By Patti Murphy
Christie Stanley is a business owner who would seem a prime candidate for prospecting by merchant level salespeople (MLSs). Located in a bustling strip mall in Kingston, Wash., her shop sees $60,000 to $80,000 in sales weekly. But Stanley hasn't piqued the interests of many MLSs. Her shop, Green Tiki Cannabis, while legal under state law, is effectively banned from accessing interbank payment systems under federal law and card brand rules. All transactions are in cash.
And Green Tiki is not alone. With sales of medicinal and/or recreational cannabis products now legal in over two dozen states, thousands of cannabis shop owners can't get accounts with acquirers, leaving them awash with cash that technically can't be deposited at banks or other federally insured financial institutions.
Marijuana and other cannabis products are illegal under federal law – classified as a Schedule 1 narcotic on par with heroin. That means federal regulators can shut down banks and credit unions that knowingly do business with cannabis dispensaries, even if it's legal in the jurisdictions where they operate. The Federal Reserve can and has rejected applications for interbank clearing accounts for financial institutions that want to serve cannabis businesses. And the card networks have said transactions from cannabis retailers are off limits until federal law deems otherwise.
"There's no way to overcome the clash of state and federal laws at this point," said Massachusetts attorney Shanel Lindsay. The uncertainty this creates "permeates every aspect of the cannabis business," not just pot shops, she added. Lindsay owns Ardent LLC, which sells a device for creating pills or topical applications from raw cannabis. Ardent's monthly receipts total about $70,000, Lindsay said, and like Green Tiki, the business can't accept traditional card payments. Lindsay also sits on an advisory board commissioned by the state of Massachusetts to develop policies and procedures for legal cannabis businesses operating in the state.
"The potential for shut downs and loss of business is a big risk for any bank to take on," said Dustin Eide, Chief Executive Officer of CanPay, a Colorado firm that provides a mobile debit app for payment acceptance at cannabis dispensaries.
While the market for legal cannabis products is huge and growing, it's not an easy market to excel in. "There definitely is money to be made in the business, but nobody is making it easy for these guys," said QubeChain's Andie Kolb.
For starters, it takes significant time and money to deal with myriad, sometimes disparate federal, state and local laws and regulations that control how cannabis businesses operate. Every state, for example, has its own regulatory hierarchy, and many allow for local regulation of cannabis dispensaries. Local zoning codes also have to be considered, and zoning boards lobbied.
Costly overhead is associated with protecting employees and cash. And then there's the issue of taxes. Absent bank accounts, cannabis businesses can't initiate employee withholding payments electronically as required by the Internal Revenue Service. That triggers a 10 percent IRS penalty for paying with cash.
There's also a provision of the IRS Code (Section 280E) that limits allowable deductions for businesses engaged in activities deemed illegal under federal law, such as cannabis. Unlike other businesses that write off payroll expenses, supplies, employee benefits, etc., when preparing tax returns, cannabis businesses only get to write off the cost of goods sold. Christie Stanley, a dispensary owner in Washington State, said that's a bigger issue for her than banking. "Congress needs to change the IRS code," she said.
Several members of Congress have introduced legislation to remove marijuana from the Schedule 1 list and/or encourage state decriminalization efforts. Despite bipartisan support, however, these measures have languished, leaving states that have legalized or are in the process of legalizing cannabis searching for workarounds.
"The clash between state and federal law threatens to cripple legal California cannabis businesses before they even get up and running," California State Treasurer John Chiang, wrote in a report released in November 2017. The report, prompted by a ballot initiative legalizing recreational sales of marijuana in California beginning in January 2018, described the situation as "an urgent public policy issue." Relegating pot shops to cash-only businesses makes them (and their employees) targets of violent crime and makes tax-collection more costly and labor intensive, the California report concluded.
In Los Angeles, the city council proposed creating the nation's first-ever city-owned bank to, among other things, serve cannabis businesses as a workaround to the problem. Elected officials in Hawaii, meanwhile, mandated that the state's eight licensed medical marijuana dispensaries go cashless. The state is working with CanPay to support the mandate, which took effect Oct. 1.
CanPay is one in a small army of technology companies developing payment solutions for legal cannabis businesses. "We want to help licensed businesses to operate normally. And we want to make it safe for everyone," Eide said.
Customers of participating dispensaries download an app from a CanPay website and set up accounts using their checking account information. Once verified they are able to log into the app whenever they enter a dispensary, whereupon they receive a one-time payment PIN that's good for 30 minutes. Transactions are cleared through the automated clearing house (ACH) system, Eide noted.
CanPay originates ACH debits through financial institutions that adhere to a set of guidelines issued by the U.S. Department of Justice and the Financial Crimes Enforcement Network (FinCEN) in 2014. The guidelines, issued in response to growing conflict between state and federal laws, provide a framework for banks and credit unions to serve cannabis businesses and not run afoul of regulators or federal money laundering laws. Requirements include heightened due diligence and risk analyses, as well as Suspicious Activity Reports on all cannabis-business transactions even those known not to be attempts at money laundering.
