Banking in Cannabis, Part 1 of 3: Current Methods of Payment
Guest post by Dustin Eide, CEO of CanPay
Although legal cannabis is becoming more mainstream as new states continue to approve its use, the industry is still struggling to exit the shadows of the grey market. Rules and regulations vary across state lines and are being created on the fly as the industry evolves day-to-day. The one constant in it all however, is the uncertainty of banking.
To date, none of the major traditional payments providers allow cannabis-related transactions to cross their networks due primarily to the ongoing conflicts between state and federal law. This includes common household names like Visa, MasterCard, Discover, and American Express. As a result, state-legal cannabis businesses have been relegated to operating primarily cash-only businesses. Next time you’re in a retail dispensary, look in the corner—most have an ATM on premise to help deflect the heavy inconvenience on customers that comes with being unable to leverage electronic payments. However, ATMs pose their own inconveniences including high fees with each transaction and the safety concern associated with housing and dispensing large amounts of cash.
Across the country’s legalized states, creative attempts to move beyond this “cash intensive” model have been aplenty, but the hard truth remains: There are few viable, transparent, and compliant electronic payment options available.
Let’s take a look at payment methods currently being employed in dispensaries across the industry.
[Note: this list does not generally address the legitimacy of these solutions, but only that they are presently used in some dispensaries. We will be providing, in part 2 of this series, the questions you can ask the operators of these services to get to the bottom of the riskiness associated with each.]
Cashless ATM/Voucher System aka Point of Banking
The Cashless ATM (also known as Point of Banking) payment option uses a countertop credit card terminal to mimic an ATM transaction. In order to appear to be an actual ATM cash withdrawal, all transactions must be conducted in increments of $5, resulting in actual cash back to the customer with each purchase. The customer also pays a frontend fee of between $3-$5 (this was just increased nationwide in October by a whopping $1.75) plus another potential cash advance/cash withdrawal fee from their own bank when the transaction settles. The merchant receives an electronic deposit into their bank account for the sales approximately 3-4 days after the sale.
The “Hidden” Merchant Account
The “hidden” merchant account operates similarly to a traditional merchant services account and can include Visa, Master Card, Discover, and/or American Express. It differs when it comes to the fact that the merchant is unable to operate under its own trade name, but instead must use a name unrelated to their licensed cannabis business or utilize a third-party intermediary’s name so as to hide the nature of the business. The third party in this case receives the funds first and then transmits them out to the cannabis merchant. This can include overseas merchant accounts or domestic accounts, and often involves fees of 5%+ for the merchant and “convenience” fees for the consumer. This type of account has also been known to be highly unstable as they are closed upon discovery by the processor/bank.
Some licensed cannabis businesses accept cryptocurrencies (think Bitcoin, Etherium, etc.) at the point of sale for cannabis purchases. These cryptocurrencies must first be purchased (with USD or another cryptocurrency) or “mined” before they can be used by a consumer to make a purchase. While this may seem like a reliable payment option on the surface, the intricacies of crypto currency, also known as blockchain, are quite complex and unfamiliar to your typical consumer/patient. For starters, most solutions for the cannabis industry use credit cards to fund the procurement of the cryptocurrency, which can then be immediately used for purchases in the store. This amounts to using the cryptocurrency as an intermediary, or mask, to facilitate the credit card purchase. However, if credit cards are used, the merchant account is usually based overseas and customers will incur international processing fees. Many banks also block overseas transactions and/or digital currency purchases. On top of all this, many of the cryptocurrency payment service providers receive the funds intended for a cannabis purchase into one or more bank accounts that they control prior to remitting those funds to the merchant.
It’s a fine line to walk. Particularly since cryptocurrency solutions combine the world’s most unregulated “currency” with one of the world’s most regulated industries: cannabis.
Stored Value or Pre-paid
With stored value, aka pre-paid card options, customers determine how much they will want to spend and then pre-load a card or app with the necessary funds. They then use the card or app at the dispensary to make a purchase. Some services fund these pre-paid accounts through Automated Clearing House (ACH) transfers, while others fund accounts with credit card payments. The money sits in an account controlled by the stored value service provider (at a bank that may or may not know these will be funds used for cannabis purchases) until the customer makes a purchase, then the money is “transferred” to the merchant’s account at the same stored value provider as payment.
Automated Clearing House (ACH) Based
Payment services built on the Automated Clearing House (ACH) network are most similar to the experience consumers have while shopping at traditional retail establishments when they use their bank-issued debit cards. These are card or app based payment services that use the ACH network to create bank-to-bank transfers on behalf of consumers and cannabis businesses. The ACH network is the same network your bank uses to settle funds for bill pay and debit card purchases—making it familiar for customers to use. All the customer has to do is link their checking account to the card or app to be able to make payments. The ACH network has no specific prohibition on cannabis transactions, making it highly reliable and efficient.
As the cannabis industry continues to evolve, so will banking and payment solutions. A number of creative methods have been cobbled together to provide an alternative to cash-only models, but we can anticipate those solutions providing the most normalized retail payment experience will be the ones that consumers and cannabis businesses will ultimately gravitate towards as the landscape matures.
Next up in our 3 part series: “12 Key Questions to Ask When Choosing a Banking/Financial Services Solution.” Stay tuned!
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.