Big Money Is About to Get Access to Marijuana Stocks

Here’s a crazy scenario that’s still a harsh reality for marijuana stocks: Imagine running a legal business — one approved by the state — and generating millions of dollars in revenue…but not being able to deposit it in a bank account.

Crazy, huh?

Think about paying the bills. Instead of writing a check or sending money electronically, you need to deliver cold, hard cash.

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Grab your briefcase filled with wads of $100s to go pay the electric bill to keep the lights on.

I’m exaggerating a bit to make a point, but the feeling is all too familiar for the marijuana industry.

Due to regulations, few banks will take on the risk of doing business with a marijuana company in the United States. I attended the Benzinga Cannabis Capital Conference in Miami Beach earlier this year, and this was clearly one of the major problems for industry leaders I spoke with.

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Of the nearly 5,000 FDIC-insured commercial banks in the United States, only about 400 — or 8% — offer services to the marijuana industry.

But in just the last few days, there was a potentially game-changing development that could change all of this soon. I’ll talk more about that in a bit.

First, let me explain why cannabis stocks have such limited access to banking.

A Risk Worth Taking

Banking is a problem for many of these companies because marijuana itself is still illegal at the federal level in the United States.

It also remains a Schedule 1 drug according to the DEA. These are the drugs considered highly addictive with zero medical use. To put that into perspective, marijuana is in the same category as heroin and LSD.

It’s ridiculous and flies in the face of everything we now know about marijuana. There are plenty of indications it will be reclassified soon, but the drug’s current Schedule 1 classification creates issues for companies approved to do business on a state level.

Even with the federal laws hanging over the marijuana industry, business is still booming. Marijuana is one of the fastest-growing industries in North America. And when an industry grows at that kind of breakneck speed, it leads to large amounts of cash for companies that are profiting.

Normal businesses put that cash directly into a bank account — but that hasn’t always been an option for marijuana stocks. I’ve heard firsthand stories about businesses in Colorado that would store millions of dollars in cash in large safes, complete with around-the-clock armed guards to protect it.

The few banks that are willing to take on the risks associated with marijuana companies come with a hefty price tag.

When you or I go to the bank and open a savings account, the process is simple. And more importantly in this day and age, the account is free and typically comes with some perks, such as a slightly higher interest rate.

But for marijuana companies, opening a bank account is a far more rigorous and costly process. One bank in Massachusetts charges an upfront fee of several thousand dollars just to open an account. On top of that, there’s an ongoing monthly “maintenance fee” of $5,000.

That’s a lot to pay to simply have a bank account, but it’s often the only option for legitimate marijuana businesses.

The banks willing to take on high-risk clients benefit by way of the massive ongoing fees. It’s easy to be outraged by the fees, but honestly they are somewhat warranted considering the amount of compliance banks must undertake for marijuana companies.

I’ve thoroughly researched marijuana banking in the United States and found that most of these banks are small, overlooked names. It may seem counterintuitive, but regional banks have been more willing to take on the risk for a potential payoff than the big banks.

Last September, U.S. Bank announced that it would no longer be the custodian for the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), an exchange-traded fund (ETF) of publicly traded marijuana stocks that is the only one of its kind in the United States. The fund is less than a year-and-a-half old and has already brought in more than $1.2 billion in assets! The move by U.S. Bank is baffling, and it shows that Wall Street still takes an old school approach to this early-stage industry.

That’s fine with me, though. It opens up opportunities in the financial institutions that are willing to work with marijuana companies, especially in states like Washington, where marijuana is fully legal. Those banks stand to make a lot of money in the process from the huge boost in cash deposits, and as investors we can, too.