Card payments remain a 'challenge' for legal cannabis as major banks avoid the sector. Changing classification won't help.

By Steve Gelsi

Standard credit card transactions remain elusive but some smaller banks have waded in

When Ellis Soodak was planning the launch of Verdi Cannabis dispensary in New York City, he didn't want to face the dangers his father did at the family's liquor store in the 1970s and 80s.

Back then, many credit card companies avoided alcohol transactions, so stores selling whisky or vodka often did business in cash.

"My dad was robbed," Soodak said. "One time he had cash on him but had a duffle bag with his gym clothes in it. He managed to trick the thief into taking the duffle bag."

Soodak wanted to find a safer path for the opening of his store in January, after seeing plenty of headlines about thieves stealing cash from cannabis dispensaries around the country.

Now, when a customer buys from Verdi Cannabis, the store accepts credit cards, but with some extra steps. There's also an extra fee of 4.20% for credit-card transactions, in addition to taxes.

The store's system requires an email address and mobile phone number from customers to create a virtual wallet. The individual cannabis transactions in the virtual wallet are not visible to issuing banks that deal directly with credit-card companies.

It's not as convenient for customers as payments at non-cannabis stores, but it's the best that he could find.

These more limited payment plan options are expected to continue, partly because all of the largest U.S. banks still avoid the space even with the historic move by the Biden administration to lower the federal classification of pot to the less dangerous rating of Schedule III.

That's because banks are federally insured, while cannabis remains a banned substance at the federal level, whether its classified as equal to heroin or as less dangerous. Banks don't want to run the risk of an enforcement action if they transact with cannabis companies.

"Any potential decision to reclassify cannabis has no bearing on the legal issues around banking it," said Rob Nichols, president and chief executive officer of the American Bankers Associate, a trade group for the industry. "Cannabis would still be largely illegal under federal law, and that is a line many banks in this country will not cross."

This stance keeps the brakes on two of more important payments giants in the space, MasterCard Inc. (MA) and Visa Inc. (V). Both of these credit-card giants continue to enforce bans on pot transactions. Given the above position by the ABA, pot as Schedule III would not change this.

A ban is also in place for loans and other financial services for cannabis by the nation's largest banks, as well as stock market listings for U.S.-based, plant-touching companies on the Nasdaq or the New York Stock Exchange.

Many other financial services providers also avoid cannabis transactions, even though medical marijuana is legal in 34 states. Twenty-four states allow recreational cannabis for adults.

"Banks that provide services to cannabis businesses face higher costs and there's still the specter of regulatory ramifications in the sector, so banks have not wanted to mess with it," said Jonathan S. Robbins, chair of the cannabis practice at Akerman LLP in Fort Lauderdale, Fla.

Meanwhile, legislation to smooth the way for banks to work with legal cannabis businesses remains in limbo. Versions of the so-called SAFER Banking Bill have been making the rounds on Capitol Hill for 10 years and even failed another attempt to get it to a vote this past week.

Also read: Cannabis banking measure to be left out of FAA bill, industry exec says

Slow progress

While the major banks continue to avoid cannabis, more payment service options are available from smaller banks for legal dispensaries.

These methods remain more expensive and often take longer at the checkout counter than Venmo or tapping a credit-card.

Nowadays, more of the U.S.'s roughly $30 billion in legal cannabis sales takes place over exclusive payment networks that have been set up under federal guidelines initially published in 2014 by the Financial Crimes Enforcement Network (FinCen) to bank legal cannabis.

At last check, FinCen reported 485 banks, 169 credit unions and 145 financial service providers that took part in cannabis transactions under its guidelines in the fourth quarter of 2023.

That's up from the 479 banks, 168 credit unions and 126 financial service providers that took part in cannabis transactions in the fourth quarter of 2022.

By contrast, the U.S. currently houses a total of about 4,000 commercial banks, 565 savings and loans and more than 4,700 credit unions.

'Banks that provide services to cannabis businesses face higher costs and there's still the specter of regulatory ramifications in the sector, so banks have not wanted to mess with it.'Jonathan S. Robbins, chair of cannabis practice, Akerman LLP

Dustin Eide, chief executive of CanPay, said the Littleton, Colo., company has now helped bring about more than $1 billion in transactions at state-legal dispensaries since 2016. It has built up a client base of 300,000 consumers and 1,100 participating dispensaries.

CanPay's enrollment is similar to Venmo or PayPal (PYPL). There's a sign up process to link your bank account to CanPay.

The company offers a mobile app that allows customers to make debit payments from their checking accounts through the Automated Clearing House (ACH) network.

Banks that work with legal cannabis companies include Safe Harbor Financial, Needham Bank, First Federal of Florida and Salal Credit Union in Seattle.

Mastercard and Visa remain off limits even after meetings with the massive payment processing companies, said CanPay's Eide.

"We were told in no uncertain terms by Visa and Mastercard that these would be prohibited transactions and if it is done, they will find it and shut it down," Eide said.

Also read: Mastercard moves to stop cannabis purchases with its debit cards

Staying within the FinCEN guidelines, CanPay worked with credit unions and community banks to build a payment network that would allow for transparency and stability at a low cost, Eide said.

Even with more options, payment setups take work

While offerings from payment services companies have improved in the past couple of years, finding a good option to process transactions still takes hard work.

Trends Dispensary in Long Island City, N.Y. uses various cashless ATM and Automated Clearing Houses (ACH) providers such as Aeropay, Stronghold and TMG for customers to pay with debit card or bank accounts, although these options add more steps and time for a purchase.

"Payments are a challenge for us-as is the case for most dispensaries," said Brandon Carter, chief operating officer Trends Dispensary. "Cash is king but poses a major safety risk for ourselves and our employees."

Paul Dunford, vice president of knowledge and co-founder at Green Check, has helped more than 150 institutions set up financial services for cannabis as a specialist in tech and services needed to "compliantly and profitably" serve cannabis-related businesses under the government's 2014 FinCen guidelines.

"Bankers are naturally a conservative bunch," Dunford said. "They're very conservative around cannabis because it's federally prohibited."

To be sure, the payments situation in cannabis isn't as cash-based as it used to be.

With retail cannabis sales projected by MJBiz to grow to more than $50 billion in 2028 from about $32 billion in 2024, the payments space should remain attractive, despite its challenges.

While the proposed rescheduling won't cause banks to budge for now, it could loosen things up over time, said Robbins.

"Moving to Schedule III does not straight-up 'legalize' cannabis at the federal level, but it will be now be a highly regulated (by the federal government) substance and the presumption is that big pharma will jump in-this will all have a positive effect from a banking and payment perspective," Akerman LLP lawyer Robbins said.

-Steve Gelsi

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05-18-24 1007ET

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