Finding Flexibility And Compliance In Cannabis B2B Payments

As the B2B payments landscape continues to make headway on the digitization front, not all industries are able to benefit from the modernization push.

The legal U.S. cannabis market continues to struggle with a lack of access to traditional financial services, and even a surge in FinTech solutions cannot close the gap. As a result, cash and clunky wire transfers, riddled with manual paper-based processes, are now the norm in a quick-growing market where cannabis has been legalized at the state level.

The crux of this challenge, of course, is compliance. While traditional banks can service businesses in this market, the burden of compliance checks continues to hold back financial service providers’ ability to offer seamless B2B payment solutions to the industry.

Without the ability for cannabis companies to adopt the majority of a growing number of B2B payment platforms available today, industry FinTech startup Spence Labs has decided to build new infrastructure from the ground up to address the service gap. In a recent interview with PYMNTS, CEO Chris Rentner explained his firm’s strategy for navigating the compliance complexities of legal cannabis B2B payments and offered his viewpoint on why marijuana-specific financial solutions will continue to be necessary even if — and when — the U.S. federal government decides to legalize the product.

A Maze Of Compliance

More banks are opening up to legal cannabis businesses to provide basic services like bank accounts and transaction capabilities. To facilitate B2B transactions, financial institutions must conduct a heavy volume of compliance checks to ensure that any money that moves is doing so legally and is going to legal companies.

Making matters even more complicated is that those checks, from anti-money laundering (AML) to know your customer (KYC) to the Bank Secrecy Act (BSA), have constantly shifting requirements about which data must be collected.

“What happens here traditionally — and ‘traditionally’ is a relative term, because cannabis financial services [are] changing daily — when these types of transactions were taking place, financial institutions had to manually go and ask all of their MRBs [marijuana-related businesses] about their transaction flow,” explained Rentner. “What is your monthly transaction flow? What are your large or suspicious activity transactions that took place? Where did you send your money this month?”

This typically occurs in emails and PDF document exchanges, he said, which is why industry-generic B2B payment platforms like Bill.com are unable to facilitate transactions for the legal cannabis space: Their infrastructure can’t support these checks and exchanges of information. It’s an additional leg of function that had to be built into Spence’s new Spence for Business B2B payment solution that was announced earlier this month.

“You need to provide all of this data to the bank and the customer, and you need to unlock … data from banks’ traditional systems that aren’t typically very accessible,” Rentner said, adding that Spence’s technology facilitates ACH transactions by way of its bank partner with automated compliance workflows via API integrations.

Flexibility For The Future

While maintaining compliance is a factor of unwavering importance for any solution operating in the legal cannabis arena, Rentner noted that B2B payments tools should also be flexible in other ways. Infrastructure needs to support a wide range of end users, transaction values and payment models, he said, whether it’s a small mom-and-pop cannabis shop making a $300 subscription payment or a major dispensary paying a $1.9 million bill for expansion.

B2B payments technology for this space must also be able to flex in preparation for the future. As regulation evolves, the kinds of data that must be exchanged between businesses and financial institutions must adjust accordingly. Further, noted Rentner, federal legalization will open up the opportunities for other payment infrastructures — most notably, the card networks — to operate in this space.

Today, it’s impossible to facilitate card-based B2B transactions legally, even though some merchants can process debit card B2C transactions in a so-called “cashless ATM” model.

“We believe that if you, as a financial services company today, are processing network-logoed cards, you are violating either the merchant or consumer terms of service with that network,” said Rentner. But while the company’s B2B payments solution is not interested in facilitating card transactions due to the current regulatory climate, the infrastructure can easily loop into the card networks when federal legalization occurs and when those card networks begin to step into the space.

Understanding the future of cannabis legalization at the federal level will be critical for the payments industry moving forward. But being able to jump quickly in response to that legalization will be key for industry-targeted FinTech solutions going forward. Yet, according to Rentner, federal legalization will not necessarily mean that cannabis-specific tools will be rendered unnecessary.

On the contrary, he said, because cannabis will still be perceived as a high-risk industry even after federal legalization, solution providers will still face a heavy burden of complex security and compliance requirements that must be built into their own infrastructure. It won’t happen overnight, either.

“This is not going to change tomorrow,” noted Rentner. “Federal legalization will not all of a sudden have every bank in the world participating in the cannabis industry or have other existing FinServ players jumping in tomorrow. Even if they did, they would have to modify their systems.”