Pot has a payments problem.
Cannabis’ status as a schedule-one narcotic means the federally chartered banks, the card networks and the traditional payments ecosystem have made it clear that they’d like to steer clear. In turn, that means digital payment methods of all kinds have largely been a no-go, making pot a $7 billion cash industry in 2016.
That’s a situation that’s untenable for a variety of reasons, Dustin Eide, CEO of CanPay, told Karen Webster in this week’s edition of Matchmakers. Cash, especially that much of it, is an insecure, cumbersome, friction-filled currency – not to mention physically unclean, hard to keep track of, easy to miscount (and steal) and all around a hassle for businesses in regulated states that want to sell pot to patients and customers. It also means that dispensary owners, their customers, regulators on the state and local level and pretty much everyone in any state with a legal cannabis industry have a reason to want to de-cash the system as much as possible.
But, because of cannabis’ legally complicated status, the traditional payments elixir of plastic cards or digital wallets has remained elusive.
Eide, a payments veteran himself, made it his business to solve what many consider to be an intractable payments problem.
“When we really decided to take on this problem, the first thing we did was to dig into what was purportedly available in the industry,” Eide said. "We realized that digitizing payments for the legal purchase of cannabis was three layers more complicated than even normal payments backend stuff.”
And, he added, there was a dearth of compliant, transparent solutions in the marketplace.
Eide and the CanPay team created the first debit-based, digital payments solution for the cannabis industry, built on a network of compliant financial institutions.
The Power Of Transparency
The Cole Memo, issued in 2013 by the Department of Justice, lays out the guidelines under which financial institutions can offer compliant financial services (like bank accounts) to businesses operating dispensaries in states where it is legal to sell medicinal and/or recreational marijuana.
As Eide noted, there is not an abundant number of Cole-compliant financial institutions operating in the U.S. – in fact, there are fewer than two dozen. Those few work hard to be very transparent about their services with regulators, but do not heavily market them otherwise, "because they can quickly be overwhelmed with requests for service,” Eide explained.
But they do exist – and CanPay has made it easy for them to become part of an integrated, interoperable, secure payments network into which dispensary business can lawfully be paid using a digital method of payment – and not cash.
Eide said that although it may sound simple, it's actually a “big deal” given the lack of transparency associated with some digital payment solutions. In some cases, Eide noted, those solutions were either surreptitiously using the card networks by not making clear the businesses' actual intent, or by using an intermediary, like a gift card or cryptocurrency, to mask the purchase of cannabis.
CanPay, Eide said, is willing to take the card networks and national issuers seriously when they say they don’t want to have anything to do with this industry – and that trying to leverage “tricky” solutions that just mask the payments problem is increasingly going out of fashion in the industry.
“Dispensary owners especially want to normalize their businesses,” Eide said. “When you order from a restaurant, the name of that restaurant appears on the bill. There is a level of legitimacy that comes with transparency – and we see businesses that would rather use a solution that doesn't require them to do business under one name and financial transactions under another.”
How It Works
The challenge of building a network of compliant banks was to first find a payments system that the financial institutions and regulators would be comfortable with. For CanPay, that was the ACH network. Then came a massive amount of work to devise a framework in which dispensaries would be permitted to accept CanPay as a method of payment.
The solution, Eide told Webster, was that any dispensary that wanted to use CanPay had to be enrolled as a customer with Cole-compliant financial institutions in their network, and therefore vetted by that institution.
Once CanPay has confirmation from their institution that they are a customer, they verify their licenses to ensure that everything is up to date and the business is who and what they say they are.
CanPay consumers have the option to link their checking accounts to their CanPay accounts via an app that is available on the web or by creating an account on the CanPay website.
Once the app is installed, a CanPay customer can log in at any accepting dispensary in the U.S. and initiate a payment from her checking account, which triggers a single-use pin that generates no identifying data and is only live for 30 minutes. Dispensaries have tablets that enable the software to process the payment.
“Once the merchant has the PIN, it is just like running a debit or credit card payment," noted Eide. The customer gets a payment-approved notice in the app, and they can walk away with their product.
Eide also noted that while the service is tablet-based today, they have been in talks with point-of-sale companies that are also focused on the cannabis industry, and they expect to see some integrations with the CanPay API in the near term.
The Changing Marketplace
Cannabis sales, Eide noted, are a complex problem to solve. In his opinion, “it is probably the most complicated payments challenge that I could have hoped to have found.”
But, he said, as their integration in the state of Hawaii recently proved, it is complexity surrounding the ecosystem of cannabis that needs solving.
“Hawaii is a unique set of issues because it is an island state, where having massive cash pools because of the medical cannabis industry is a huge issue. You have large numbers of patients with cash in their pockets in concentrated locations, which creates a lot of targets. The logistics of moving money becomes a lot more complicated when you are talking about places with one road in and out: You have security flashpoints. Plus, you have to move this money on and off the island itself.”
That created a unique set of pressures that brought the governor, the banking commissioner, the dispensaries and the financial institutions to the table to get a solution for digital payments up and running.
And because there was that widespread support, Eide noted, they were able to offer statewide cashless payments to Hawaiian dispensaries within eight months of starting the project.
The issues in the rest of the cannabis legal world may not be quite as stark, he told Webster – but as the annual value of the industry grows past $20 billion and even $50 billion a year, the idea of trying to manage it all in cash will become every bit as untenable in the contiguous United States as it became in Hawaii.
The cannabis industry wants digital payments – and the customers who use it are equally incented to use them.