A blue wave wouldn’t allow cannabis firms to accept card payments, but it would enable change
The upcoming U.S. election could move the cannabis industry closer to the mainstream, but legal dispensaries will still have to deal with workarounds to accept card or mobile payments.
Despite bipartisan momentum toward legalization, cannabis sellers, growers and merchants have long relied on circuitous access to financial services, since federal prohibitions have made mainstream banks reluctant to work with the industry. This has made it nearly impossible for U.S. cannabis sellers to accept mainstream cards and wallet apps.
There’s a chance for more substantial relief, but the politics are complicated.
“We expect cannabis legislation to be enacted someday in the relatively near future, but when that will happen is anyone’s guess, even if the Senate turns blue with the November elections,” said Dustin Eide, CEO of CanPay, a Denver-based cannabis payments app.
The uncertainty of different state regulations and no federal mandate has resulted in a mix of blockchain, cryptocurrency and cashless ATMs, which are all complicated and inefficient. Cashless ATMs, for example, require extra hardware and do not have a direct connection with the merchant’s point of sale. As a result, cash is still a major payment method.
Removing marijuana from the federal list of controlled substances would in effect legalize cannabis in all 50 states. That wouldn’t directly drive financial services or payment policy. But it would give regulatory cover for financial institutions to work with cannabis businesses, enabling easier access to card payments, reducing the need for complicated payment gateways.
One of the Senate’s most vocal opponents of cannabis legalization, Sen. Mitch McConnell, R-Ky., faces a reelection battle in November against Amy McGrath, who won the Kentucky Democratic primary in the spring. McGrath supports an incremental legalization of cannabis, and has run ads against the senator, calling McConnell’s unrelated support of hemp into question.
The polls have McConnell about 5 points ahead of McGrath. The Democrats need to win three or four Republican held seats (depending on the presidential race and subsequent VP tiebreaker) to win control of the Senate. That outcome would cost McConnell his post as majority leader even if he were to retain his seat.
The minority leader, Sen. Charles Schumer, D-N.Y., who would be in line to be the new majority leader, has supported legislation to remove marijuana from the controlled substance list. The House could vote on a similar bill this month, in theory bringing a bill to the president before the election.
President Trump has been mixed on cannabis, expressing support for federal legalization, but more recently has taken a harder line and said putting state referendums on the ballot would hurt his reelection chances. Sen. Kamala Harris of California, the Democrats' vice presidential nominee, is the lead sponsor of the Senate bill, lessening the chances Trump would sign a bill before the election. Democratic presidential nominee Joe Biden supports decriminalization and legalization of medical marijuana, with recreational use left to the states.
The maze of politics has CanPay accelerating its existing payment products as more states legalize cannabis, anticipating a larger market while hedging the uncertain legal or regulatory environment. CanPay operates a mobile app-driven payment system, and has partnered with firms such as Jane Technologies to offer an online menu for ordering and payments. Order ahead, pickup and delivery are available based on local laws.
Cannabis sellers can accept card payments if they lie about their business category, but this is a risky and shortsighted strategy.
“Our goal today is to continue to offer a viable alternative to the risky and likely illegitimate ATM/PIN debit/credit card based options that cause great disruption to dispensaries and their consumers when they are discovered by the card brands and shut down,” Eide said.
CanPay’s compliance program is built around the existing federal guidance, which Eide said is sufficient to provide legitimate payment services to any cannabis dispensary with access to compliant cannabis banking around the country.
“While we are paying attention to changes at the federal level and providing insight to regulators/legislators based on our experience, the current uncertainty around when, and how, cannabis legalization will be enacted has not impacted our approach to compliance,” Eide said.
The political pressure also challenges the hemp industry, which sells products containing cannabidiol (CBD), which is often associated with THC, or marijuana derivatives — though the products have different psychoactive effects.
CBD retailers often have their merchant processing accounts terminated when a financial partner confuses CBD with THC, said Bo Grist, executive vice president of delivery at Ignition Commerce, an Atlanta-based e-commerce and multi-channel retail integrator, adding that causes subscription payments to be cancelled, requiring a complicated fix to restore recurring payments.
“Because the CBD industry is still relatively small, there are some companies that are going to shy away,” Grist said, adding a shift in the Senate could loosen restrictions on the THC industry after the election, thus making it easier for CBD companies to operate. “For many southern Republican senators in hemp-growing states, there would be a willingness to ease" THC restrictions.
Legal marijuana is a growing business, with U.S. sales projected to triple in the next five years. And where there's legal clarity, mainstream financial services soon follow Amex, Visa and Mastercard agreed to process card payments in Canada immediately after legalization.
“It’s the potential for change that creates the disruption rather than wherever things settle out,” said Brad Amstrong, a partner at Los Angeles-based fintech investors Lovell Minnick. “A lot of times it's helpful for a financial institution to draw in a subject matter expert to remain compliant.”