Despite the growing legality of marijuana sales, banks have largely written off the industry as being too high-risk. Recent remarks by U.S. Attorney General Jeff Sessions would seem to reinforce that position.
Though the winds appear to be blowing against it, LeafLink's co-founder and CEO Ryan Smith insists there is still momentum in the legal cannabis market, especially for companies that enable digital payments.
"The growth of this industry really can't be stopped now," said Smith, 26, who was the first CEO of a cannabis-related company to be listed on Forbes' 30 Under 30.
The New York-based LeafLink, which provides an online marketplace, CRM, back-office services and order execution, has both good and bad signs ahead of it. The company raised $13 million in funding in 2017, including a $10 million round near the end of the year, led by London-based Nosara Capital.
Sessions has taken a hard line against legal cannabis, urging allowing federal prosecutors to be more aggressive in enforcing federal laws that may contradict more liberal state laws in some locations. This is a sharp reversal of Obama-era instructions that were more supportive of legal cannabis.
Sessions' stance is expected to push legacy businesses such as banks further away from the industry at a point where there were signs of compromise.
"If these regulations go through, clearly there's going to be a large pause from financial institutions," said Tim Sloane, vice president of payments innovation and the director of the emerging technologies advisory service at Mercator. Venture capitalists may also recognize the stresses on ROI given the changing regulatory environment, he said. "As a result I would expect fewer investments going forward, assuming the Justice Department does crack down."
There are signs Sessions' move is already having an effect, as debit card processors have discontinued business with some dispensaries in New England, threatening the progress of digital payments.
"Cash will be their only acceptable tender," said Raymond Pucci, an associate director of research services at Mercator. "At some point this issue of states versus the Feds will be sorted out, but until then it will be a period of painful watching."
Smith is not concerned at this point. LeafLink does not sell or grow marijuana, so it would not be directly impacted by any new federal regulation, though it could suffer indirectly.
"No law was created by Sessions so it doesn't really change anything," he said, sticking to his company's bullish outlook. "And the cat's out of the bag in terms of this industry; there's no going back. If anything, this may force a decision on regulations that could move the industry forward and provide clarity."
LeafLink charges a subscription rate to manage e-commerce and merchant services for sellers; it does not charge per-transaction fees. The company follows state politics in its expansion strategy — as state regulations relax, LeafLink looks to those regions to boost its network.
It plans to use its latest VC funds to grow its base of 400 brands and 1,700 retailers in six states. LeafLink has handled $186 million in transactions since 2016 and is targeting $500 million in 2018.
"The way people pay depends on the market; there's a wide range of maturity," Smith said. "Eighteen months ago, 70% of the payments were in cash, but now we're seeing up to 65% ACH and wire transfers in the more mature markets."
Those markets would be Colorado and Washington, the early movers for legal cannabis. Smith is betting on a boost from California, where recreational sales became legal on Jan 1. The company plans to be live in 10 states in a few months with New Hampshire, Vermont and Pennsylvania in its pipeline.
Legal weed has always been a tough business—merchants have often lied to banks to get payment processing and other banking services, and would get quickly dropped if the banks found out about the business model, even where it is legal.
The legal pot industry has also tried workarounds such as cashless ATMs as a way around skittish banks. Cashless ATMs look like point of sale devices, and handle ATM card payments as cash withdrawals instead of sales to a merchant. The merchant receives the cash and provides change to the buyer.
More recently, there has been progress in bringing digital transactions and processing to the cannabis industry, including traction for cryptocurrency. And LeafLink is not alone in the marijuana e-commerce market: Baker, a retail platform based in Denver that focuses on dispensaries, launched an order platform in 2017.