Banking in Cannabis, Part 2 of 3
Guest post by Dustin Eide, CEO of CanPay
Ever since the major card brands ceased allowing credit card and debit card transactions for cannabis purchases, cannabis dispensaries and retailers have struggled to find a reliable and legitimate alternative to cash purchases. How do dispensaries provide secure, legitimate payment options to customers when traditional financial providers won’t participate in the industry due to federal regulations? Cash has traditionally been the first choice, with ATMs popping up in virtually every dispensary – but aside from security concerns, this tangible option can be inconvenient and unnecessarily costly for customers (think high ATM fees).
When it comes to cashless alternatives, there are several options. The challenge is separating the legitimate solutions from the risky and potentially fraudulent. Finding the safest, most secure payment choice for your business comes down to asking the right questions.
Many payment services try to get around the rules and regulations by disguising where transactions originate. They might use fake business names, transmit money through foreign banks, operate under an inaccurate merchant category code, or rely on digital currencies such as Bitcoin to mask the credit card purchase. This makes transactions appear legitimate and allows cannabis businesses to fly under the radar temporarily – however, these “solutions” have proven unreliable in the long run. Risk and compliance teams are always on the lookout for telltale patterns, and being discovered can lead to serious repercussions.
Transparency is key when it comes to finding a payment solution that is sustainable in the long-term, and luckily there are now straightforward options. You can filter out risky solutions by asking the following questions:
- What name shows up on the paying customer’s bank statement? Hint: It should include your business’s full trade or DBA name.
- Does the payment service disclose the financial institution(s) involved in their transaction flow?
- Do your funds ever leave the US banking system?
- If Visa/MasterCard debit or credit cards are involved, what Merchant Category (MCC) is used? You can check out the Visa Data Standards Guide to research the code being used (there currently are no “recreational” or “medical” marijuana retail codes issued by the card brands, indicating their lack of approval of transactions in the cannabis industry).
- Are any intermediate currencies or other methods of “storing value” used in order to convert payment?
Financial Services Ethics
The fact that cannabis financials services relationships can be challenging shouldn’t mean you have to bend the rules of ethics to get what you need. Legitimate payment solutions will disclose their relationships with cannabis businesses and obtain the right licenses to operate within the industry. You can identify legitimate solutions by asking these questions:
- Is the payment service required to be licensed as a Money Transmitter and/or Money Services Business? If so, have they registered in every jurisdiction, including foreign countries, where they operate?
- What is the funding timeline from purchase to delivery to the merchant’s bank account? Longer than two banking days indicates funds flow somewhere else first before being retransmitted to a merchant’s bank account.
- What name shows on the deposit to the merchant’s bank account?
- Does the payment solution disclose publicly anywhere the list of cannabis businesses accepting their payment service?
- Does the payment service mention serving cannabis businesses on their main website or do they use peripheral terms like “cash-intensive,” “cash-only,” “recreational” or “highly regulated” businesses without directly identifying they serve the cannabis industry?
The most important part of finding a long-term cannabis payment solution is to make sure all parties are operating in compliance with current state legislation and federal guidance. A legitimate solution should require the cannabis businesses it works with to submit current state-issued marijuana licenses and be banking in a cannabis compliance program built around the federal guidance for cannabis banking known as the Cole Memo and FinCEN Guidance. Ask your payment provider the following questions:
- Does the service collect state issued cannabis licenses for each cannabis business they serve and do they maintain current licenses?
- Does the payment service require cannabis businesses to be banking under the Cole Memo and FinCEN Guidance before using their service?
The cannabis industry is constantly evolving, but the principles of transparency, ethics, and compliance should always be in place when it comes to the relationship between financial services and cannabis businesses. Such a highly regulated industry demands payment services that comply as closely to the rules and laws as your business does, so make sure your payments provider checks all of these boxes. If they refuse to answer any of these questions, or claim that they are beholden to a “non-disclosure agreement” with their bank, let that non-answer guide you as well.
Here is a link to the first article in this series, “Five Ways Cannabis Dispensaries Offer Alternatives to Cash Payment“. Stay tuned for the final part of our 3 part series: “Hawaii Goes Cashless: A Case Study in Cannabis Payment Solutions.”
About the author:
Dustin Eide is the CEO of CanPay, the first legitimate debit payment platform for the cannabis industry.
Dustin first learned the art of a well-crafted message while working in marketing for a Fortune 300 company. He eventually determined that the corporate life was not for him and he set out to make his mark on another industry. Always one for a challenge, Dustin chose the hyper-competitive payments industry where he spent more than 7 years learning its intricacies while serving 1000’s of retail and ecommerce businesses, banks, and technology partners with creative payment solutions.
Following Adult-Use marijuana legalization in Colorado and Washington in 2014, Dustin saw the opportunity to use his unique problem-solving skills and knowledge to build a legitimate and stable payment solution for an industry that lacked access to traditional financial services. Dustin and his team launched CanPay in November of 2016 and rapidly grew the platform into the largest legitimate payment network for the regulated cannabis industry, currently serving more than 35 dispensaries in 5 states.
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