Banking's detente with fintech can also solve legal weed's payment problem
The legal cannabis industry is growing quickly, but there are still major challenges in making the payments system work.
According to Marijuana Business Daily, “retail sales of medical and recreational cannabis in the U.S. are on pace to eclipse $12 billion by the end of 2019—an increase of roughly 35% over 2018—and could rise as high as $30 billion by 2023.”
Given the huge growth, why then is there so much friction in the purchasing of state legal cannabis? The simple answer is because at a federal level, sales of cannabis, whether for medical or recreational purposes, remain illegal and marijuana remains a Schedule 1 drug, along with heroin, LSD and MDMA.
As a result, the payment networks (Visa, Mastercard, American Express and Discover) have decided not to grant a merchant category code for the sale of cannabis. Further, banks are reluctant to bank marijuana-related businesses (MRBs) because despite guidance from FinCEN, most banks are risk-averse and don’t have the knowledge or desire to take on the increased compliance requirements. Except for small-dollar transactions, most people would prefer to use a card to pay for purchases.
So we have a disconnect between what consumers want and merchants can provide. Banks would like to provide services to this industry to seize on the revenue opportunity.
Fintech can bridge this gap in a number of ways. Like Uber and Lyft removing the friction in paying for cab rides, one place to start is to link buyer and seller in a cannabis transaction. There is no digital connection because the transaction occurs in cash.
Fintech has been doing this for years with electronic ledgers and pooled funds accounts; physical money isn’t moved but rather digital entries are updated to give the user the appearance that money has moved “instantly.”
The second piece is of course the settlement of real money, and ultimately that involves banks. For years fintechs were trying to disrupt traditional financial institutions, but recently there has been a shift in both banks and fintech from competition to collaboration. An article published by Entrepreneur titled “Collaboration, Not Competition, Is Key for Fintech Companies” talks about the importance and interest in partnerships between fintech firms and banks.
Fintech companies for years have been creating solutions to complex problems, many times driven by the pain of the consumer. Cannabis is no different, and by creating technology that can integrate into banks to help meet their compliance requirements and manage their risks, fintech firms can help more banks support MRBs, without waiting for any change from the federal government.