In January 2020, Illinois joined 10 other states in the country (along with the District of Colombia) by legalizing recreational marijuana. While this has presented an immediate business opportunity that many have taken advantage of, the continued federal ban on the drug has led to unique challenges for both business owners seeking ways to process payments, as well as for financial institutions and partners who are interested in working in the space.
Members of the Chicago Payments Forum tackled the subject in a recent roundtable meeting, noting both the potential – and still very significant risks – the new market holds.
“There are a lot of different rules; recreational versus medical, and with the federal/state divide, you won’t find a nationally-chartered bank in this space, at least not overtly so,” said Beth Horowitz Steel, a partner at payments consultancy Glenbrook Partners. “And as that relates to card payments, Mastercard and Visa have both historically said that they abide by federal laws. Once Canada legalized cannabis at the country level, Mastercard and Visa approved transactions there.”
There are, of course, payments processors finding ways around these card rules. Some operate by accepting cards at point of sale, used to instead purchase prepaid cash cards which are used to accept the purchase. This is, however, what is called a cashless ATM transaction. It feels like a normal retail experience, but customers typically get handed cash back as it must be rounded to the nearest $5. These systems get shut down every couple of months, as they are a violation of both Mastercard and Visa’s terms of service.
This makes the outlook for card transactions fairly bleak – even debit cards, if they hold the Mastercard or Visa logos, use those cards’ payment rails and run afoul of terms of service challenges. This forces many dispensaries to work on a cash basis, but finding institutions willing to process that cash poses its own challenges.
“There are still cases here and there where people have had to do cash payments in the state of Illinois,” said Mike Fourcher, co-founder of GrownIn, a Midwest-focused cannabis industry newsletter. “it’s not as common as it was 3-4 years ago, but that still does happen. Everyone operating in Illinois right now has stories about how they used to keep $250,000 in cash in a safety deposit box because they couldn’t get someone to bank with them. There’s an underlying tension everyone has about the business.”
This is fueled by continuing uncertainty about the industry at large, driven by the continued federal ban. And while safety deposit boxes and cash counting may work well for individual business owners, it can drastically limit scalability.
“With multiple locations, cash counting becomes more of an issue,” Fourcher said. “But there’s no clear solutions. Multi-state operators have different bank relationships for multiple states. They’re all over the place. There’s no consistency. This makes it very difficult in a business scenario.
“On the other hand, there’s lots of opportunity because no one is ruling the roost. Execution, the thing I see again and again is about execution. There are very large companies that just can’t execute on this.”
Meeting those challenges requires a committed approach on the parts of payments processors entering the space.
“We’re the first payments payment company in Chicago to serve the cannabis space,” said Daniel Muller, founder of the Chicago-based AeroPay. “The process was lengthy, but we put the time into it. It’s about finding a good bank partner to support the effort, and create a great integration that lets you serve the space compliantly. We’ve worked with state regulators to make sure we’re 100% in line with things.”
AeroPay’s service is mobile-based, and much more seamless than the old days of cash-only business. The challenges nevertheless remain difficult to overcome; for banks, the marketplace still feels unstable, and that translates to even cannabis-friendly banks being very cautious with how much they’re willing to tie themselves to cannabis-related deposits.
AeroPay announced the launch of its compliant digital payments solution for cannabis businesses. Benzinga has the story.
The risks have kept the national players out of the game altogether, but with that risk there’s also opportunity for local payments businesses to take advantage of the emerging market.
“I think there’s been a lot of innovation,” said Justin Block, Chief Strategy Officer and Chief Financial Officer at Global Primex LLC. “But much of it’s opaque to the consumer. There was a solution I saw that created an internal ecosystem for payments, so the consumer wasn’t just buying but funding someone else’s digital wallet. There’s a lot of things like that where there’s creative things happening but the consumer is rarely aware of everything that’s going on.”