In October 2022, Vermont is scheduled to join 18 other states in legalizing recreational sales of cannabis — setting up a potential gold rush of new dispensaries and growers. The state’s Cannabis Control Board recently estimated that recreational marijuana could reach $225 million annually by 2025.
Many regulatory questions must still be answered, but the new market is expected to far exceed Vermont’s existing medical cannabis industry, which consists of only five dispensaries. Although state regulators have years of experience in medical cannabis, only one Vermont financial institution has experience in cannabis banking — VSECU.
CU QUICK FACTS
HQ: Montpelier, VT
DATA AS OF 09.30.21
12-MO SHARE GROWTH: 12.0%
12-MO LOAN GROWTH: 7.6%
VSECU (Vermont State Employees Credit Union, $1.1B, Montpelier, VT) began providing banking services to medical cannabis businesses five years ago for one simple reason: No one else would do it.
Federally regulated banks have traditionally been wary of the industry because of federal laws criminalizing cannabis possession and sales. Without a state-chartered entity like VSECU stepping forward, cannabis businesses would have no access to accounts for depositing their cash-only sales or issuing paychecks to employees.
“The original reason we got involved was not based on a point of view on cannabis and whether it should be legalized, whether medicinal or recreational,” says Rob Miller, CEO of VSECU. “We were quite neutral in that, but we did see a financial inclusion issue. That's why we got involved. We believe all of our members should have access to the financial system, particularly if they are legal entities operating within our field of membership.”
“We did see a financial inclusion issue. We believe all of our members should have access to the financial system, particularly if they are legal entities operating within our field of membership.”
Working With Regulators
VSECU’s foray in cannabis banking was the result of a board decision made after substantial research and due diligence, says Greg Huysman, director of business lending and services at VSECU. As part of developing the new program and fees, Huysman consulted with other credit unions in legal cannabis states.
“We’ve learned a lot the past few years,” Huysman says. “We definitely had some stumbles as we were learning to serve the industry in the way all the federal and state regulators would like us to, which is difficult because there's never been clear guidelines on cannabis. We have a tight program now to ensure all the money that's flowing through is legitimate cannabis revenues and not black market stuff, which is what the auditors are concerned about.”
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As of the third quarter of 2021, Vermont’s five medical cannabis dispensaries held deposit balances of $785,000 at VSECU and total loan balances of $62,000. VSECU charges a small percentage fee on total monthly deposits to cover the additional expenses required for serving the industry plus a small margin to compensate for the risk associated with cannabis banking.
Looking ahead to recreational sales in 2022, Huysman says he expects VSECU to continue to be the only local institution that provides services to the industry.
“Until the friction between state and federal laws is resolved, it's going to be a concern for new lenders or new credit or financial institutions to come into the cannabis market,” Huysman says. “We’re preparing to take on as much market share as we can.”
“Until the friction between state and federal laws is resolved, it's going to be a concern for new lenders or new credit or financial institutions to come into the cannabis market. We’re preparing to take on as much market share as we can.”
The Guessing Game
Neighboring states have already adopted recreational sales, so Vermont will be a relative late comer to the market. Miller says it’s still too early to tell how many new dispensaries will open for recreational sales, but he notes that VSECU has already made key investments and put processes in place for medicinal sales. He expects VSECU will need make more investments, especially in the compliance area to ramp up for recreational.
“We still need to see the proposed rules from the newly formed Cannabis Control Board to have a better sense of how many permits they're planning on issuing, to whom, the qualifications, the fees, and those types of things,” Miller says. “Frankly, once we get that information, we might have a sense but I'm not sure we’ll really know what the volume is going to be and how much of that volume we're going to be able to meet, particularly in the early days.”
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