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May 24, 2022   /   K. Lee Graham
  • Varying federal and state rules factor into whether or not a business is a ‘legitimate’ cannabis or hemp business. These laws prompted banks to create industry-tailored programs which account for the evolving legal landscape.

  • Both cannabis and hemp business owners benefit from understanding the types of programs available to them. Typically, a business’ industry classification determines the kind of financial services available to them.

  • Full transparency between a hemp or cannabis business and their bank ensures long-term, safe and secure banking relationships that reduce the potential of accounts being shut down and disrupting operations.

Though they share common roots, hemp businesses and cannabis businesses are two very different industries with unique needs when it comes to financial services. Many of these differences stem from the different ways each industry is regulated, which directly affects the way banks provide services to each industry.

Hemp has been legal to some degree across the nation since the 2018 Farm Bill. When banks use the term ‘hemp’, they refer to any product or by-product of the marijuana plant that tests for less than 0.03% Delta 9 THC. Cannabis refers to any product with greater than 0.03% Delta 9 THC. Our programs also follow these distinctions when categorizing a business as eligible for either our hemp or cannabis banking programs.  Businesses dealing with both products will always be classified as a cannabis-related business.

2 Separate Programs to Address the Unique Needs of These Industries

Whereas hemp regulations are well established in many states, cannabis state laws are rapidly changing throughout the country. Additionally, there’s been a continued push for change at the federal level which would revolutionize the banking options available to cannabis business owners.

Until then, a few key differences remain in the ways that banks tailor their financial services for hemp and cannabis. As a hemp or cannabis business owner, expect to see some of the following distinguishing characteristics between hemp banking and cannabis banking programs.

Product Due Diligence is More Rigid for Hemp Businesses During Onboarding

Both onboarding processes for hemp businesses and cannabis businesses should be an extensive process, so be prepared. Thorough onboarding protects both the bank and the business, reducing the risks that bank accounts are flagged for any unknown activity that could freeze or disrupt operations.

However, the hemp ‘product’ due diligence process is a bit more complicated from a banking perspective because financial institutions need to do a bit more investigating. Why is this the case if hemp is federally ‘legal’ and cannabis is not?

The hemp industry encompasses a wide range of both commercial and consumer products (hundreds, if not thousands of different products). This range introduces varying levels of risk depending on the product. A business may grow industrial fibers for manufacturing purposes, or it could sell consumable gummies with less than 0.3% Delta 9 THC. These are two very different business types with unique risks, however, they both fall under the definition of ‘hemp’ for banking services. The onboarding process and ongoing checkpoints for hemp businesses must include enough questions and research for a banker to gain a deep understanding of all the products the business produces, as well as consideration for any potential product expansions in the future.

Compare this process to cannabis banking onboarding. While it is not legal in all states, bankers should know exactly what they’re dealing with when banking cannabis businesses.

‘Cannabis’ solely refers to consumable goods with over 0.3% Delta 9 THC. The product is straightforward and there isn’t the same range of variability in business types as the hemp industry. When a cannabis business is onboarding with a bank, the bank knows for certain that the business is selling or is involved in facilitating the sale to some extent of consumable products with psycho-active properties.  The actual onboarding process for cannabis-related businesses may be slightly more extensive, as it is equipped with additional rules that must be followed to account for the illegal nature of the product at the federal level.  However, the product due diligence piece isn’t the main concern.

Your bank needs to know conclusively all that your business does, sells, and/or grows in order to deliver the most secure and compliant banking options. With cannabis businesses, bankers can arrive at that conclusion with a bit more ease.

Cannabis Banking Programs May Offer a Tiered Service Option

One size doesn’t always fit all. Even within a single industry, different types of businesses need different levels of compliance measures. Whereas hemp-related businesses can all be serviced similarly because of hemp’s federal legal acceptance, the cannabis industry opens the opportunity for further tailored services.

Both the hemp and cannabis industries include ancillary partners who work in the industry without growing or selling products. Businesses like law practices, marketing firms, logistics companies, etc. still fall into the hemp or cannabis industry categories, whether they are specialized for the industry or have just one or two hemp or cannabis-related clients.

Taking these differences into account for hemp bankers is not as critical as it is for cannabis businesses. Hemp is federally legal, so long as ‘legitimate’ hemp business guidelines are followed, the banking risks are not as significant as they are for cannabis. The post-onboarding requirements and fees for any hemp-related business will most likely be similar across the board, regardless of business activities.

