Article

Case Study: How Frankenmuth Credit Union Banks Michigan’s Underserved Legal Cannabis Industry

cannabis, oil, extracts and jars
By Josh Herman

5 minutes

Learn about the steps this $1 billion institution took to go from finding a partner to fielding a pilot to running a program.

Headquartered in Frankenmuth, Michigan, Frankenmuth Credit Union has more than 60,000 members, surpassed the $1 billion asset threshold in 2021 and has been recognized for outstanding service by being named the Forbes 2020 Best Michigan Credit Union and for strong financial performance by being named to the S&P 2020 Top 100 Performing Credit Union List.

Envy is the name of our cannabis banking product line and program. For a business to be part of the Envy program, it must qualify and become part of Frankenmuth CU’s membership.

Why Cannabis Banking

After discussions with our members, we found that our communities needed a fully compliant and transparent cannabis banking program for their state-legal businesses. When Frankenmuth CU sees a need in our communities, we act.

Entering the cannabis banking space can appear very complex and even intimidating, especially considering that non-compliance can carry substantial consequences. We entered the space under the assumption that consequences of non-compliance could be as minimal as informal corrective action in an audit or exam or potentially, if blatant, criminal prosecution. Doing cannabis banking the right way was of the utmost importance.

The high stakes make choosing partners in this space very important. With this in mind, we partnered with leading cannabis banking fintech provider, Green Check Verified, to work with us to develop a custom and compliant cannabis banking program, Envy, as in “green with envy.”

We partnered with Green Check Verified for several reasons. First, they came across as a very caring and transparent company, which is a philosophy that we align with as a credit union. Second, the demos that we went through with their team showed efficiencies that would allow us to scale with minimal staffing changes. Third, Green Check Verified bases its advisory services on publicly available state and federal guidance plus experience with a wide range of state- and federally chartered institutions and their regulators. As a former regulator, I really appreciate the expertise they bring to the table.

About the Program

We built the program to be fully compliant, while also considering that we didn’t want the program requirements to be overly burdensome to our business members. From a member perspective, Envy seeks to treat state-legal cannabis businesses as normal businesses. This means that we only ask for documentation that we need and nothing more. This also means that we are continually exploring services that not all of our peers are offering. We offer checking and savings accounts, ACH, wires, checks, and many other “normal” services. But we also offer insurance solutions through our wholly-owned insurance agency, My Member Insurance Agency. We offer lending solutions. And as we get out and talk to cannabis businesses, we continue to explore other services that this emerging industry needs, while remaining fully compliant.

We started Envy with a pilot program to make sure everything was buttoned up and that we would be able to scale up when the time came. Green Check Verified and our first Envy members really helped us tailor the program to the needs of the industry. From the fee schedule to deposit services, these partners were critical in our development. During our research, we found the fees in this space to be higher than a normal business account, but we also found that these fees can be overly burdensome on these small businesses. We created our fee schedule so Envy will be accessible to the small businesses in our communities, while also covering our costs of increased due diligence and monitoring.

Measuring Success

While the number of accounts, deposit balances, fee income, interest income and profitability are all important, we are currently measuring the success of our program using feedback from the Envy Frankenmuth CU members. Comments from our members that we are helping relieve stress or that they feel like a normal business tells us that we are successful. However, as I stated, the financial statistics are also important.

There were various one-time costs during the creation of the program, but these are minimal compared to the potential financial upside discovered during the financial forecasting and pilot phase.  

Where the Industry Is Headed

The good news for the cannabis industry is that access to financial institutions is here to stay, and the number of participating institutions will only grow. Similar to how the industry has seen the price of marijuana decline as more competition has entered the space, I also see the banking fees declining and services increasing as more financial institutions begin offering services to these businesses. The complexity and high-risk nature of the industry from a compliance standpoint will probably be around for a long time, but automation and education can and should reduce the physical costs for financial institutions, which in turn should reduce the corresponding fees for the businesses. Even if federal and state guidance continues to lag the growth of the industry, standards for providing services to the cannabis industry are currently being and will continue to be developed by those financial institutions in the space.

Member Feedback

At Frankenmuth CU, we want cannabis-related businesses to walk into our lobbies and be proud of their business. The feedback that we’ve received from our members tells us that we are accomplishing this goal, and we consistently receive new requests from businesses across the state, wanting to be a member of Frankenmuth CU and part of the Envy program. The reaction from our communities has been positive. The future of cannabis banking is bright, and Frankenmuth CU will be a part of providing services to state-legal businesses.

Josh Herman is enterprise risk manager and member of the executive committee at $1 billion Frankenmuth Credit Union, Frankenmuth, Michigan.

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