Though cannabis' status as a Schedule 1 controlled substance has hampered the industry's ability to fully integrate into the digitally dominated payment world, with credit card issuers refusing to process cannabis transactions, cannabis businesses have historically been able to enjoy similar benefits of efficiency, convenience, and security with debit cards. However, MasterCard's recent ban on the use of their debit cards for cannabis product purchases deals yet another blow to an industry too often required to view opportunities from the outside looking in.
Cash(-Free) is King
Cannabis is a Schedule 1 controlled substance under the United States Controlled Substances Act, meaning that there is a federal ban on the sale of cannabis even in states where it is legal, and this creates an uncertain landscape for banks that engage with cannabis merchants. Although the Federal government has historically avoided interfering with the cannabis industry, the U.S. Bank Secrecy Act (BSA) requires banking institutions to monitor and report on all suspected illegal activities. The U.S. Financial Crimes Enforcement Network, which is tasked with enforcing the BSA, has provided some flexibility to financial institutions given the state-legal status of cannabis, but many financial institutions – and all credit card processors – have nonetheless chosen to avoid the administrative hassle and relative high risk of the budding cannabis industry.
Operating in potentially dangerous and uncharted waters, businesses have deployed alternative payment methods, such as "unencoded" payments (virtual cash), to circumnavigate potential federal intervention. This has enabled the cannabis industry to participate in our increasingly cash free society.
Payment disbursements have defined the nature of dispensaries' participation in the virtual payment market. Dispensaries first used cashless ATMs (also known as "point of banking systems") to process payments. These machines allowed consumers to use their ATM card as if they were pulling cash out of an ATM, with the transaction rounded up (e.g. from $58 to $60) to resemble an amount typically withdrawn from an ATM. The payable amount is then deposited into the merchant's account, with the consumer receiving the difference in cash. However, because cashless ATMs avoid scrutiny by disguising cannabis purchases as ATM withdrawals, last year MasterCard and Visa cracked down on cashless ATM services, instructing issuing banks to stop accepting cashless ATM transactions.
In its wake, "pin debit transactions" emerged as a payment option for cannabis purchases. This method offered advantages to the cashless ATM by allowing customers to make payment through debit cards without rounding. However, in late July, Mastercard instructed payment processors and banks to stop accepting pin debit transactions for cannabis, effectively foreclosing cannabis transactions entirely on Mastercard's debit cards. If Visa follows suit, cannabis dispensaries will completely lose their ability to use payment cards to process cannabis transactions.
How Will This Impact the Industry?
The cannabis industry's only digital alternatives to credit and debit cards – cryptocurrency and ACH transfers – are not very user friendly, so dispensaries will effectively have to become all-cash businesses.
This creates a number of significant challenges for cannabis dispensaries. The U.S. economy is becoming increasingly cash free, with a recent Pew study revealing that 41% of consumers do not make any cash purchases in a given week. The lack of access to credit and debit cards may therefore negatively impact sales for cannabis dispensaries. In addition, the cannabis industry's banking problems have made it difficult to raise capital, with many investors choosing to remain on the sidelines until the financial and regulatory risks lessen.
Perhaps more worrying, this move may lead to a significant rise in crime for dispensaries. Cannabis-related businesses have already been a significant target for robberies – Washington dispensaries reported at least 100 armed robberies in 2022, and robberies at New York City smoke shops rose from 137 in 2021 to 593 in 2022. With cannabis businesses forced to rely entirely on cash, dispensaries are bound to see an even greater uptick in crime.
Realistically, dispensaries' lifeline will have to come in the form of regulatory reform, but these efforts have been slow to come. Given the trouble pushing through full legalization, the cannabis industry has championed the Secure and Fair Enforcement (SAFE) Banking Act, and although the U.S. House of Representatives passed the SAFE Banking Act in both 2019 and 2021 and included the provisions of the SAFE Banking Act in the America COMPETES Act of 2022, the SAFE Banking Act has been met with inaction in the Senate. Despite signals from Senators Chuck Schumer and Sherrod Brown for consideration in 2023, efforts at passage have been delayed by disagreements over the bill's provisions.
Looking Ahead
Hopefully, the cannabis industry's increasing difficulties will push Congress to action. But until then, the cannabis industry may have to brace for difficult times to come.
Louis DiLorenzo and Kevin Kurtz contributed to this post.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
