This week, Congress finally began to act on the nation’s first stand-alone cannabis reform legislation. The SAFE Banking Act, as it’s known, seeks to provide protections to financial institutions that work with state-licensed cannabis businesses, extending them the same protections afforded other businesses. The House is expected to vote this week and signs are growing that the Senate may soon consider it as well.
While the law—like most—is imperfect, it addresses a serious problem: A lack of access to banking by cannabis-related businesses means many operate in a cash-only environment, which has serious consequences including increased violent crime, higher costs and reduced access to financial data for law enforcement.
But there is a potentially more far-reaching aspect of this bill, one that may not be immediately obvious: The opportunity to ameliorate the effects of the “war on drugs” on communities of color. This is an important step, one that lawmakers shouldn’t underestimate.
The cannabis industry, like many others, is dominated by owners of a similar profile: white, male and wealthy. Many historical and economic reasons explain this, but in the cannabis industry, it is magnified. Because traditional avenues of capital for business development (i.e., small-business loans, home equity lines of credit, etc.) are cut off for cannabis entrepreneurs because of a lack of access to banking, individuals seeking to open a cannabis business must either raise funds among their own network of investors, fund the business with their own existing capital, or a combination of the two.
Women and racial minorities face well-documented barriers in accessing investment dollars, in part because the ability to fund one’s own business depends largely on preexisting wealth. Increasing access to traditional financial products increases opportunity for potential minority and women cannabis entrepreneurs to enter the space.
Another beneficiary of expanded opportunities are minority-depository institutions or MDIs — financial institutions recognized by the Federal Deposit Insurance Corp., as predominantly serving minority communities. America has 149 MDIs and many credit unions and community development financial institutions focused on underserved communities. MDIs arose from a combination of factors, including America’s history of institutional and economic racism and legal impediments against large commercial banking that lasted well into the 1990s. MDIs remain important sources of capital and banking access for minority communities.
MDIs are generally community-oriented banks, far smaller than large regional or national banks. Community banks have an important comparative economic advantage, understanding local communities, having relationships with local businesses, and providing services for people and industries that larger financial institutions do not serve. According to a recent report, the majority of small-business credit available to minorities flows throw MDIs. This is the good side of relationship banking — it can be a tool for the democratization of access to credit and a reminder that it has been previously used as a tool to concentrate and deny opportunities.
Some opposed to SAFE have argued that legislation is not needed given that banking involvement in cannabis-related business has grown steadily over the past five years. In 2019, 633 banking intuitions reported financial activities involving marijuana-related business activity, a near doubling since 2014. Yet, many financial institutions, especially large banks, are so concerned about risk and reputation that they frequently de-bank people or businesses with even tangential relationships to state licensed cannabis. Typically, the only banks providing services are community banks and credit unions, and that coverage is incomplete and inconsistent.
The passage of SAFE is not likely to cause large financial institutions to open their doors suddenly to cannabis-related businesses. The legislation does not change the federal status of cannabis nor does it directly reduce the major reporting requirements (such as Suspicious Activity Reports) that drive up costs and increase the potential for regulatory fines. Larger financial institutions will likely continue to shy away from serving cannabis businesses, although it will likely reduce those banks’ concerns about secondary providers who serve cannabis businesses (e.g. architects, landlords, accountants).
What is likely to happen from SAFE’s passage is more community banks and credit unions deciding to serve marijuana businesses. This should lower costs, increase security, make the cannabis black market even less appealing, and create new customers for community banks, credit unions and MDIs.
The legislation would also begin a broader conversation on how to increase opportunities within communities targeted by the drug war. Part of that conversation must involve a key source of funding for small-business financing: the Small Business Administration’s 7(a) and 504 loan programs, both of which account for a substantial portion of community banks’ small-business lending portfolios. SBA’s 7(a) program is a critical source of credit for small businesses that “cannot be obtained elsewhere,” and serves as a key credit resource for minority-owned businesses. While SAFE is a step toward unlocking the banking sector for the cannabis industry, legislative action or executive guidance that expands access to SBA programs will increase opportunities among a diverse group of cannabis businesses, especially minority-owned enterprises.
Another challenge involves institutionalized rules and norms that still undermine the ability of people of color and women to have access to financial products in the same way and at the same rate as others. The ability of financial institutions to cite risk in the cannabis industry when it conveniences them and ignore it when it does not, allows racism and gender bias to continue.
In an effort to address these challenges, SAFE requires banking regulators to issue an annual report to Congress on diversity and inclusion in cannabis banking services and instructs the Government Accountability Office to study “barriers to marketplace entry … and the access to financial services for potential and existing minority-owned and women-owned cannabis related legitimate businesses.” These reports empower regulators and Congress to continue the conversation about justice and inclusion for minorities and women and identify additional ways to address the biases that exist within the American economy and its banking system.
SAFE addresses real and growing problems, even if incrementally. Its passage will not entirely fix the challenges that cannabis businesses face accessing financial services. Nor will it fully reverse institutionalized racism in American finance and commerce.
But the cannabis industry is growing rapidly and facing substantial problems working with the banking and financial sectors. Congressional action that reduces the risks associated with an un-banked industry is progress that can take a first step toward facilitating opportunities for a diverse group of prospective entrepreneurs, including those targeted by the decadeslong war on drugs.
This incremental progress is something that both parties should support. Rejecting the SAFE Banking Act because it does not solve the entire problem will only make problems worse in the short and long terms.
Makada Henry-Nickie is a David M. Rubenstein fellow in governance studies at the Brookings Institution. John Hudak is a senior fellow in governance studies at the Brookings Institution. Aaron Klein is a fellow in economic studies at the Brookings Institution.