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 recently confirmed pick for attorney general is Alabama Sen. Jeff Sessions, 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.
Given the uncertainty and the stigma of marijuana, many payment providers and banks are still hesitant to work with cannabis merchants. There are, however, a growing number of companies focusing on or looking to enter the market. Some are taking a back-door approach by classifying transactions under improper MCC codes, but others are more forthcoming about their efforts.
“The key to high-risk areas and banking relationships is to have a strong compliance program and transparency,” says Braden Perry, a partner at Kennyhertz Perry LLC in Kansas City, Missouri, and a former federal enforcement attorney. He also recommends payments players arrange for independent compliance audits of their cannabis businesses.
Lamine Zarrad, chief executive and founder of Tokken, a Denver-based company that extends payments and banking services to high-risk businesses, says knowing your customers is critical in the cannabis space.
“KYC is a major tenant in doing work with cannabis—just like it is in gambling, adult entertainment, pawn shops, liquor stores and so forth,” says Zarrad, a former federal bank examiner. “You also have to know about the business and the baseline of its activities.”
Payments companies should be prepared to demonstrate that their merchants are compliant at the state level. “This might provide some protection against legal action,” says Tanya Hoke, founder and managing director of Galen Diligence, a Cambridge, Massachusetts-based company that provides expert investigative due diligence services for potential investors and businesses in the cannabis industry.
Payments providers also need to be able to identify which accounts are linked with marijuana businesses—so they can be monitored appropriately in the event of increased federal scrutiny, she says.
Even with these efforts, however, the cannabis space remains a dangerous business proposition, says Theodore F. Monroe, a Los Angeles attorney whose clients include payments and processing businesses.
He points to Operation Choke Point, an initiative that turned the screws on banks and third parties that did business with controversial—yet legal—industries such as ammunition sales, escort services, get-quick-rich schemes and online gambling. Something similar could happen in the cannabis space, he predicts.
“There’s only so much [payment companies] can do to protect themselves," Monroe says. "They need to be careful who they do business with.”