The weed industry is being hit with a double whammy

REUTERS/Jonathan Alcorn

Ayrn Taylor, a United Food and Commercial Workers union (UFCW) member and employee at the Venice Beach Care Center, displays medical marijuana during a media visit at the medical marijuana dispensary in Los Angeles, California February 6, 2013.

The legal weed industry faces many unique challenges to doing business. Most companies in the space are frozen out of banks, can't use credit cards for transactions, and can't get loans, creating huge headaches for the industry.

On top of that, marijuana is like any other commodity - when there's a supply glut, the price plummets. And that's exactly what's happening in legal markets like Colorado. Cultivators are ramping up production, and the price of marijuana is dropping, causing profit margins for growers to decline as well.

Marijuana companies - especially those that deal with the plant directly - are squeezed between the high cost of doing business and lower profit margins from the plummeting price of pot.

And then, there's the banking problem.

Financial institutions that do business with marijuana companies often charge exorbitant fees in order to offset some of the risks of dealing with these businesses, as marijuana is still federally illegal.

In its most recent Beige Book, the Fed made two references to the nascent marijuana industry's banking troubles (emphasis added):

1) In the San Francisco District, financial institutions in states with a legal marijuana industry reported increased operational costs related to regulatory constraints.

2) Financial institutions in a few states with a legal marijuana industry reported increased operational costs related to regulatory constraints on activities linked with that industry.

What the Fed is saying here, essentially, is that banks are being pushed to come up with more rigorous compliance and risk management controls in states with legal marijuana. And these extra expenses have caused some banks to either raise their costs - sometimes prohibitively - for marijuana business clients, or drop their accounts with marijuana companies entirely.

David Ramos/Getty

Marijuana businesses have a tough time accessing banking services.

The regulations stem from FinCEN, which created a set of guidelines for banks to follow if they do business with marijuana companies, based on the recommendations of the Department of Justice's Cole Memo. The DOJ's memo stipulates the federal law enforcement priorities for dealing with marijuana businesses.

Banks themselves, according to the FinCEN guidelines, must provide the due diligence necessary to show that their clients aren't breaking any federal or state laws. As well, banks must file Suspicious Activity Reports (SARs) for any marijuana businesses they work with.

Complying with FinCEN's guidelines is an expensive proposition for banks, and these costs are often transferred onto legally-operating marijuana companies. These companies end up getting charged huge sums just for the privilege of putting their money in banks.

The other choice for banks is simply to cease doing business with the marijuana industry. MBank - a small bank in Oregon - decided to close its marijuana accounts because the resources required to comply with the byzantine federal and state regulations vastly outstripped the potential revenue gains, according to American Banker.

It's just too expensive, and risky, for many banks to do business with marijuana companies. Until the profit potential of marijuana outstrips the costs of compliance for the banks, it's unlikely that this situation will change.