SAFER Banking: Temper Your Expectations
“All that glisters is not gold” Shakespeare, The Merchant of Venice
The Benzinga hype machine is underway this week. (I’m being a bit tongue and cheek. Its one of the better cannabis conferences). Many cheerleaders will be touting the benefits of 2 potential reforms: Rescheduling and SAFER Banking, the new & improved SAFE.
This piece is about SAFER, not because it’s more important than Rescheduling (it’s not) but because it is more misjudged.
Yes, passing SAFER will be a positive development. The sector needs all the good news it can get. SAFER may unlock banking services for many smaller firms. It could also bring down the cost of banking and insurance for the larger MSOs. Finally, the public markets could inflate in the short term. Emphasis on 'may' and 'could.'
On the other hand, SAFER will be a lunch-bag letdown for many businesses after the initial euphoria fades.
I come to these conclusions based on my knowledge of how the top end of the banking sector thinks and functions.
1. Not every large bank or financial institution will want to serve the cannabis industry.
For many commercial bankers, cannabis firms will be seen as a compliance hassle with significant default risk. Moreover, banks consider the risk-adjusted return on capital as to where they deploy their funds. The cannabis industry won’t automatically make everyone’s cut. To wit, no more than 3 of Canada’s 6 largest banks deal with weed companies.
2. Increased banking access doesn’t necessarily mean lower banking fees.
Banks entering the sector will have new compliance, due diligence and industry education needs. Cannabis will be categorized as a high-risk ‘sin’ business. These factors will lead to premium banking fees (see Canada).
3. SAFER will likely boost lending and deal making for a select few large and profitable cannabis firms.
Yet, an un-fundable business pre SAFER will be the considered the same post SAFER.
4. In the absence of full legalization, SAFER is just one piece of a complex legislative puzzle.
Rescheduling and Interstate Commerce are arguably more important. In fact, SAFER (as written) won’t deliver a smooth path to 2 key market needs: exchange up-listing and credit card processing. And SAFER doesn’t directly help any Canadian LPs.
5. Finally, SAFER does not exist in an economic vacuum.
More bankers serving a high-risk industry does not translate into a low cost of capital in a high interest rate, uncertain environment.
Many MSO executives already know this, which might explain why some of them have been selling shares during the recent market run up.
Let’s temper our SAFER expectations, continue to push for full legalization and see how things play out, including (fingers crossed) with Rescheduling.
#Benzinga #SAFER #SAFEBANKING #banking #capitalmarkets #regulations