The massive opportunity in legal pot payments
As marijuana legalization spreads throughout the U.S. and the world, companies in the cannabis market must navigate a delicate tangle of new and old regulations.

Despite the market's growing legitimacy, many many payment providers remain unwilling to risk working with dispensaries, leading to some inventive workarounds.

This listicle is compiled from reporting by PaymentsSource writers including John Adams, Kate Fitzgerald and David Heun. Click the links in each item to read more.
Chart: A growth industry
4/20 is their Black Friday
As the cannabis industry has inched toward legitimacy, it hasn't abandoned its roots. And that includes the infamous pot smokers' "holiday," April 20.

A huge spike in payments is expected this day. Tracking presale volume against prior years, cannabis technology company MJ Freeway projected $80 million in sales on 4/20 for 2018, up 48% over a year earlier and up 300% over an average day. By comparison, avocado sales on Cinco De Mayo in 2017 totalled $54 million, and pizza sales during the Super Bowl in 2018 totaled about $300 million.

The legal cannabis industry is becoming like any other merchant category, in need of processing variable payment volumes, migrating consumers away from costly payment methods, and tying payments to business functions like marketing and inventory.

"From a B2B standpoint, we see that brands want to capitalize on this holiday in a big way," said Ryan Smith, CEO of LeafLink, a New York-based company that provides order execution, CRM and other services for the cannabis industry.

Cannabis has always been an industry that succeeded in spite of its stigmas. While regulations have loosened in many states, banks largely stay away from providing credit or financial services to dispensaries, forcing them to use alternative payment methods if they don't want to exclusively take cash.

The political climate is also turbulent. On the conservative side of the aisle, Attorney General Jeff Sessions has called for crackdowns, while former House Speaker John Boehner has joined the board of legal cannabis company Acreage Holdings. Among Democrats, Cynthia Nixon, a candidate for New York governor, has made cannabis deregulation a central part of her platform.
legal medical marijuana
It adapts to a rocky regulatory landscape
Though recreational pot is legal in a number of U.S. states, big banks don’t want to work with cannabis sellers. And that is unlikely to change anytime soon.

Part of the issue is regulation — most banks are averse to marijuana's hazy legal footing — but a growing number of workarounds can help make these businesses less cash-based. The problem is these workarounds aren't as seamless as simply paying by credit or debit card at any other store.

“We’re in a gray area and everybody will have to deal with that,” said Eveline Dang, vice president at Cannapay, a vendor to the legal cannabis industry. “In terms of service providers, it’s our job to provide merchants with the right tools and systems and solutions that they will use to make sure they use them properly to be compliant in every way possible.”

Cannapay is part of an emerging category of providers implementing creative ways to make cannabis payments seem more digital than they actually are. The options include cashless ATMs (which initiate transfers when a customer inserts a debit card) and e-checks.

The drawback of these systems is that point of sale technology isn't designed to interact with them, making implementation often seem like assembling a massive jigsaw puzzle.

“POS systems typically are the core of the business with merchant payments, but now the way that POS systems and payment systems work is that it’s like a work around solution,” Dang said.

When a customer makes a purchase, it isn’t directly connected to a payment system. So the merchant has to go into the POS system and manually confirm that the payment was completed. Since most banks don’t work with dispensaries, the merchants have to write out their transactions to avoid discrepancies.

Starbuds, a marijuana store in Denver — where there are 158 active licensed marijuana stores alone — primarily deals in cash, according to Chris McCullough, the store's vice president of operations.

“At this point the industry has kind of gotten used to it,” McCullough said. “Of course we would enjoy to have credit card systems or a way to process them in an easier fashion.”
Cannabis leaf
Banks may be pushed out of the market
In the world of medical marijuana sales, there is a reluctance for traditional banks and payment providers to be associated with what remains a controversial area with a fluid legal footing.

However, some companies see this as an opportunity, including Medical Cannabis Payment Solutions, a provider of end-to-end management of medicinal marijuana operations.

If these companies adapt well enough, they may negate the cannabis market's need for traditional banks and payment processors.

The company has announced an upgrade to its site and payment platform in December. The revamped site features a new investor page with updated company news and financial and stock information.

"We have been working for a long time to complete our website and to increase our transparency and provide our customers, partners, investors and the media the information they need in order to understand our best-in-class technology and solutions,” said Jeremy Roberts, Medical Cannabis Payment Solutions' CEO, in a release.

Medical Cannabis Payment Solutions has also rebranded its payment system StateSourced. The company says the product is one of the first purpose-built solutions for cannabis banking that solves cash-handling issues, offers electronic payment and e-commerce features, and provides immediate access to funds while maintaining FinCEN compliance.
A medical marijuana growing room
Going (almost) digital
E-commerce can bring many efficiencies to a retailer's operations, but in the legalized cannabis industry, payments must still be handled offline.

This places marketing automation provider Baker in the odd situation of launching a white-label e-commerce platform for marijuana dispensaries that will provide tools for pre-ordering, pickup and delivery — but not payments.

So what does the platform's "Buy Now" button actually do?

At launch, Baker's co-founder and chief product officer David Champion said this: "Currently, the Buy Now button is a fast track to the shopping cart, allowing the customer to quickly add product to their basket and proceed to the last step of the order flow with one click or tap. The payment transaction, for now, still happens during pickup or drop-off."
ATM sign
Cashless ATMs
Because banks are still wary of working with marijuana dispensaries, these businesses have to come up with creative ways to accept cards.

