Well, what a difference a year makes. Last year at this time Strategic Planning sessions were all about increasing deposits. In particular, how to find deposits without paying premium rates and increasing the cost of funds.
Maybe at that time the discussion of cannabis banking came up. There's a bunch of deposits to be had there, right?
Fast forward to 2020 and nothing follows the rules anymore. Stimulus checks, PPP funding, and "flight to safety" deposits are putting institutions in the position of having excess liquidity. While that might feel good for a moment, the reality sets in soon enough that if there is nowhere to lend the funds out to, the Net Interest Income is going to take a digger.
Does that mean you scrap the plans for a cannabis banking program - and the fee income that goes with it? Maybe, maybe not.
Any institution who survived the 2008 financial crisis knows that excess liquidity does not last. The markets may change post election and funds may be returned to riskier investments. Stimulus and PPP funds will run off. The "return to normal" may stall and there could be an increase in delinquency, around lines of business that have struggled, or those who are unemployed.
I'm not a CFO, nor have I played one on TV, but I do know you have a tough job maintaining the right balance between not enough, and too much liquidity. I also suspect that too much is probably the better problem to have. Around the topic of liquidity, here are some things to think about with regard to bringing in deposits from cannabis banking.
- Bringing in deposits from cannabis businesses, who are generally looking for transaction accounts, is going to be less expensive than buying deposits from your market with high CD rates.
- Relationships with cannabis businesses will net the institution generous fee income.
- Cannabis businesses in many areas are looking to grow and expand, however they either have to exhaust their own capital or look for investors. If your institution has the risk tolerance, you could lend the funds back to that community.
- While the deposits from cannabis businesses can be substantial, it depends on your individual market, and the sales within it. And, anecdotally, about 20-50% of those deposits stay on the books at the institution. The rest are used for expenses of running the business.
- If this number still seems high to you, there are niche sweep solutions that enable you to move excess liquidity off your balance sheet while offering money market rates to attract new cannabis businesses.
Ultimate control for the size of a cannabis program lies with the institution. The program can be in place with the size and number of cannabis businesses that is determined by need, and measured with a robust risk assessment. However, if the time comes where additional deposits are needed, at that point it's easier to add another few accounts rather than trying to ramp up a new program when it's needed.
If you're interested in understanding what the opportunity would look like, our financial analysts can work with your institution to determine how aggressive your program might be and what opportunities you can explore as part of a cannabis banking program. Schedule a Financial Modeling Workshop today.
Green Check Verified has a proven track record of working with financial institutions across the country to launch and scale compliant cannabis banking programs. We focus on regulatory compliance and operational efficiency so that our clients are able to grow low-cost deposits, increase fee income and provide necessary services for small businesses in their community.