Medicine Man, a legal Colorado marijuana business, paid one month’s state taxes in a bag filled with cash. Totaling $122,000, the money could not be paid through a checking account because Wells Fargo had closed Medicine Man’s account. Instead, armed guards from the Blue Line Protection Group made the delivery to a state office.
Marijuana dealers’ relationship with banks is fragile. Nervous because marijuana is illegal under federal law, the Bank of America, Wells Fargo and others like them have closed marijuana-related accounts. Even after the U.S. Treasury said in February that marijuana business accounts would be okay if guidelines are observed, still the banking industry is saying no. Correspondingly, a statewide initiative to create a local banking network has also had little effect.
Where are we going? To the importance of financial intermediaries.
Think about what it means when a bank won’t let you open an account. No checks, savings, loans and debit cards. One business owner said she was buying money orders at 7-Eleven to pay her bills. Her revenue is in cash. She spends a lot of time on cash management.
Similarly, getting insurance has been tough. Like the banks, most insurance companies are avoiding anything that the federal government says is illegal and also explain that pricing risk is difficult for new industries like marijuana. As a result, according to Bloomberg, business is booming for the “handful” of companies selling insurance to the marijuana industry…especially I suspect in Washington where liability insurance for legal marijuana dealers is a state mandate.
Some Financial History
During the nineteenth century, the U.S. banking industry evolved. Starting with Alexander Hamilton’s First National Bank in 1791, gradually, a network of financial intermediaries evolved. The goal was to connect savers and borrowers, to get money circulating, to let businesses borrow and expand. By the end of the century, we had investment banks able to gather the huge money they needed to finance railroad building and massive business combinations like U.S. Steel. Meanwhile, insurance companies were accumulating the assets that meant they too were becoming financial intermediaries.
The Bottom Line: A Financial Infrastructure
Like blood circulates life-supporting nutrients around the human body, so too does a financial infrastructure bring sustenance to businesses—sustenance that is unavailable to Colorado’s marijuana dealers.