California Credit Union Forms New Cannabis CUSO With Fintech & Trust Bank

A California credit union, a fintech and a trust bank are launching a new CUSO that will enable credit unions and community banks to offer banking services to cannabis companies without making the personnel and technology investments needed to meet stringent state and federal compliance requirements.

The CUSO, HigherGrowth LLC has been in development over the last two years by the $97.4 million North Bay Credit Union in Santa Rosa, Calif., which has been serving California cannabis companies since 2017, and its partners Austin Capital Trust Company in Henderson, Nev., and MRBD, a Silicon Valley fintech.

Austin’s platform provides for efficient access to financial services, digital onboarding and custody, while MRBD’s API-driven technology platform includes AML, KYC and FinCEN compliance modules; automated workflows; payments solutions and integrations with state regulators for ongoing monitoring of cannabis operators, according to HG. In addition to these technology platforms, the CUSO’s operations will include North Bay’s compliance staff of 18 full-time employees who will be responsible for ensuring state and federal compliance requirements are met on behalf of financial institutions.

“We’ve been doing cannabis banking since 2017 and developed quite a robust infrastructure of compliance with personnel and technology,” North Bay President/CEO Chris Call said. “We’ve got the capacity to really expand what we’re doing beyond our geographical footprint. And it’s just a matter of having the right vehicle to be able to offer those services to other institutions that are looking to bring on cannabis deposits. And that’s why we formed HigherGrowth to offer the infrastructure and the expertise that we’ve developed over the past four years.”

Earlier this year, North Bay became the exclusive and preferred banking partner for the California Cannabis Industry Association, representing 400 marijuana businesses and their 15,000 employees.

Carole McCormick, who has served as North Bay’s chief compliance officer and cannabis banker since 2018, is president of the new venture.

In 2017, about 100 credit unions and nearly 300 banks were offering banking services to marijuana-related businesses, according to FinCEN’s marijuana banking update quarterly report. Those numbers, based on suspicious activity reports filed with FinCEN, have jumped to 174 for credit unions and 510 for banks by the end of this year’s second quarter, the FinCEN report showed.

Only a small percentage of credit unions and banks serve cannabis companies, in part, because marijuana is still illegal under federal law. However, in most states, marijuana is legal for either medical or recreational use, and in some states, pot has been legalized for both medical and recreational use.

BDSA, a Colorado-based marijuana research firm, said cannabis sales reached $17.5 billion in 2020, up from $12.1 billion in 2019. BDSA forecast U.S. pot sales are expected to generate $41.3 billion in revenue by 2026, an annual growth rate of 15%. Illinois, which launched adult-use last year, saw the largest dollar gain, rising by $784 million. Several other markets saw major expansion, the top four being California (+$586 million), Florida (+$473 million), Colorado (+$451 million) and Oklahoma (+$400 million), according to BDSA.

Moreover, a 2020 Gallup poll showed that 68% of Americans favor the federal legalization of marijuana.

Call noted in states where marijuana is legal, the federal government has taken a hands-off approach, though it can draw greater scrutiny for the credit union’s operations from the NCUA.

“That’s why we’re forming the CUSO – to relieve other credit unions of that scrutiny because all that scrutiny would be directed to the CUSO,” Call said. “They [the NCUA] just want to know that the CUSO is profitable and is conducting business in a safe and sound manner, but they don’t have the same regulatory authority over the affairs of the CUSO as they do over credit unions.”

Despite the public’s acceptance of cannabis, the industry’s revenue growth and its need for banking services, McCormick pointed out credit unions and community banks have hesitated to adopt cannabis banking programs because the investment in a compliance infrastructure would require adding staff, equipment and specialized software.

“With HigherGrowth, that infrastructure can be outsourced to specialists while allowing the institutions to benefit from increased deposits and lending,” she said.

The HG platform will provide processing and enhanced due diligence for cannabis account requests, onboarding of accounts, transaction monitoring, armored car cash pick-up services and regulatory report filings. Financial institutions will be able to monitor their cannabis accounts with the HG platform and MRB operators will use the platform to manage all their financial transactions, from scheduling wire transfers to making online bill payments.

HG’s fees offer “cafeteria-type” options that would allow credit unions to choose the services they want.

“Institutions may want us to just do the [cannabis client] onboarding, which would be one fee. And then others may want us to manage the whole account relationship, which would be another fee,” Call said. “But we’re pricing it to allow credit unions to markup to whatever fee is charged and pass it through to the individual cannabis operator. So, there will always be a margin that they will be able to earn as their spread.”

The new CUSO also said it expects to expand its services to include commercial loans, payroll services, 401(k)s and insurance products.

HG envisions setting up an exchange or marketplace that would enable cannabis operators to post loan requests that would attract multiple lenders to bid for those loans.

More information about the HG platform is available on its website.