A startup challenges the high-risk status of legal pot sales

Register now

Seeing an opportunity to address the multi-billion dollar cannabis industry’s needs for payments processings, Zodaka is launching with a system that focuses more on price than process.

Though cannabis sales are legal in many states, the market is underserved by legitimate processors who treat such sellers as high-risk. If cannabis sellers can get a bank account, they would likely be priced according to the perceived risk of their operations.

“In our industry, it’s not uncommon for merchants to pay fees upwards of 6 to 10% plus reserves of 10 to 20% of payment volumes which makes it difficult to make a living,” said Jordan Friedman, CEO of Zodaka.

The startup has been in business for approximately four months serving e-commerce CBD oil and seed merchants and will soon move into retail store POS cannabis merchants. Typical Zodaka pricing ranges between 3 to 5% depending on volume and no reserves, Friedman explained. Consumers pay by initiating a transfer from their checking accounts.

"We use a direct transfer system similar to ACH and we never hold the money in transit," he said. "The sellers will see the money in their bank account within two to four business days ... we basically don’t have chargebacks in our business."

According to Frontier Financial Group, the legal cannabis industry will generate almost $11 billion in sales in 2018. For perspective, that’s double the size of the revenue that Danish company Lego sold last year and over 50% bigger than the projected $6.8 billion in revenues Spotify, the world’s biggest selling music streaming service, expects to generate this year.

Since the cannabis industry sits between a federal ban and states’ legalization efforts. most banks don't want to take on the risk of working with them. This means that most stores must either accept cash only or use some type of workaround solution ranging from cashless ATMs, to dedicated cannabis networks and even cryptocurrency.

Some cannabis merchants try to hide their real business nature to be able to accept credit and debit cards. “Eventually they get found out, their accounts are frozen, they lose thousands of dollars and are forced back into a cash business," Friedman said. "We aim to change that with our version of electronic cash.”

Cannabis is also considered a high risk industry due to higher levels of fraud and chargebacks.

The challenge all high risk businesses face, which includes industries such as firearms, gaming, adult entertainment, and even e-commerce, is that they pay higher processing fees, experience longer holds on receiving funds, and expect sizeable reserves to be withheld from sales to pay for potential fraud. Further, not all payment processors want to work in high risk industries so that often means working with specialty vendors who can dictate pricing and terms.

The idea for Zodaka began when Friedman started working in the industry with his father, first in delivering cannabis and then in developing software to help run the shops.

“We saw an opportunity to foster change, which is why we got into the payments piece, because that’s the real pain point for merchants,” Friedman said.

The name Zodaka combines the words Zodiac and Tzedakah, the Hebrew word for charity. "Our life’s charity is to serve the cannabis community," he said.

For reprint and licensing requests for this article, click here.
Marijuana banking ACH Alternative acquirers