"There's a lot of work that has to be done on the compliance side," said Andie Kolb, Senior Vice President for Business Development at QubeChain LLC. "It's just not [always] worth the added resources." She noted that it can be particularly difficult for large banks with interstate operations to justify since legal problems related to cannabis customers in one state could put at risk merchant portfolios in other states.
There's also the risk of getting caught up in government enforcement actions, like the now dormant Operation Choke Point, which resulted in many banks cutting ties with high-risk businesses, like gun dealers and cannabis shops, Lindsay noted.
On top of ongoing compliance burdens, financial institutions serving legal cannabis businesses also endure rigorous and more frequent regulatory examinations, Eide said. "It's the traditional bank examination process on steroids," he added. "They have to validate everything they do."
In addition to the dispensaries in Hawaii, CanPay has contracts with dozens of legal cannabis dispensaries in California, Colorado, Florida, Maine, Oregon and Washington. The company works with 20 financial institutions, mostly community banks and credit unions, through its closed-banking feedback loop. All rely on cannabis banking platforms designed to comply with the FinCEN-DOJ guidance, Eide said.
In Hawaii, CanPay works with Safe Harbor Private Banking, a unit of Partner Colorado Credit Union. The Arvada, Colo.-based credit union developed a platform to bank cannabis businesses in compliance with the FinCEN-DOJ guidance to serve customers in its home state. The Safe Harbor unit was launched in July 2017 to market the platform more widely.
"We want to expand the cannabis program nationally and help other financial institutions solve the safety issue of the unbanked cannabis industry," said Safe Harbor CEO Sundie Seefried. As of July, Partner Colorado said it had deposited, validated, reported and monitored over $1 billion in sales from cannabis businesses in Colorado.
Eide conceded CanPay's mobile debit app is not a perfect solution. "It's as close to the experience of paying with a credit or debit card as we can get without violating any [government or card association] prohibitions," he said. Should the federal government relieve cannabis of its Schedule 1 status, CanPay has the technologies and processes in place to support all manner of retail cannabis payments.
Wil Ralston, President of SinglePoint Inc. said his company is similarly positioned. "We already have all the pieces in place to get a credit-debit card solution up and running," Ralston said. In the meantime, Seattle-based SinglePoint is test-driving SingleSeed Payments, a mobile solution for paying at cannabis dispensaries that uses a proprietary bitcoin exchange. "We hope to start processing by mid-January," Ralston said.
A mobile technology company, SinglePoint has been acquiring technologies and companies that eventually will support a soup-to-nuts platform for cannabis businesses. "The overall goal is to have a fully integrated solution for businesses to manage their day-to-day operations from beginning to end," Ralston said.
Medical Cannabis Payment Solutions, based in Cheyenne, Wyo., has another approach. It's readying a closed-loop system for cannabis payments that customers can access by card or mobile app and that abides by federal guidance. The card/app can be funded with credit or debit cards, through a checking account link or using bitcoins. Participating dispensaries receive funds via ACH or wire transfers.
"When customers are made aware of our ability to comply with FinCEN, and avoid the problems spelled out [by DOJ], they tell us there is no alternative: we're it," said Medical Cannabis Payment Solutions CEO Jeremy Roberts. The company said it ultimately wants to provide an end-to-end cannabis business solution, not just support payments.
The market for legal sales of cannabis products (medicinal oils, pot, cannabis-infused edibles, etc.) is huge and growing. North American consumers spent $6.7 billion on legal cannabis products in 2016, according to The Arcview Group, a cannabis investment and market research firm. The website Marijuana Business Daily estimates total annual demand for recreational cannabis in the United States exceeds $45 billion.
In Colorado, retailers racked up a collective $1.02 billion in sales of medical and recreational cannabis products during the first eight months of 2017, adding $162 million in taxes and fees to state coffers. California officials said they expect legal cannabis sales there to top $7.6 billion a year by 2020, adding an estimated $1 billion a year in revenues to state coffers. Arcview, meanwhile, forecasts a 27 percent combined annual growth rate in legal cannabis sales through 2021 when it expects legal pot shops in the United States and Canada to collect $22.6 billion in revenues.
So are there opportunities for ISOs and MLSs to tap into this revenue stream? Yes, but not many, and those that exist may not be lucrative, or technically legal. "There are a lot of folks out there misrepresenting themselves," said one MLS. This MLS, who asked not to be identified by name, said he considered working with offshore processors to support cannabis dispensaries but was scared off by what he saw as a lack of transparency.
Assessing offshore options, Kolb said, "There are a lot of wild cowboys out there." And Ralston pointed to the added cost of working with offshore processors, including international transaction surcharges. "It's not something I even suggest people do," he said.
Several experts believe the traditional ISO/MLS business model of making money by marking up the rates of upstream partners doesn't work well in a market like cannabis, where risks are deemed high and costly. "It's always going to be high risk," Ralston said. "They [cannabis businesses] are still going to pay high rates."
Kolb agreed, stating, "There's really not much profitability there when you start cutting into the pie." 
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