When Delaware successfully passed laws last year legalizing recreational marijuana use and sales, state regulators started working behind the scenes to build out the system to support an industry that may bring in millions in tax revenue.
Meanwhile, the First State will also have to contend with the biggest challenge that 21 other states have carefully navigated years before: How to bank an industry that trades in a substance still considered illegal under federal law?
While President Joe Biden has supported reclassifying marijuana as a less dangerous substance — and both Vice President Kamala Harris and former President Donald Trump have echoed that support —the recreational marijuana industry has grown strong since Colorado and Washington first legalized use 12 years ago.
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Now that marijuana sales are legal, Delaware's financial services sector will have to prepare for the unique challenges that come with banking the business. | DBT PHOTO BY KATIE TABELING/NATALIE NEWHART[/caption]
Today, more than half of Americans live in a state where recreational use is legal and 74% percent live in a state where marijuana is legal for either recreational or medicinal use. It’s also a lucrative industry, with Fortune Business Insights reporting that the market was valued at $43.7 billion in 2022 and North America comprising 82% of the global market share.
But the biggest challenge to date is navigating each state’s regulations, local jurisdictions' own laws and finding a bank that will handle an industry that has now developed into a cash-only business by necessity.
Take it from Jennifer Stark, one of the owners of medical dispensary The Farm in Harrington. She and her brothers were awarded one of the few medical marijuana licenses in 2020 and it took years to open its doors for business. Between hiring and setting up manufacturing for THC-infused candies and other goods, Stark said that it was almost impossible to bank the thousands of dollars safely.
“I can remember talking with our consultant when we were first applying for the license, and he was on the way to the bank depositing $9,000. That was when we learned that it has to be under $10,000 in cash transactions, or it can be audited by the IRS,” Stark said.
Many financial institutions do not want to do anything when it comes to marijuana companies, fearing that handling accounts from such businesses could expose them to legal dilemmas. There has also been very little federal guidance on how to minimize that risk — meaning cannabis companies, even if legal under state jurisdiction, often can’t get approved for credit cards or have checking accounts closed. Many companies had to rely on payment processing companies, with higher than normal transaction fees compared to the range of 1 to 3% on an average credit card.
When the Farm opened its medical business, it was a half hour drive from eight banks and federal credit unions in Kent County. None took their account up until 2023. For a few years, Stark said that she had to use financial services company Domo, which is based in California. She estimated that she paid a $1,000 flat fee per month to bank there. Now, she can make a short drive to a Maryland-based branch that now has locations in central and southern Delaware.
“It made deposits hard, because you couldn’t just run to the bank, you’d have to send a check to San Francisco,” she said.
Working with the Maryland-based bank, however, made things a little simpler for the Farm. “If there’s any discrepancies with payroll, you can just stop by and have that conversation,” she added.
A SAFE way to bank
Even if marijuana is reclassified as a Schedule III drug under the control substance act versus its current classification of Schedule I, it would still be largely illegal under federal law. That’s a line many banks still will not cross, even though the support is growing for financial services to handle cannabis accounts. The American Bankers Association, a trade group that represents the nation’s $23.9 trillion banking industry, found in a 2022 study that more than 70% of people prefer federally regulated institutions outside of rising financial technology firms.
Even with that building momentum nationwide, there’s been slow movement on the federal level to green light financial institutions with the Secure and Fair Enforcement (SAFE) Act. Reworked for the last 11 years, this bill would address many of the lingering questions on banking, tax collection and transparency. The latest version was proposed in September 2023, but little movement has happened since.
“Everyone sees the problem, it’s just more of a political process on the federal level right now, more than anything,” Marijuana Commissioner Rob Coupe told the Delaware Business Times. “An all-cash business presents challenges for auditing, tracking and things like that, so a traditional banking model for oversight is preferred versus using a credit or debit card. It’s just better checks and balances for everyone involved.”
Another issue is the matter that cannabis companies’ tax rate is between 75% to 80%, because of a section in the federal IRS Code that disallows any deductions dealing with Schedule I substances. That means that until marijuana gets reclassified, small and big operators alike will be running on hard margins.
Some banks and payment processing companies have quietly figured out how to do business with the marijuana companies, though it’s more reliant on those willing to take the risk. FinCEN reports there are 680 banks and federal credit unions working with marijuana-related businesses, though Peter Su, who is an industry expert and who serves on Asian Cannabis Roundtable, says insiders believe the true number is closer to 120 institutions.
“When you think about how people are banking, it’s simple math. Even if the FinCEN report is correct, that’s only 680 institutions across the entire country. There’s something like 10,000 financial institutions in America, so it’s a relatively small percentage of the overall financial institutions,” Su said. “Any indication that’s banking cannabis today is doing it in a simple way. It’s not that they figured it out. They’re just strictly following the guidance we have, which has a lot of gray.”
