Walking into the Planet 13 Entertainment Complex—the world’s largest cannabis dispensary—in Las Vegas, Nevada, is a luxury experience. Seventy-four registers line up as personal shoppers accompany customers, explaining the different types of premium cannabis in glass cases. Customers can also catch a glimpse of robots making infused HaHa gummies and fizzy beverages. It feels seamless, and for many, like going to an Apple store.
That is, until checkout time.
Cash is king by default. You won’t be able to Apple Pay your way out. Among the 19 states (and the District of Columbia) that have legalized recreational cannabis usage—37 states for medical marijuana usage—none of the operating dispensaries will take credit cards as a payment option. The dominance of cash has made dispensaries prime targets for theft. Last year, the Los Angeles Police Department reported a twofold increase in burglaries, stickups, and armed assaults at legal cannabis dispensaries. Operating a legal dispensary also means highly punitive taxes because owners cannot seek typical standard business deductions.
Classified as a Schedule I drug “with no currently accepted medical use and a high potential for abuse,” marijuana is part of a cohort that includes heroin, LSD, and ecstasy. Despite the debates over its (and the others’) medical usage, cannabis is still, at the federal level, illegal to buy, sell, and possess. Major credit card processors like Visa and Mastercard will not authorize any credit purchases for cannabis products in the United States. To get around those challenges, about half of existing dispensaries use “cashless ATMs,” a method that miscodes a purchase at a point of sale (POS) as an ATM withdrawal. It is an option that Visa has notably frowned upon.
These nuances have made cannabis banking a major challenge for the small-to-large businesses involved in the industry. The result is a patchwork of solutions for retailers to transfer money safely while guaranteeing a quality customer experience.
At Money 20/20, an annual conference focusing on the latest trends within the fintech industry, a completely new set of panel proposals emerged this year focusing on cannabis banking. “From Illegal to Legal” was the overarching theme. Originally considered fringe, cannabis is now an industry with the potential to grow to over $30 billion by 2030.
Entering the Space Safely
Banks are reluctant to enter the cannabis space because of the lack of clear-cut regulations regarding cannabis’s legality and how it affects operating across state lines.
In what are typically known as KYC, or Know Your Customer, protocols, banks that want to work with cannabis dispensaries have to do a lot of due diligence with site visits. Erin O’Donnell, the cofounder of Infused Banking, a learning platform for cannabis and banking professionals, emphasized looking for red flags: Do the number of employee lockers match the business’s claim for the size of their payroll? How do they handle cash flow? Similarly, dispensaries have to know about the Bank Secrecy Act and other regulations that banks have to follow.
“The bank has to reconcile your million dollars with your sales, or you are money laundering. It has to say to a regulator: ‘I know what this customer sells. I know what this customer does. I know who it employs.’ So it’s really about transparency,” adds O’Donnell. Many banks also struggle with the stickiness of cannabis as a topic—and that doesn’t bode well for an industry that already faces stigma. “If you’re kind of embarrassed about banking them, that’s not a great relationship.”
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Physical safety is also a concern that fintech startups are trying to address. The more banks that go online and enter the space, the safer the people involved in the industry will be. With Mastercard and Visa out of the game, newer software startups have stepped in to ensure that small and large cannabis retailers show transparency at each step. Simply moving customers from paper to a digital transaction platform helps a dispensary document their work and remain compliant with the federal government.
Designing Anew and Setting the Tone
Wading into the gray areas of cannabis banking requires these startups assemble a mixed team of experts familiar with both traditional cash payments and digital ecosystems, in addition to people who have experimented with creative payment solutions. Everyone involved needs to be aware of exactly how cannabis is a different beast.
“We want to bring in the product, engineering, and partnership resources that have experienced large scale institutions and progressive fintechs. They can take those learnings and apply it to an industry that’s underserved. You need to be very creative,” says Ryan Himmel, the head of strategic partnerships at LeafLink, a wholesale technology B2B platform for the cannabis industry. For LeafLink, their approach to the problem was developed from a practice called invoice financing.
Invoice financing is when LeafLink provides upfront payments for a supplier via ACH, the same way a bank processes a paycheck, while then assigning invoices to the endpoint retailers. In facilitating large sums of money movement digitally, the startup makes it easier for these suppliers to scale. Credit unions in particular have led the charge in adapting fintech, compared to national banks, because of their smaller scale and ability to cater to their local communities.
Similarly, there are many factors that a customer-facing retailer has to accommodate for. “For a cannabis retailer, your point of sale cannot be the same as a restaurant or a hotel. You have state regulations, you’ve got tax reporting, and ID verification for your consumer. So the POS software has to be able to accommodate all of those attributes,” says Jessika Wood, the head of strategic payment partnerships at Dutchie, a platform that deals with the point of sale, ecommerce, payments, and insurance in the cannabis industry. No longer simply an in-person experience, the Covid-19 pandemic forced dispensaries and suppliers to evolve and go online in order to survive. With that, the buyer experience went digital and set the standard.
“We’re kind of setting the tone in terms of what ‘compliant’ means. As the market matures and things exist in the space and you’re not seeing the sky falling, more and more banks are getting involved,” says Jennifer Yager, senior vice president of anti-money-laundering compliance at Valley Bank. Partnering with multi-state cannabis operators, Valley Bank had to help customers find banks, wallet service providers, and even cash transport companies who were willing to touch cannabis cash.
Automation would reduce the number of resources spent on compliance, helping out smaller dispensaries that may enter the market in a more disadvantaged position. For these fintech startups, other than a business opportunity, integrating social equity is also part of their holistic plan. Many partner with The Last Prisoner Project to help redistribute some of their cannabis revenue back to those who have been disproportionately incarcerated due to past cannabis prohibition. Setting compliance standards also means setting social equity standards and expectations for this lucrative but also historically fraught industry.
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“It’s not only just solving the daily operations and providing access, but we do care a lot about the actual industry and trying to change the stigma around it,” Wood says.
The Future of Cannabis Banking
President Joe Biden recently announced the unconditional pardoning for all US citizens and lawful permanent residents for the offense of simple possession of marijuana in violation of the Controlled Substances Act. This, along with the SAFE Banking Act of 2019, which has bounced around Congress for the past three years, signal the federal government’s changing attitude toward the cannabis industry. Historically, the unequal enforcement of marijuana possession laws by police has led to racial disparities. Black people are more than 3.5 times more likely to be arrested for marijuana possession.
While the SAFE Banking Act would signal that banks would not be penalized, it does not solve the fundamental issue of criminality.
“SAFE doesn’t fix the card problem. It doesn’t fix 280 E. It doesn’t fix this marijuana-limited SAR (Suspicious Activity Report) filing framework, which creates a lot of compliance burden—and the value of which might be questionable,” says Yager. She also noted that the Act would not open up Small Business Administration loans for smaller dispensaries. It would reduce the stigma for banks, but would not change the landscape much.
So for now, entrepreneurs will have to keep engaging in more untraditional cannabis banking opportunities. Maybe someday, Himmel noted, bigger banks or Stripe and Square will be interested. But they’ll be a bit behind on data. Cannabis startups will be ready with a flick of a switch. As the Money 20/20 Illegal-to-Legal Summit drew to a close, conference attendees gathered around panelists, eager to ask questions and explore whether their local banks could embark on their own cannabis banking journeys. AI startup founders stood in line, eager to see whether their solutions could contribute to the process even more.
“There’s a lot of money to be made for banks and for fintechs,” Himmel says. “It’s hard to resist it because it’s so great to be part of something that didn’t exist before. That’s an entrepreneur's dream.”