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Many legal cannabis suppliers and retailers are being forced to operate in a cash-intensive market due to federal laws that limit access to traditional banking.

This poses significant risk as cash-based industries, companies and trade can’t be properly monitored, regulated or taxed. And this is particularly concerning for the legal cannabis market that’s expanding to $12 billion in sales this year, with projections to reach $30 billion in four years.

Banks face four significant challenges when servicing the cannabis industry, according to a California state-backed report.

First, the bank may be at risk of criminal or civil liability under federal drug and banking laws. Moreover, because this large industry is new and rapidly evolving, it creates business risks even without enforcement of the federal drug laws.

Another factor is the significant administrative burden to properly file the required federal reports governing cannabis banking transactions, and the potentially severe penalties for incorrect filings.

Also, the know-your-customer requirements are more significant than normal because similar transactions may or may not be allowed pending various state laws.

As a result, banks are cautiously entering the market, which therein limits the ability of cannabis companies to operate in a traditional fiscal environment: using checks, credit cards, electronic transfers and the like.

Even in Canada where cannabis is federally legal, major Canadian banks exercise caution when it comes to providing services to domestic businesses.

A national study of the Canadian cannabis sector found that one of the highest barriers to entry for the Canadian cannabis sector is access to capital, as banks are not currently issuing traditional financial instruments to cannabis companies.

There could many reasons for this. But there is a general lack of understanding for the new industry and limited data on performance that could be contributing factors. Plus, banks are often unsure about the nature of dealing with something that was illegal and is now legal.

From a cross-border perspective, Canadian banks are withholding the opportunity to finance legitimate U.S. cannabis businesses for fear of jeopardizing relations with U.S. regulators while cannabis remains illegal at the federal level. They are also very aware of Canada-to-U.S. payments that could be connected to cannabis.

Further, third parties — such as equipment sellers, landowners and transporters — looking to work with cannabis companies also face significant cost-benefit risks from a financial, reputational and legal standpoint. Legalized jurisdictions have increased scrutiny of ancillary businesses that are indirectly, or even unknowingly, assisting illegal and unlicensed operators within the industry’s “gray” market.

So how can legitimate cannabis businesses bridge the gap?

It starts with connecting the dots. Big data and analytics will play a critical role in helping to contain and manage the risks within the industry.

Platforms leveraging advanced data analytics — coupled with automated intelligence — will allow businesses to aggregate, analyze and connect vast numbers of data points and entities to help identify bad actors within the network. This will help to purge the illegitimate and criminal activity.

With this type of intelligence and insight, businesses across the cannabis supply chain can make better-informed decisions about where the greatest risk exposure lies. This will also help ensure government, law enforcement and concerned citizens of the provenance and integrity of the supply chain, from source to finished product.

Techniques such as entity resolution and network analysis, that allow systems to make associations between companies, accounts and people (that otherwise would have gone unnoticed), will assist in this process.

This tactical approach looks at all of the available information, rather than a single piece in isolation, such as credit score or a bank transaction. As a result, the reviewer can better understand the holistic picture and subsequent risk.

In states where “track and trace” systems have been implemented, data analytics is critical in helping cannabis businesses keep tabs on every transaction, from seed to sale, to identify suspicious patterns amid the noise of legitimate payments and interactions.

The cannabis industry already suffers from issues similar to those of the designer fashion industry: fake products. While the product may not be fake, many people start cannabis businesses with the dream of making money. However, competition is already fierce and desperate people may turn to illegal cannabis sources to maintain profits.

The cannabis banking problem won’t be solved without legislative reform. However, there are ongoing efforts between state and federal regulators that would ultimately enable banks to serve the cannabis industry safely and efficiently.

In the meantime, the opportunity is still ripe for cannabis businesses to self-regulate and establish compliance best practices that will help minimize the risk and uncertainty across the supply chain.

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Marijuana banking Big data Predictive analytics Analytics Data science Machine learning Fintech regulations Fintech