Regulation

Why The SAFE Banking Act Won’t Solve All Cannabis’ Payment Problems

One down, two more steps to go: That’s the situation with the federal SAFE Banking Act, which recently won approval by the U.S House of Representatives. The bill promises to open up cashless payments for the growing retail cannabis industry. If the bill were to win approval by the U.S. Senate, then President Trump, it would become law.

Prospects of that happening are, at best, uncertain, according to most experts. However, no matter what happens, the recent success of the SAFE Banking Act in the House still raises important issues, and shines a needed light on parts of the legal retail cannabis industry, as discussed in a recent conversation between Karen Webster of PYMNTS and David Durant, executive vice president and general counsel for payment services provider YapStone.

Among the most interesting messages? Even if the SAFE Banking Act does become law, that won’t spell the end of payment challenges for the legal cannabis industry. “The SAFE Banking Act itself might not be the ultimate answer,” Durant told Webster, “but perhaps the late beginning of a conversation that is overdue.”

More about that in a bit.

Recent Developments

First, a quick review: The U.S. House of Representatives passed H.R. 1595, known as the Secure And Fair Enforcement (SAFE) Banking Act, on Sept. 25. The bill was sponsored by Congressmen Ed Perlmutter of Colorado, Denny Heck of Washington, Steve Stivers of Ohio and Warren Davidson of Ohio — all members of the House Committee on Financial Services. The legislation aims to ensure that state-authorized and regulated cannabis businesses are not forced to operate with cash only. That’s because financial institutions (FIs) would be provided with what amounts to a federally approved safe harbor to serve not only retail cannabis stores, but all the vendors and service providers that serve those stores (think plumbers, carpenters and others).

Now, federal law treats marijuana as a Schedule 1 drug, which holds true regardless of various state laws — and serves to keep FIs and card networks on the sidelines, rather than risk running afoul of federal law, including anti-money laundering regulations. That lack of clarity from the federal government, as Durant put it, has led states that have legalized marijuana to try innovating their way out of that knot, in some cases, by building protections for banks and credit unions into state banking laws.

Long-Term Tension

However, even if the SAFE Banking Act were to become law, he told Webster, there will still be tension and contradiction between state legalization and federal law — a tension that reflects the larger issue of federalism in U.S. politics and governance.

“I think there is a balance to be struck,” Durant said. “[The SAFE Banking Act] is a good way to move us in the right direction, to bring us a little more clarity and certainty.”

The only way to erase the confusion from the entire matter — that is, the legalization of marijuana in a growing number of states, and the fact that some 60 percent of U.S. citizens support legalization — is to work toward what Durant called a holistic solution. What that might be remains unclear, but the fate of the SAFE Banking Act and larger political concerns will help dictate that, as will the success of various states to innovate new ways of cannabis payments. After all, those states with legalized marijuana want to collect the tax revenues from cannabis sales.

That said, don’t get too optimistic about finding that holistic solution anytime soon. When the discussion of future reform efforts turned to marijuana, the payments and Schedule 1 issues involved, Durant said, “I am skeptical [that] the federal government will do it in [a] holistic fashion, without significant lobbying efforts from business[es], the credit card networks and the banking sector.” Nor does he think the SAFE Banking Act will make it through the U.S. Senate anytime soon. Even so, the general goal of such holistic reform is clear. “You want to get to a place where you actually have real standards to protect consumers, and provide a safe harbor for industry players operating within the bounds of state laws,” he explained.

Schedule 1 Roadblock

The federal Schedule 1 classification of marijuana, of course, remains a massive obstacle for the payments industry in general. “As long as it’s a Schedule 1 drug, you will never get one of the big card networks to play without a safe harbor,” he said.

Other challenges remain, besides the lack of widely applicable standards. A line of thinking centered around the SAFE Banking Act indicates that FIs will face hard work on risk and compliance, and in determining whether people involved in the retail cannabis space are essentially clean enough to deal with — that is, that they don’t have criminal histories or other parts of their past that might set off Know Your Customer (KYC) alarms for risk and compliance officers.

“You will have some bad actors,” Durant said. “There will be a bit more [of a] burden on the financial services industry to spot bad actors and minimize misbehavior, but they will get the ability to charge for that.”

Legal cannabis is a business, after all, and the lure of fees and new revenue will certainly draw in banks, credit unions, card networks and other payments players.

“It may take a little while to build the infrastructure, and it will be harder for those folks in the cannabis industry who have more colorful backgrounds,” he told Webster. “But once the banks and card networks see there is actually money to be made for them, it will become an incentive for them to get behind this idea.”

So, what does that all mean for the coming months and the first year of the new decade? A continuing — and relatively unsafe, insecure and often corrupt — reliance on cash, as well as a reliance on closed-loop payments and a handful of state-specific innovations for legal cannabis payments. However, things are moving, if slowly, and that will bring more change of one type or another, even if not always as quickly as some would hope.

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