By: Eileen Goode (@eileengoode)
Legalized for medical consumption in 20 states and for recreational use in Colorado and Washington, marijuana is still federally classified as a Schedule 1 narcotic. And federal rules prohibit federal banks and credit card companies from processing pot-related transactions.
As such, dispensaries and growers cannot easily accept or use credit or debit cards, operate bank accounts, or make use of electronic payment systems because technically all of these activities could be interpreted as money laundering.
The implications for the payment card industry not participating in legalized marijuana sales is quite substantial. State-legalized marijuana is expected to be a nearly $3 billion industry in 2014, with the potential to grow to $10 billion over the next five years, according to the ArcView Group. (http://arcviewgroup.com/)
As a so-called “grey market good,” pot can be sold openly and taxed directly in some highly regulated situations. But its nearly exclusive reliance on cash as a medium of exchange keeps it firmly tied to its black market roots. This unusual situation creates both hassles for business owners and opportunities for entrepreneurs looking to normalize the market.
Not Easy Being Green
Something even as normal as paying taxes can be problematic. Most small-businesses owners typically pay their taxes with a check – either via paper or electronically via the automated clearinghouse system. Pot dispensaries in Colorado don’t have that luxury.
One dispensary owner PYMNTS.com contacted, and who requested anonymity, counts out stacks of $100 bills and runs them through a money counter before placing them in dryer sheet-lined Tupperware containers that he puts in a cardboard box in his car’s trunk. He then drives to the state revenue office, where he trades his Tupperware containers for a tax receipt.
The process for paying the collaborative that grows his product is much the same: He places tens of thousands of dollars in cash in the trunk while he sits in the driver’s seat and prays he doesn’t get robbed.
”I don’t think anyone can appreciate what a weird experience handing someone a suitcase full of money actually is,” the dispensary owner tells PYMNTS.com. “And my suppliers don’t like it either. You’d think getting a briefcase with whole bunch of hundreds in it would be great, but actually it sucks if you can’t like, go to a bank.”
A different dispensary owner, who has a bank account, so far has skirted banking regulations through subterfuge—her dispensary is part of a holding company with a nondescript name. While her bank understands the nature of her business, she still limits use of her account to necessities, for fear of losing it. She even pays her employees in cash and reports spending hours each week counting out exact change to put into envelopes.
Trying to remain viable in a market comprised of terrified small-business owners is not a sustainable long-term plan. The federal government understands this, but as of yet there is no timetable for official guidelines. With banks and credit card companies indefinitely sidelined in the emerging marijuana marketplace, alternative solutions are presenting themselves to fill the void.
The use of bitcoins has been floated as one possible solution because transfers of the digital currency are not subject to U.S. banking regulations. This would allow dispensary owners to pay suppliers and employees with electronic transfers.
The difficulty arises with coin processors, like BitPay, who use the banking and credit systems for bitcoin exchanges. Bitcoin’s lack of widespread recognition as a currency, coupled with its tendency to attract speculators, also has slowed its adoption within the marijuana market.
Some players have considered electronic payment networks as an alternate path to traditional banking. Plainview Systems LLC was widely touted at its launch in 2009 as the first B2B payment system for medical marijuana dispensaries. Plainview was designed to accommodate streamlined supply chains, easy compliance data reporting, electronic transaction tracking and tax document support. Though initially successful, according to spokesman Will Stickney, the company was unable to expand because traditional bank accounts were still required to move money in an out of the system.
High Times, the cannabis culture magazine, has announced a private equity fund with the goal of raising $100 million over the next five years to invest in cannabis-related businesses. Though the fund will direct some money toward growing and dispensary operations, its main focus will be developing ancillary businesses. Top among its priorities are payment systems that allow financial transactions within the pot market to be as transparent and secure, with or without a change in banking regulations.
With serious investment on the horizon, and a lot of money on the line, it remains to be seen whether banks will have an opportunity to get into the market before inventive competitors become entrenched.