America's legal cannabis industry is on fire. Last year it hit the $6.6 billion mark, and by 2025 it should roughly quadruple to $24.1 billion, according to cannabis research company New Frontier Data.

All that growth is fueling demand for things such as real estate, electricity and even people with experience scaling up businesses. But it's also fueling demand for more payment options.

Stuck in a legal purgatory that hinders access to everything from checking accounts to credit cards, legal cannabis merchants typically run all-cash businesses. But some credit unions are stepping into that void by embracing recent innovations in cannabis payments, as well as the new members that industry is bringing their way.

Leaders at two of those credit unions described that new payments landscape, the risks they face and what credit unions should know if they want to start serving the booming and controversial cannabis industry.

Bypassing the Buck

Most states have legalized marijuana in some form or fashion, but the federal government still deems it illegal and federal laws largely prohibit weed-related financial transactions.

In turn, it's hard to buy and sell legal cannabis when major card networks largely won't allow their credit cards to be used for it, Carmella Houston, vice president of business services at Salal Credit Union in Seattle, said. The constraint has forced people to find other creative solutions, she said.

“What some people have come up with is like a kiosk-type system where they will use their card to purchase a voucher,” she explained. Many cannabis retailers have also installed ATMs in their lobbies so customers can get cash quickly.

Other options turn to the ACH network. The Colorado-based CanPay, for example, operates an app that customers can use to buy cannabis via a checking account. “It's run through the ACH rails as opposed to the Visa/Mastercard rails,” Houston explained.

There's also bitcoin. “Basically, cards are used to purchase bitcoin — cryptocurrency,” Houston noted. Settlement takes a few days, so merchants have to be prepared. “It's not the same as getting cash, because they're not going to receive the funds immediately,” she said.

In the Weeds

Despite the payments innovations occurring on the customer side of the business, cannabis merchants still need a place to put their money. That's where Salal and other credit unions in “legal” states come in — they vet the applications, open the accounts and then dial up the supervision and compliance.

Salal, which has $507 million in assets and about 36,000 members, has more than 300 accounts with legal cannabis operators; most are in Washington, but the credit union is expanding into Oregon, Houston said.

A lot hinges on careful adherence to the compliance work, because federal regulators still have the power to shut everything down, she reminded.

“They could threaten to pull their insurance from our credit union. That would probably be the worst-case scenario. Well, technically the worst-case scenario is that we could all be put in jail,” she said.

For Sundie Seefried, CEO of Partner Colorado Credit Union and Safe Harbor Private Banking, which is a new CUSO that provides a compliant banking program for cannabis businesses, the greatest hazard is compliance with the Bank Secrecy Act as it pertains to money laundering.

“How does one account for all transactions when only a small portion of the industry is banked. Cash transactions are difficult to trace and as we know, it's a big cash industry at this point,” she explained.

“Once banked, it will be easier to find money-laundering issues between financial institutions. Until then, it's the greatest risk for those wishing to serve the industry.”

Partner Colorado Credit Union, headquartered in Arvada, Colo., has $348 million in assets and about 32,000 members.

The Court of Public Opinion

Both Seefried and Houston said their credit unions haven't received much backlash or criticism for getting into the cannabis business.

“I've had only one member complaint, and that member closed his account. However, I've had several community members open an account because they appreciate what we've done to keep their community safe and want to affiliate with a credit union watching out for their community,” Seefried said.

“We had less than a handful of existing members that voiced their disgruntledness that we were serving the industry,” Houston added. “But we have by far exceeded that in multiples from people who have thanked us for serving the industry, and people who have actually opened accounts with us because they do think we are being innovative and forward-thinking in helping to serve the industry.”

Seefried said the financial world has supplied most of the criticism she hears.

“I think most of that stems from the potential reputation risk for the industry. Somebody has to bank this unbanked industry for the safety of our communities, and that is what keeps our team on task, regardless of the critics,” she said.

The response from regulators has sometimes been mixed, but taking more time to inform them has helped, Houston said.

“We educate them up-front as opposed to waiting for them to just come in and criticize,” she explained. “We told our state regulators that we were serving the industry, so they were aware, but I think the federal regulators maybe were not as aware. So they were a little surprised and did not view it favorably. But we've since invited them to come back — I think we've been examined six times in the last three years. The federal regulators, now, when they come in, they just observe. They don't make comment one way or the other.”

Getting it Right

Seefried and Houston said six things can help credit unions serve the cannabis industry successfully.

1. Staff up. “Hiring talent is the first big expense to consider,” Seefried said. “A good place to start is within the MSB arena and then add cannabis knowledge on top of that. It will be very difficult to find experienced cannabis bankers to hire.”

2. Know your customer. “One cannot bank what one does not understand,” Seefried cautioned. “Getting industry knowledge must be at the top of the list prior to starting to serve the industry.” That means going onsite to learn the business, studying the tax and accounting implications, knowing state regulations and keeping up with the political environment, she said.

3. Become a Bank Secrecy Act ninja. “The normal BSA certifications don't encompass enough training to monitor this market, as the black market exists on an international level,” Seefried noted. “It will be necessary to engage high-level consultants that are willing to walk down this path with you, review your portfolio, and work on issues that very well may be in front of the DEA and other federal agencies. It is very important to get the right information to help them do their jobs. I always say, it is not about if you will find criminal activity, it is when you will find it, so awareness must always be optimal and you cannot fear finding such. That will prove your program in the end.”

4. Think about armored truck service. Dispensaries handle a lot of cash and credit unions aren't strangers to armored trucks, but it may take time to find a company that will make the pickups. “It was very difficult, initially, to find an armored car service that was willing to work with us in this industry,” she said.

5. Be choosy. “For every 10 inquiries we get, we open one account. And we're pretty conservative — we want people to have good credit scores, no outstanding state or federal tax liens; we want them to have some financial wherewithal, you know, a strong business plan,” Houston said. Applicants also have to have at least two years of relevant experience, and the credit union does site inspections of every account it opens, she noted.

6. Prepare for change. Serving the cannabis industry requires stamina and curiosity, Seefried said. “The compliance demands in accordance to the FinCen guidelines/BSA regulations are extensive and untested yet,” she said. “Five years down the road, it will be far more tested, standards more precise and much more experience on which to draw for future programs. Right now, it's all in a test mode.”