It is undeniable that cannabis is more than just a budding industry — it is big business. In Denver, ground zero of legalization of cannabis, there are more retail marijuana stores than there are Starbucks stores. As more states legalize marijuana for either medical or recreational use, the economic potential may finally become a reality. In California alone, the cannabis industry is worth $3.1 billion dollars. Nationwide, legal retail marijuana sales were over $8.5 billion in 2018 and expected to have topped $11 billion in 2019. Many dispensaries, as marijuana retail outlets are known, have gone upscale — with sophisticated displays, well-educated salespeople (or “budtenders,” as they are known), and expensive décor — leaving behind the image of the college dope dealer. Yet, in one way, the industry is still rooted in the past: when it comes to handling payments. Today, cannabis is largely a cash business. From retail payments to owners paying their tax bills with grocery bags filled with cash, the payments and banking system has not kept pace with the booming cannabis industry.
The modern legalization of marijuana has its roots in the 1990s. Although it remains illegal at the federal level, five states and Washington DC first legalized marijuana for medical use in the 1990s. Another eight states followed suit in the 2000s. However, it wasn’t until 2012 that the first states — Colorado and Washington — legalized pot for recreational use. Since then, other states have followed, and there are no signs this trend will be slowing down anytime soon. With Illinois joining the fray this year, now 11 states have legalized recreational use, and 32 states have legalized medical use.
Needless to say, the marijuana industry is still highly regulated. Retailers, and every other participants in the cannabis supply chain, have to account for every bit of inventory. For the states, this ensures both compliance and proper tax collection. This policy, known as “seed to sale,” is a complex administrative task. In order to comply, many retailers and suppliers rely on sophisticated inventory management and point of sale software, albeit some do still run their compliance tests on Microsoft Excel. However, the mandate for compliance goes up in smoke with a key gap — because cannabis businesses are unable to obtain bank accounts, most payments occur in cash. This includes not only payments from customers, but also payments to employees, suppliers and even taxes. In addition to causing a huge administrative burden and expense, being forced to conduct business in cash also undermines the compliance that those laws intend.
Considering that cannabis is still illegal under federal law with the Controlled Substances Act, banks, many of which are federally chartered, do not allow companies in the cannabis space to have bank accounts. Under the Trump administration, previous guidance — given by the Justice Department to provide safe harbor to banks that service cannabis businesses which are legal under state law — was ultimately reversed. Businesses aren’t officially able to take credit cards: “Transactions in the U.S. involving the purchase or trade of marijuana are not permitted on the Visa network, until such time as federal law allows,” according to VISA. However, it is clearly in the joint interest of the cannabis industry and the government to move this business to digital payments. For the government, it is harder to collect taxes and detect when individuals or companies are selling illicitly. Both the industry and government would benefit: allowing electronic payments would make it easier for the consumer, increasing volume and garnering greater tax revenues.
This is where opportunities for fintechs emerge — providing solutions in both payments and compliance. The cannabis industry will continue to grow for years to come, but it will likely remain a deeply regulated industry. This is a perfect opportunity for fintech companies to provide services in payments and compliance to help cannabis companies manage their finances and operations in order to keep growing sustainably. There are some companies already well-positioned to do so. Companies designated by various states which enable tracking and taxation through their products had a first crack at this. These includes Metrc, BioTrack (owned by HELIX) and MJ Freeway (owned by Akerna). Point of sale providers such as Flowhub, Green Bits and Treez are already sitting on many retailers’ registers. Adding payments is a natural product extension that will pay off in spades in the future. And finally, payment focused companies such as Dama Financial are trying to electronify the entire payment flow, from retail payments to supplier and tax payments.
The cannabis genie is out of the bottle and it will be difficult to put it back in. Now the challenge for the industry is to make the experience, including payments, as seamless as other retail experiences. This is both in the bestinterests of theindustry (providing consumer convenience and reducing the cost of handling cash), and the regulators (ensuring compliance). As the industry continues to roll up sales, addressing these challenges will ensure that the industry remains high on success.