One idea is the cashless ATM, which simulates a debit card transaction from the consumer's perspective but is still a cash transaction on the merchant's end.

Customers run transactions at the ATM in the dispensary, which prints out a receipt for the approved transaction. The customer then takes the receipt to the cashier to make a purchase and receive change.

The transaction at the ATM is passed from the customer's bank account to the merchant's bank account via automated clearing house transfers.
Alabama Sen. Jeff Sessions
Learning from example
Payment companies thinking about a future in the cannabis market have much to learn from the past experiences of other high-risk industries.

First off, this up-and-coming market—which is still illegal under federal law—requires payment companies to have exceptionally strong underwriting, due diligence and risk-management practices. They also need a thorough understanding of applicable laws, regulations and card brand rules. Additionally, it’s critical that they advocate for cannabis merchants proactively and reactively, if issues arise.

“This is how the other high-risk industries have managed to thrive in a high-risk space,” says Anthony L. Ogden, an attorney in Beverly Hills, California, who runs BankCardLaw.com, a provider of legal and consulting services to the payments industry.

Certainly, banks and payment companies operating in, or considering, the cannabis space have special considerations. A lot rides on what stance the Trump administration takes. Despite the substance's illegal status under federal law, the Obama administration decided not to interfere with state laws legalizing cannabis. However, that’s subject to change under a new president who has strongly criticized illegal drug use. Also notable is that Trump’s attorney general pick, Jeff Sessions, is a politician with a history of anti-marijuana statements.

“Payment companies are operating in a legal gray area that extends from the Obama administration,” Ogden says.
Barney's coffeeshop in The Netherlands
Compliance is a global problem
When there’s talk of Amsterdam, many people immediately conjure up the skunky smell of marijuana emanating from coffeeshops. And they wouldn’t be wrong.

The Dutch city is known for its lax laws surrounding soft drugs like cannabis and psychedelic mushrooms. And it’s been that way for several decades. But even still, cannabis companies have trouble landing banking relationships, much like similar businesses in the US.

“It’s quite a complex issue just the same as in the States,” said Oliver Margerison, director at Amsterdam Genetics, a producer of cannabis products that are then sold to coffeeshops and dispensaries. “Every cannabis-related company in the Netherlands has or has had issues with banking facilities.”

How much contention with financial institutions is dependent on the sector the business falls in, and whether or not it can be fully honest about its operations, said Margerison.

For instance, coffeeshops which also sell food and drink are categorized as horeca businesses, a sector that also includes restaurants that don’t sell cannabis.

“If you say to the bank you are a coffeeshop, there is no way you will acquire a bank account or any other facilities,” said Margerison. “If you say to a bank you are a horeca company and they do not delve deeper, you most likely will acquire the facilities and once you have received the facilities, it is very difficult for the bank to then retract the facilities if they have not done a full investigation into the company in the first instance.”

This legal loophole allows some cannabis companies to secure bank accounts and accept PIN debit transactions.
Hello My Name Is sticker
The name game
Companies in cannabis-related businesses must be careful about how they brand themselves, even if they don't sell recreational or medicinal marijuana.

Janell Thompson and Katarina Maloney say choosing the "wrong" name for their company was all it took to run afoul of banks and be labeled as co-owners of a high-risk business.

That name is HempHealthInc.com, an online business that sells cannabis-related products but is not a medical marijuana dispenser. Its name has led to trouble with banks and processors blocking accounts or refusing to provide merchant services because of the potential risk involved, Thompson said in a 2015 interview.

Thompson and Maloney operate businesses under the names Hookahzz LLC and JKWholesale Inc.

After two years, JPMorgan Chase closed the company's business accounts without specifying a reason, Thompson said, whereas PayPal cited the sale of hemp-related products for not doing business with JKWholesale (PayPal's terms prohibit the sale of drug paraphernalia, including the sale of tobacco and prescription drugs where prohibited by law). The company did not use Chase Paymentech for card services in the past.

"We know we are caught in Choke Point, but we are not medical marijuana or anything illegal," Thompson said. "We are completely clear legally, but the banks and PayPal don't differentiate it, mainly because of the word hemp in our name."
legal medical marijuana plant
Some banks are willing to take the risk
Banks are starting to see the business case in working with cannabis shops. Marijuana-related businesses throughout the United States brought in $6.7 billion in sales in 2016, an increase of 25% from 2015.

And now Honest Marijuana, true to its name, can be honest with its bank about the product it makes. The influx of competition has also lowered the fees for the grow house; Honest Marijuana now pays about 1% for payment processing, down from 4.5% it paid previously.

Despite this progress, most financial services providers still see compliance as a hurdle. Only about 300 of the more than 11,000 banks currently operating in the U.S. work with legal pot vendors.

“Paradoxically, most of the institutions nationwide that offer business to marijuana suppliers are small and very unhealthy; most are the ones desperate for income,” said Lamine Zarrad, founder and CEO of Tokken, a Denver-based blockchain startup.
A green debit card
The market is welcoming to prepaid cards
Another option is a specialized prepaid and loyalty card for licensed marijuana dispensaries.

In 2014, Cal-Bay International developed the CB Green Card to facilitate purchases of medical and recreational marijuana from licensed dispensaries. It also designed an electronic payment method that could operate on Cal-Bay's payment processing terminal.
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