Data: Pot payments on the rise

Now that states such as Michigan, Utah and Missouri voted in favor of legalization in this year's midterms, legal marijuana is poised to become a growth industry.

But because cannabis remains illegal at the federal level, merchants are largely unable to access the banking system and are precluded from accepting credit and debit cards. However, the U.S. card brands appear eager to move into this market. Just last month, when Canada legalized recreational cannabis sales, American Express, Visa and Mastercard rushed to handle those payments.

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Fresh off election wins in states such as Michigan, Utah and Missouri, the states’ cannabis legalization train moves on. According to Governing.com and TIME, consumers can legally use marijuana for recreational or medical purposes in 10 states plus D.C., while an additional 23 states and the island of Puerto Rico permit medical use of the drug.

The results from this month's midterm elections reveal that Michigan voters approved recreational cannabis use by a 55 percent to 45 percent vote. However, North Dakotan voters turned down a recreational use proposal by a 59.5 percent to 40.5 percent vote. Both states already had medical marijuana use laws on the books at time of voting. Meanwhile, Utah and Missouri both joined the legion of states permitting medical cannabis use.
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The market for legal weed is massive, as the consumer demand which has been pent up for decades is finally being addressed.

According to the Frontier Financial Group, businesses sold more than $7 billion in medical and recreational marijuana products across the U.S. in 2017. This is expected to rise to more than $10 billion in 2018 and jump to over $24 billion in 2025.

Because cannabis remains illegal at the federal level, merchants are largely unable to access the banking system and are precluded from accepting credit and debit cards. As a result, the business of cannabis is one dominated by cash purchases. However, several companies are working on solutions to solve the industry’s need for digital payments. CanPay is offering a mobile app to make purchases. Alt Thirty Six has created a cannabis payments platform for marijuana dispensaries. Meanwhile companies such as the Tokes Platform and Dash are using cryptocurrencies to solve the problem. GreenStar Payment Solutions has developed the cashless ATMs to serve merchant needs.
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According to the Colorado Department of Revenue, the state has collected more in marijuana taxes every year since recreational legalization than it has collected from liquor taxes. In 2017, the state collected almost five times as much from the taxes and licensing fees of cannabis than it did from the business of selling and licensing of alcohol.

The potential for states willing to license and regulate the distribution of legal cannabis is huge. Arcview Market Research was cited in Inc. magazine as quantifying the black market for marijuana at over $46 billion annually. Using the Michigan proposal that was passed on Tuesday as a guide, it calls for a 10 percent excise tax on all marijuana sales, in addition to licensing and other fees. Applying this tax rate to the $46 billion black market, it could generate $4.6 billion in incremental state revenues from legalization. While the outcome of the federal-state tug of war is still hazy, it’s clear that legalizing cannabis is big money for the states.
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Few banks or credit unions are openly handling marijuana-related business because of the compliance burden and other risks, but demand for financial services is rising as more states legalize pot. So far 334 banks and 107 credit unions were documented participants in the cannabis industry at the end of June 2018, according to the most recent data from the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), but the numbers are gradually rising.

Banks processing payments in the fast-growing cannabis industry are seeing profits, according to Tyler Beuerlein, executive vice president of business development at Scottsdale, Ariz.-based Hypur, a consulting firm to money transmitters which also provides software and consulting services for financial services organizations handling cannabis and other high-risk payments.

“Most banks and credit unions in the cannabis payments arena are having good success, after they get past the challenges of operating in a high-risk, highly regulated industry,” Beauerlein said.

Hypur's app enables pot merchants to authorize consumer payments through several participating banks and credit unions within the parameters of state and local regulations. Consumers download Hypur's app, link a bank account and use a four-digit PIN at terminals at each participating pot dispensary to pay, according to Beauerlein said.

It’s unclear whether federal policy on cannabis sales will change with the departure of former U.S. Attorney General Jeff Sessions, but many banks are ready to act if U.S. policies become more lenient, according to Beauerlein. “Sessions was vocally opposed to financial institutions being involved in cannabis, but with his departure we’re getting a lot of interest from financial institutions,” he said.
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With a population of 40 million and longstanding regional leadership in illicit pot, California remains the nation’s leading marijuana market. Following the legalization of recreational pot in California in January 2018, the state is on track to see 18 percent annual growth in cannabis revenue, forecast to reach nearly $6 billion by 2020, according to Cannabis Business Plans.

Relatively steep and complex state and local taxes plus rising competition from legal pot sales in other regions may put a dent in the growth rate of California cannabis market.

Sales tax ranges between 7.5 percent and 10 percent, depending on the county; California charges all buyers a 15 percent excise tax and various cities are imposing their own taxes (10 percent in Los Angeles, for example). These factors will drive about a third of sales volume to illicit pot growers, Cannabis Business Plans estimates.

Cannabis taxes are likely to be significantly lower in certain other markets, which could have a positive effect on local marijuana markets. Michigan, where voters approved recreational pot use in the November 2018 election, is aiming to charge 6 percent sales tax and 10 percent excise tax. The long-term trend is continued enforcement of local and state taxes, experts say.

The growing number of states legalizing pot is also driving down the cost to consumers and with market expansion, some markets are seeing cannabis production surpluses. But entrepreneurs still foresee broad opportunity. “The cannabis market is expanding into new markets, and one way or another as the industry looks to become legitimately banked, we expect to see more banks and credit unions adopting cannabis payments across the U.S.,” said Hypur’s Beauerlein.
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