The compliance burden of a legal marijuana business having to manage regulations that vary by state, and between the state and federal level, has created a banking conundrum for a market forced to rely heavily on cash.
Banks, of course, are held back from being able to fully service these companies, faced with a compliance conundrum that cannot be solved when going it alone. PayQwick Chief Operating Officer Bob Craig told PYMNTS in a recent interview that it’s not that financial institutions (FIs) don’t want to address this challenge and bank the underserved legal marijuana industry — it’s that the burden is so large that they are often unable to meet its requirements in-house.
“It’s not that they aren’t interested — they are very much interested” in addressing this challenge, he explained. But the compliance challenges associated with this market are not easily (or quickly) addressed.
“This is not just about opening an account,” Craig continued. “You need to watch every transaction.”
The Compliance Burden Proliferates
Legal cannabis companies not only require more stringent Know Your Customer (KYC) and other financial regulatory compliance initiatives at the time of onboarding, but every transaction that occurs with that company must be analyzed for compliance as well in an ongoing initiative to mitigate risk and promote security.
Craig also emphasized that when it comes to maintaining compliance, no business is an island; analysis must extend beyond the business itself and into its supply chain and business partners to ensure transactions are all legal.
Companies that provide lighting, fertilization, or services and products that don’t touch the plant-side of the marijuana supply chain — for instance, providers of office supplies, packaging and branding, or even accountants and lawyers — haven’t always had an easy time finding financial service providers, either.
“Banks have struggled to serve the ancillary businesses,” Craig noted. “They struggle to support them because they’re uncomfortable with the flow of funds. They still feel — and we agree — that they would need to monitor compliance for plant-touching relationships, and even for entities that are not plant-touching.”
FIs, especially smaller banks and credit unions, are increasingly finding it valuable to outsource this compliance burden to a third-party technology partner that is able to provide the level of ongoing, consistent due diligence required for high-risk, traditionally cash-intensive businesses.
Leapfrogging to Digitization
The compliance challenges of the legal marijuana sector may be unique, as is their struggle to access banking services. Third-party players like PayQwick can address that hurdle for both banks and cannabis businesses, allowing industry players to access digital financial services and products.
While some industry players would argue that businesses in this sector have an immense necessity to reduce their reliance on cash and gain access to digital tools for compliance and security, the opportunity to digitize is also a chance to leapfrog into the digital economy and grasp the same benefits of electronic payments that companies of any other industry can enjoy today.
Craig pointed to PayQwick’s ability to allow a cannabis company to pay tax payments electronically, send wire transfers or even make check payments if they so choose. They can obtain services that support electronic supply payments, he added, addressing B2B supplier friction and promoting faster delivery of goods down the supply chain.
Digitization takes away the risk of moving hundreds of thousands of dollars in cash for tax payments, accounts payable or even payroll, Craig said, addressing the “very touch-intensive,” “expensive” and “wrought-with-error” processes associated with cash and manual financial processes.
Third-party intervention also enables multi-state businesses in this market to address another key challenge: accounting for finances across state borders when a company cannot move funds between states in which they operate, meaning funds for payroll, supplier payments and taxes cannot come from a centralized pool of a company’s funds.
“Revenue and banking has to occur on a state-by-state basis,” explained Craig, adding that a digital platform allows such businesses to centrally manage their finances to ensure compliance without forfeiting efficiency and oversight.
Comfort With Digitization
The current regulatory landscape means not all FIs will be comfortable servicing this industry. While that landscape is in flux, and while more FIs are expressing interest in servicing this market, Craig noted that not all are equipped to manage the compliance burden that weighs so heavily on the market.
Interestingly, not every cash-reliant business in the cannabis market is comfortable taking the leap into digitization, either, even as opportunities to work with financial service providers expand. But as the interest and familiarity of legalized marijuana spreads, so will confidence in the financial services market — and the cannabis businesses themselves — when it comes to embracing electronic payments and digital financial tools.
“Some [marijuana businesses] are very much cash-only, and they’ve decided they’re not going to do anything except for cash at this point,” he said. “But more of those will become more comfortable — and trading partners will become more comfortable — with trading and settling transactions digitally.”