Fintech solutions for the cannabis industry have proliferated as the legally emerging, fastest growing industry in the nation still faces barriers to traditional banking. Some of these fintech solutions have proven untenable, but that doesn’t mean they don’t offer important lessons for the future of cannabis payments and how fintech can be a part of it.
Cannabis businesses have long faced obstacles when it comes to basic banking services. Even securing and keeping a checking account could be a big challenge for cannabis businesses. Payment processing, especially, has been off limits to legal cannabis businesses, even when they are fully compliant with all state laws.
This means most cannabis businesses have to deal completely in cash. The only alternative for many is to lie to the bank about their operations, which is a slippery slope that carries with it significant consequences to the business. Dealing in cash only, however, is cumbersome and risky, especially when you can’t deposit it in a checking account.
Fintech companies have emerged as a source of workarounds for bans on cannabis payment processing or banking services. Unfortunately, most have failed to become established, sustainable services that can stand the test of time, either due to regulatory considerations, lack of adoption, or the card networks themselves. When considering fintech for cannabis payments, it’s important to learn from what didn’t work to determine what could fill the payment processing needs of cannabis businesses nationwide.
Each of the fintech solutions for cannabis banking offered below is a novel approach to the challenges posed by the industry’s lack of access to banking and merchant processing services. Unfortunately, each also has a fatal flaw that has prevented it from becoming the go-to option for cannabis businesses.
Digital wallets serve as a middleman between a bank account and a cannabis transaction. A customer downloads a mobile application, to which they link their bank account. Then, the customer transfers funds from their checking account into the digital wallet. The digital wallet, now funded, can then be used to engage in cannabis-related transactions with a cannabis business.
This is generally an effective approach to cannabis payment processing, until the card networks catch on. The card networks view the transaction with the digital wallet as linked to the cannabis-related transaction, and therefore consider this method as using their network to purchase a federally illegal substance.
Repeated attempts to bypass the networks could result in a company being added to the Terminated Merchant File (TMF), which could prevent access to card networks for up to five years. Card networks could also pressure banks to drop clients who engage in this behavior, so even if your bank is cannabis friendly it could result in an account termination.
A cashless ATM involves the use of a digital ATM and a customer’s debit card to make “withdrawals” that cover the cost of the purchase. Rather than getting the withdrawn amount in cash, like a regular ATM, the customer is given their change.
For example, a customer purchasing a gram of cannabis oil for $70 would make a “withdrawal” of $80. The cashier at the dispensary would offer the customer $10 in change. To the bank and the card network, this looks like an ATM transaction.
The issue with this approach is that it is patently illegal and risky. The bank is either ignorant to this activity or turning a blind eye, which means a cashless ATM could be terminated at any time for violating the agreed-upon terms for using the machine. Charging an ATM or convenience fee for a purchase is a federal crime under the “Durbin Amendment.” Attempting to disguise a purchase as a cash withdrawal is fraudulent. If a business is repeatedly caught using cashless ATMs, they could incur lawsuits or, in extreme cases, be targeted for criminal prosecution.
Another area in which cannabis businesses are limited is funding. Lending can be difficult to come by for cannabis businesses, but fintech platforms offering a marketplace of cannabis investors have sought to fill that void.
These platforms are effective in that they offer businesses the opportunity to get in touch with investors and lenders directly. The biggest benefit is these platforms offer a source of fast funding that is available specifically for the cannabis industry. However, this funding tends to be expensive, either costing equity or requiring high down payments or interest rates.
While previous fintech attempts at solving the complicated issues surrounding cannabis payment processing have largely failed, there are important lessons to be learned from them.
These lessons are:
1. Avoid the card networks: Major card networks like MasterCard and Visa have made it clear that they will not support any cannabis-related transactions until cannabis is federally legalized. Any sustainable payment solution must circumvent the card networks — at least until cannabis is federally descheduled.
2. Transparency is a must: If the bank can’t know, it isn’t sustainable. Even if the bank does know and choose to turn a blind eye, it is only a matter of time before the card networks or bank examiners come calling. Any long-term sustainable solution must be fully transparent and endorsed by a cannabis-friendly bank.
3. Adoption must be easy: Customers are used to paying with their debit or credit card, or they’ll pay in cash. The issue with mobile wallets is primarily a lack of adoption, so any sustainable cannabis payment solution must be easy to use and familiar for customers.
It is important that fintech startups and entrepreneurs learn these lessons quickly, because there is immense opportunity for fintech companies in cannabis payments.
One example of a sustainable approach to cannabis debit card transactions is the newly-introduced cannabis-compliant, transparent but otherwise traditional PIN Debit merchant account, which might provide some insights that prove useful to fintech companies in developing the next groundbreaking cannabis payment solution.
PIN Debit merchant accounts change how cannabis businesses accept debit cards because transactions between a customer’s checking account and a PIN Debit merchant account are ATM transactions – they are enabled by the banks rather than the card networks. When transparently tracked by a cannabis-compliant sponsor bank, every transaction is visible to all financial stakeholders including the banks’ examiners. Such a cannabis-friendly institution monitors all transactions to ensure compliance with anti-money laundering requirements imposed by its examiners.
This approach circumvents the card networks because it operates on the debit (ATM) financial ‘rails’ which run parallel and independently of the credit card networks. Additionally, Fincann’s sponsoring bank has firmly established cannabis programs years of demonstrated compliance with regulatory requirements. In other words, Fincann’s traditional merchant processing for THC licensees like dispensaries and delivery service meets the requirements of bank examiners.
The big drawback to PIN Debit merchant accounts is that they require in-person, card-present transactions for verification purposes. This means they are not compatible with e-commerce applications.
While significant opportunity for fintech companies remains in the ecommerce sector of the cannabis industry, the current frontrunner is “Express ACH,” a solution sponsored by a well-known cannabis-compliant CA bank. Express ACH features one-click checkout similar to entering a credit card for payment without the need for pre-registration, passwords, app downloads, and other activities.
Cannabis businesses selling online are not only unable to accept debit or credit cards as payments, but they are also restricted to intrastate commerce – THC licensees are not able to engage in trade outside their states so long as the federal prohibition on cannabis continues. As a result, solutions that could help ecommerce businesses navigate these limitations are sorely needed.
If you have a fintech solution that adheres to the three lessons above, the cannabis industry needs you, particularly if you’ve developed a solution for processing ecommerce payments for cannabis businesses. Immense value remains untapped as legal markets expand, and cannabis becomes mainstream. Fintech providers could win big while providing millions of entrepreneurs with the merchant processing services they need if they can bring their solutions to market before federal legalization brings the card networks into the game.