Brandon DunnWhile adversity is nothing new for marijuana businesses, the perceived progress and the overwhelming support for legalization around the country make the move to shutdown many of the cannabis industry’s leading processors seem counterintuitive and the decision comes at a most inopportune time, as both Maryland and Missouri legalized adult use marijuana last month. Additionally, new research shows that an overwhelming number of American adults (88%) support the legalization of medical marijuana, with 59% of those surveyed saying they are in favor of legalization of both medical and recreational marijuana.
In Missouri, the cannabis industry has become the biggest source of new job creation and has brought in over half a billion dollars in revenue in just over two years of retail sales. Combined adult use and medical sales are expected to surpass $500 million in revenue in 2023 alone.
One year after Visa first warned cannabis operators, the “cashless banking solution” has become the cashless banking problem.
On December 2, 2021, Visa issued a memo saying that the company was “aware of a scheme” in which retailers utilized cashless ATMs to avoid limitations on sales for which its payment cards would be allowed to make purchases.
“Cashless ATMs are POS devices driven by payment applications that mimic standalone ATMs. However, no cash disbursements are made to cardholders,” the memo reads. “Instead, the devices are used for purchase transactions, which are miscoded as ATM cash disbursements. Purchase amounts are often rounded up to create the appearance of a cash disbursement.”
While Visa did not specifically name cannabis companies as the primary focus, the overwhelming number of cashless solutions touted their ability to process cannabis purchases, as such the devices were used largely in marijuana dispensaries around the country.
In the memo, Visa said, cashless ATMs “are primarily marketed to merchant types that are unable to obtain payment services—whether due to the Visa Rules, the rules of other networks, or legal or regulatory prohibitions.”
Despite the memo being issued more than a year ago, thousands of cannabis retailers around the country continue to use cashless solutions, with few alternatives and traditional means being extraneously expensive, dispensaries were left with limited options. Now, dispensaries around the country are facing a hard truth as the networks that supported cashless ATMS are shutting down.
What’s behind the shift?
Some of the largest processors of ATM transactions in the country, including NCR Corp.’s Columbus Data Services, have turned off the ability of processors to use their service.
That has left operators in a scramble to try to find alternative solutions.
Bloomberg reported in April that cashless ATMs would move roughly $7 billion in 2022, accounting for nearly 25% of all marijuana sales in the country.
The shutdown has impacted dispensaries of all sizes, with Multi-State Operators and mom-and-pop shops alike left looking for answers.
Curaleaf Holdings Inc., one of the largest cannabis companies in the US, reported earlier this year that roughly 30% of all transactions at its dispensaries flow through cashless solutions. Now one of the country’s largest MSOs is faced with turning customers without cash away from many of its dispensaries.
“The banking industry needs to catch up to the cannabis industry – there are thousands of retailers nationally impacted by this outage,” Rachael Herndon, Chief Communications and Compliance Officer with AJO, a St. Louis-based management, consulting, and investment group with vertical integration, told Greenway.
“Operators have come to expect outages; the industry as a whole needs real, long-term solutions. We will continue to expect interruptions and explore and support solutions,” Herndon continued. “Card transactions are not only convenient and the most popular, they are more secure and provide additional record keeping which improves operations. Having extensive cash on-site is a safety and compliance issue for retailers.
“We have been assured a new solution is coming down the pipe and, as an operation, will continue to explore and support solutions. It is past due for our representatives in Washington, DC, to support the fastest-growing industry in this state.
“Cannabis is responsible for extensive job creation statewide, our political allies need to support this very real industry. This is a very real problem impacting thousands of legitimate, Constitution-protected businesses. Problems like this are reasons dramas glorifying money laundering persist – as an industry we must reject criminal loopholes and embrace best practices as we continue to grow,” Herndon said. “A compliant, above board industry requires a functional financial climate – the hard truth is that this does not currently exist and reform is constantly tied up and pushed aside in politics.”
Some of the largest payment processors in the industry have been affected by the shutdown, including Paybotic and Jory Payments. Jory offers integration with Dutchie, one of the largest e-commerce and POS operators in the cannabis space. It was reported in 2020 that Dutchie processed more than 10% of all legal cannabis sales worldwide, and included a quarter of all legal dispensaries in the US as customers.
One of Missouri’s leading online ordering vendors told retailers statewide to expect shutdowns this week. With thousands of retailers nationally now having lost their capabilities to process card transactions, many Missouri operators are expected to follow.
Greenway spoke to Brian Bauer, Chief Revenue Officer of Safe Harbor, about the downfall of cashless banking options for the cannabis industry.
“The root cause (of the problem with the companies affected by the shutdown) is pressure from the major card networks on payment ecosystem banks and processors to eliminate cannabis transaction volume on their networks,” Bauer explained. “There is always a risk of instability in the cannabis industry when it comes to financial services. Sometimes even banks providing deposit services shut their programs down due to compliance challenges. The payments ecosystem is even more complex and involves several entities to process a transaction. Any of these entities can be the source of a shutdown.”
Can you detail some of the differences in what varying service providers are offering?
“The major payment offerings that are commonly found on the market are Cashless ATM (aka ‘point of banking’), Pin Debit, and also there are ACH-based wallet applications,” Bauer said. “Cashless ATMs have been impacted by widespread shutdowns. These are routed over networks as ATM transactions and this is why they have likely been the subject of the shutdown. Last December Visa issued a memo to inform providers that Visa disfavors this type of transaction over their networks. This year’s shutdown is likely a continuation of that effort.”
What advice or information would you give industry participants and Greenway readers?
“Cannabis businesses are used to mitigating all kinds of risks in their operations. Having a variety of payment options, like an ATM in the lobby to support cash payment plus a compliant electronic payment method, will help you manage the impact when it comes to the risk of some kind of service interruption. If you have a good partner, they can probably guide you to a replacement solution that will help you get back up and running quickly,” Bauer told us. “In addition, look closely at the terms of your contracts with payment providers. Sometimes you find restrictions that penalize businesses for switching providers. This has been a common tactic utilized by less reputable providers and could restrict your options down the road.”
“Also, be on the lookout for consumer complaints at your business regarding their payments. If your consumers are complaining about transactions in their banking records that don’t reflect accurate information about their purchase (such as the location), this is an indication of misrepresentation by your payments provider and it might be time to switch. “
In addition to current operators, Missouri will be bringing on hundreds of microbusiness licensees in the coming months, what should those operators be aware of and be looking for in a partner to process their payments?
“Plan to have a mix of payment options available to your customers. The right strategy is diversification and redundancy. Have an ATM in the lobby to support cash payments and a compliant payment option at the point of sale. If you are working with a bank that is unable to guide you, then you might need to look for a better partner who can help you navigate the complexities of cannabis financial services,” Bauer explained.
What is the solution to ensuring compliance and maintaining a company’s ability to conduct business in an effective manner?
“The real solution is federal legalization or, at least, SAFE Banking Act. Until federal reform occurs, instability in financial services will continue to impact cannabis businesses. I would advise cannabis businesses to work with a reputable financial services partner that is an industry expert to help guide them and help them implement the most compliant and reliable strategy possible.”
What do you think?