Cannabis businesses, on the other hand, must be categorized based on the level of association they have with the actual plant itself. The plant is still illegal in some places, but non-plant touching business activities, like legal counsel to cannabis businesses, may be legal. Less risk is associated with those businesses, and therefore, their banking services are tailored differently with fewer compliance requirements, fees, and oversight.

For example, let’s examine the Cannabis Banking service tiers based on business type at West Town Bank & Trust:

*Note, Professional Service Firms Could Be Classified As “Tier 2”

Simply put, there are more requirements for those business types that touch the cannabis plant itself. Therefore, these businesses may incur higher fees associated with additional compliance costs for the bank. In our experience, this tiered structure allows businesses to choose more tailored solutions where they are only charged for the services they truly need.

Hemp-Related Businesses Typically Have Access to More Banking Services

As it currently stands, regulators still have the ability to penalize financial institutions simply for serving the cannabis industry, despite the controls they have in place to ensure compliance.  That won’t change until the SAFE Banking Act is passed.  With that being the case, the products and services cannabis businesses can access are typically more limited. Specifically, business owners should expect differences in how cash deposits are monitored, what payment processing is available, and the level of ongoing agency reporting that is required.

Main Differences Between Cannabis and Hemp Banking Relationships

For example, major card providers do not currently allow payments for cannabis-related business activity, whereas hemp-related payments are more widely accepted via card. However, cannabis businesses are permitted to facilitate other forms of electronic payment transactions, like ACH.  The card processing limitations could change in the future, but for now, hemp businesses have a wider range of options for payment processing.

It should be said that requirements for banking activities may not be so different for hemp and cannabis businesses as time goes on. These differences are heavily dictated by current regulations (or lack thereof) for cannabis businesses. If cannabis is decriminalized at a federal level, requirements for cannabis businesses could result in looking much more like those for hemp businesses.

Hemp and Cannabis Banking Services Have Different Geographic Limitations

Cannabis is federally illegal, but has been fully legalized in 18 States, and decriminalized or legalized in some limited form in 32 states. Compare that to hemp. Federally legalized in 2018, legitimate hemp operators can bank in any state without incurring the same level of risk that cannabis does. Additionally, some states have also approved hemp businesses to receive financing and special licenses under the USDA’s programs.

Hemp banking services are available across the US. Cannabis banking must be implemented on a state-by-state basis in order to build special infrastructures for tailored services, like setting up new locations to accept cash deposits, which typically involves some legal and compliance work.

As the industry grows, state legislation evolves, and the development of more businesses creates a need for additional services, West Town Bank & Trust will expand its cannabis program to more states. Until then, our mission as a cannabis-friendly bank is to provide safe banking solutions to business owners in as many places as possible.

Interested in hemp banking or cannabis banking services in your state? Get in touch with one of our bankers by completing the form below:

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Choosing a bank for your business, especially if it’s hemp or cannabis-related, should be about finding the financial institution that will be a true partner in your field. We created our hemp and cannabis banking programs because we believe business owners in both fields should have access to convenient, safe, and secure services that support their growth. That’s why we streamlined the onboarding process with our partner, RiskScout, and why we’ve brought on industry experts to be our in-house voices for business owners who bank with us.

Our goal is for every client to receive a white-glove customer experience from onboarding, onward. Our banking programs were built to deliver just that.

It shouldn’t be unnecessarily burdensome for hemp or cannabis business owners to open and keep their bank accounts. As you select your banking partner, we hope you find a partner that not only knows the differences between the two industries but tailors the services they offer to be exactly what you need.

About West Town Bank & Trust | Established in 1922, West Town Bank & Trust provides tailored financial solutions to emerging and underserved industries. The Bank was one of the first to provide a full suite of commercial banking services to hemp-related businesses when it launched its dedicated hemp program in 2019. West Town Bank & Trust’s new cannabis banking program ushers in the next chapter of accessibility to financial services for stakeholders in the cannabis industry.

The cannabis banking team is comprised of seven financial service professionals, all of whom are certified to bank cannabis businesses. The Bank’s cannabis bankers currently serve on the Cannabis Financial Institutions Group of the National Cannabis Roundtable, an advocacy group dedicated to developing solutions for the cannabis industry’s most pressing challenges.