Boutique banks and federal credit unions are more likely to open accounts with marijuana companies, Su said, because they might decide the risk is worth having that client on board. In Delaware, Coupe did confirm that Shore United Bank had been actively participating in the Social Equity License workshops his office hosted, which is geared to helping potential applicants navigate Delaware’s process.
Shore United Bank has $5.8 billion in assets, with branches in Maryland, Virginia and Delaware, although it is dwarfed compared to top Delaware banks like Capital One, Discover and even regional giant WSFS. The PBC Conference, which is an annual business-to-business event that draws regulators, bankers and politicians together to discuss trends in cannabis and compliance, publishes a directory of banks with cannabis programs. There is one Delaware bank listed in the 2024 directory, although nine banks are listed as nationwide operators.
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Marijuana is now legal, and the state has finalized regulations on how manufacturing and selling it will work. | DBT PHOTO BY ERIC CROSSAN[/caption]
Balancing the books
Until federal banking reform happens, cannabis companies will be left to do their own research or hire compliance experts or attorneys to find ways to safely bank. In the meantime, state officials like Delaware Treasurer Colleen Davis are working to find ways to reassure financial institutions it can work. She is an advocate for House Bill 355, which clarifies that providing financial services and professional services to cannabis companies is legal in Delaware. HB 355, as of September 11, has yet to be signed into law.
“The biggest thing is that we have to ensure that the businesses that have a stake in this can have the processes to ensure those businesses stay strong, instead of hindering it,” Davis said. “There’s a lot more excitement from our smaller institutions as a way that this can expand their book of business, but it’s not just them. It’s the accountants, it's the delivery drivers and it’s everyone in the supply chain. We need to make sure we have a robust process in place to ensure it’s successful.”
But that process has to start somewhere. After legalizing recreational marijuana and establishing the Office of the Marijuana Commission, Delaware has finally opened its licensure application process for 125 licenses, including 30 retail licenses.
As the licensing process begins in Coupe’s office, other professional offices are preparing for a new influx of business. Akerman LLP Cannabis Practice Chair Jonathan Robbins says he’s watched this law space grow since he first took on the charge in 2014 when one client called him with questions on leasing dispensaries in Colorado. Akerman LLP recently opened up an office in Delaware, but while that office does not have dedicated cannabis lawyers, Robbins said that the state’s breadth of full-service law firms means it’s rich for opportunity for many to expand in the space.
“The truth is, there’s a real need for this in the industry, because all of a sudden you’re seeing real money come in and they need access to good professionals. The work being done really runs the gamut, because we have clients that need to negotiate lease back sales to help raise capital because they can’t secure a loan,” Robbins said. “Our employment practice is involved, so is mergers and acquisitions because you’re seeing these smaller companies gobbled up, in hopes to be acquired by bigger companies.”
Even the capital markets area of law, which focuses on finance underwriters, venture capital funds and private equity, are starting to get more involved as some marijuana companies are working to go public on the Toronto Stock Exchange. Last year, Robbins noted that Akerman represented an Austin-based bank that handled four loans to cannabis companies that were “tens of millions” of dollars each.
In Delaware, that means there will be plenty of work for firms handling corporate work and structuring companies to handle financial transitions, as well as ensuring companies follow the guidelines.
“Eight or nine years ago, it would be a challenge to find a full service firm that could do this work,” Robbins said. “The banks need someone like me or our team to understand the regulatory ramifications and landmines they might fall into. Law firms may not advertise it, but if they have a good client who wants to do this work, and you do the analysis and there’s guidance to do it, it’s likely they’ll go for it.”
The potential needs for these new small businesses will continue to grow along with the industry, and there’s still opportunity to build up a legal, accounting and lending practice around Delaware’s rising new industry – especially with smaller companies chafing against a lack of access to capital and a tax range that may be twice or three times other businesses in the state.
Andy Shelley, founder of CannXperts compliance firm based in Oregon, has been advising regulators and businesses alike since the company opened a few years ago. But in the last 18 months, Shelley has been focusing on expanding CannXperts' book of businesses with banks and other financial institutions.
The opportunity is ripe for more banks to get on board, experts note. In the past 18 months, the former law enforcement officer who studies marijuana regulations for all states has been focusing on working with financial companies to set up a cannabis program.
“It’s been an issue for years, and we’re just trying to think of a state level on how we can solve these issues, because it seems like it’s difficult to get anything done in Washington right now,” Shelley said. “Whoever’s first to figure this out will reap the benefits and get the support of the new licensees.”
“If you think about it, the perfect bank is the local bank or the federal credit union that wants to support their community, because the license holders who need the help are small businesses,” he added. “Banks can recoup those costs involved by just charging a reasonable fee to open the account as well as transfers. I just think in some ways, it’s being overly complicated.”
Editor's note: a previous version of this story misspelled Andy Shelley's last name. We regret the error.
