Twenty-five years ago, marijuana was illegal in all 50 states. Today, 18 states, two territories, and the District of Columbia have legalized small amounts of marijuana for adult recreational use, and medical marijuana is legal in 37 states.

The cannabis industry’s rise as a multibillion-dollar operation offers credit unions a promising new market, but one fraught with pitfalls. 

Credit unions in states where marijuana is legal find themselves in a tricky crossfire between state and federal law.

While marijuana may be legal in some states, it remains illegal at the federal level. Financial institutions providing services to marijuana-related businesses (MRBs) could be in technical violation of federal law by facilitating the operation of an illegal enterprise.

But because federal regulators have stayed on the sidelines, some credit unions provide at least depository accounts to MRBs to get large amounts of cannabis cash off the streets.

“A business owner should not walk around with a duffle bag filled with cash,” says Chris Call, CEO at $93 million asset North Bay Credit Union in Santa Rosa, Calif.

His credit union has offered banking services—deposit accounts, debit cards, wire transfers, online bill payment, and automated clearinghouse payments—to MRBs for four years. 

But North Bay, like other credit unions, has stayed away from lending to the industry because of the possibility of federal seizure of business assets, which would impair collateral.

Call, however, has a bright outlook for the future of credit unions providing not just depository services but lending as more states legalize marijuana.

“We think there will be more pressure on the federal government to remove it as a Schedule 1 substance in the near future,” Call says. “We certainly don’t see any federal enforcement soon. So, the risk of collateral seizure is almost nonexistent at this point.”

Call recognizes a tremendous demand for capital in the cannabis industry. He says cannabis operators from across the country approach North Bay almost weekly, hoping it develops a lending program.

Currently, most MRB lending activity is tangential, with loans to MRB employees and related entities. But the industry holds considerable potential.

“Cannabis businesses are a lot more profitable than any other local business we might come across,” says Call. “In some cases, they’re much better run. They bring in people from Wall Street and Silicon Valley to run these operations. A lot of Harvard and Stanford grads are running cannabis operations.”

North Bay, the preferred banking partner for the California Cannabis Industry Association, recently created a credit union service organization (CUSO) called Higher Growth LLC to provide compliance services to financial institutions interested in serving cannabis operators.

As part of its offerings, the CUSO will work with independent investment funds and other financial institutions to create a pool of investable funds to lend to cannabis operators nationally.

NEXT: Lending opportunities