Payment Methods

Can Legal Pot Thrive With Closed-Loop Payments?

People can say what they will about the wisdom of legal retail sales of marijuana (we here at PYMNTS take no position), but the payments knot that the cash-dominated industry is dealing with is leading to some improvisation, and even government-backed experimentation. The latest example of that, a closed-loop payments effort in Nevada, comes amid fresh signs of significant revenue growth for this nascent part of legitimate commerce.

The news is a bit vague so far, but certainly significant. Governor Steve Sisolak (D-NV) has authorized what The Associated Press called a “limited marijuana banking system” for the state, a tourist mecca where recreational cannabis is legal.

Three-Year Pilot

Under the program, the Nevada state treasurer’s office will “set up a three-year pilot program” to ease the payments situation for the local cannabis industry. The aim is to create “an online system where digital currency could be sent and received.” According to the report, State Treasurer Zach Conine “likened the system to gift cards or digital wallet apps, such as Venmo, and said the program would not include broader banking services like loans.”

The bill authorizing the program, AB466, gives an operational time frame for the program, running from Oct. 1, 2019 through June 30, 2023. According to one legal analysis, the bill could result in the creation of “one or more closed-loop payment processing systems that enable certain persons to engage in financial transactions relating to marijuana.”

Among the reasons for that, according to the bill and that analysis, is to make it harder for legal retail marijuana dispensaries to avoid paying local and state taxes — always a major concern for any industry dominated by cash. Supporters of the project also said a closed-loop payment system could raise further protections against money from cannabis sales ending up in the hands of criminals, as well as retail marijuana operations being used as fronts for illegal activities.

Cannabis Payments Landscape

By the last count from PYMNTS, 47 states have some form of legalized marijuana for sale. Collectively, those states are home to nearly 319 million people, or 98 percent of the U.S. population.

As readers of PYMNTS likely know, federal law still views marijuana as an illegal drug. That means banks, card networks and payment service providers — understandably concerned about running afoul of federal anti-money laws and other regulations — have been reluctant to offer their services to legal cannabis operations, no matter what particular state laws might be. Federal lawmakers continue to debate, and work on a bill that would allow financial institutions and others to offer their services without fear of breaking U.S. law.

Some states, though, have considered their own options to untie that payments knot.

Oregon stands as another example. Earlier this year, two Democratic state representatives introduced House Bill 3169, which would, in the words of one local report, “create a self-contained, state-chartered banking system for the cannabis industry in Oregon. … Passage of HB3169 would bypass the federal banking system, and create a limited banking alternative for the marijuana industry in Oregon.” That bill has not won approval.

Sales Growth

As various politicians, regulators and bureaucrats try to work through the cannabis payments problem (and as upstarts and other small payment companies strive to serve this market without breaking U.S. law), fresh signs are emerging of the growing sales potential of this industry. For instance, Canada-based cannabis business Canopy Growth reported its fiscal 2019 earnings late on Thursday (June 20).

Expectations on Thursday afternoon were high for the company, at least going by a report from Barron’s. It said Canopy Growth’s stock “has gained 57 percent so far this year,” outpacing the 16 percent average from the S&P 500. In the company’s Q3 financial report, Canopy Growth reported net income of about $56.8 million, up 580 percent from the year-ago period, and revenue increased 282 percent.

The growth applies to the wholesale cannabis sector, too. As reported by The Motely Fool, LeafLink, an eCommerce wholesale marketplace for legal marijuana, said that “$1 billion in annualized orders are now moving through its platform.”

The report also noted that, “since launching in Colorado in 2016, privately held LeafLink has quickly gained traction. The platform empowers licensed cannabis retailers to order from legal brands, which number in the quadruple digits, across 20 territories in the U.S. and Canada. If we annualize the value of the orders placed through LeafLink’s marketplace in May, the figure equals $1.007 billion.”

The money is starting to flow when it comes to legal cannabis retail in North America. With time, the results of these various payment tests and political efforts will gain more clarity — and what happens on that front will help guide the future of this young industry.

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