loans outstanding from over 6,346 cannabis-related businesses representing more than 17,442 active cannabis licenses.

What We're Writing

Tony Repanich contributed an article to BankingDive, It’s Time to Normalize Cannabis Payments, calling on the industry to support debit and credit card payment options for licensed cannabis operators. We’re so passionate about this issue that we created an Open Letter calling on the major debit and credit card brands to reverse their policies of prohibiting financial institutions from offering payment services connected to their networks to licensed cannabis merchants. 

What We're Reading 

• Politico: Federal scientists conclude there is credible evidence for certain medical uses of marijuana. Cannabis reporter Natalie Fertig writes about the Department of Health and Human Services (HHS) recommendation that cannabis be rescheduled as a Schedule III controlled substance. Fertig notes that “this and the other findings of the review are a major departure in how the federal government views cannabis,” adding “The Drug Enforcement Administration will have the final say in any changes to marijuana’s classification under federal law, with a decision expected in the coming months.”
• Cultivated Media. Cannabis taxes could generate $8.5 billion annually if the US legalizes. The nonprofit Tax Foundation released a report analyzing what has and hasn’t worked when it comes to state cannabis tax policies. Explaining why this matters, reporter Jeremy Berke writes, “Well designed tax policies generate revenue with far less social impact than poorly designed policies. That’s especially true when it comes to cannabis, where there’s no real academic consensus around proper taxation, the report says. But poorly designed tax policies could end up undercutting the legal market and forcing consumers and sellers back to the cheaper illicit market, if or when interstate commerce is allowed.”

• Gothamist. NY to issue nearly 1,500 new weed business licenses in coming weeks. New York cannabis officials will award up to 1,445 new business licenses in the coming weeks, including at least 500 for dispensaries. The state has already given out conditional licenses to more than 200 farmers and more than 400 dispensary owners. Research firm BDSA recently put its forecast for the New York legal adult-use market at $1.3 billion in sales for 2024, noting that this estimate downscales the “true potential for legal sales in the market.”

We encourage you to sign up to receive Cultivated Daily, a 5-minute daily newsletter for cannabis industry and policy professionals.

Shield on the Road 

We have a busy year planned and hope to see you at the various conferences and events at which we’ll be attending and speaking. Mark your calendars to meet with us as these upcoming events: 

• Acquired or Be Acquired, January 28 - 30, 2024 Phoenix, AZ
   On Monday, January 29 at 10:30 am, Shield’s Tony Repanich will join William Hufnagel, president and CEO of Dart Bank, for a discussion about how Dart Bank is leveraging its experience and expertise in high-risk banking to execute a multi-state footprint, payment sponsorship and BaaS strategy.
• Fintech Meetup, March 3 - 6, 2024, Las Vegas, NV

• CUNA Governmental Affairs Conference, March 3 - 7, 2024, Washington, D.C.