In 2015, nationwide sales of cannabis via registered medicinal and recreational dispensaries hit $5.4 billion. The 2016 sales data has yet to be compiled but it is estimated to exceed $10B.
Cannabis is now legal for medicinal and/or recreational use in 26 states spurring tremendous growth, making it an attractive industry to service. This growth comes with great challenges.
As of this writing, Marijuana is listed at the Federal level as follows:
- The Financial Crimes Enforcement Network (FINCEN)
- The Controlled Substance Act (CBA)
Unfortunately, Treasury rules govern banking (at least banks and credit unions) which relies on federally-backed insurance. Significant restrictions are in place involving business demand deposit (checking) accounts. While some dispensaries have been allowed to open accounts using their business’s name, others have accounts using a holding company’s or their personal name. The latter two present accounting issues. Regardless of bank account status, the larger issue is the volume of cash a dispensary receives from their gross sales.
When a business or individual deposits large sums of cash into a bank or credit union, the Bank/CU is required to report the deposit under the Federal Bank Secrecy Act. The Anti-Money Laundering Act (AML) requires any cash transaction exceeding $10K to be reported.
It is not uncommon for dispensaries to have daily sales totaling more than $10K and most prefer to not vault the cash on premises. Whether the cash deposit is transported via Armored Car Service or not, the deposit will generally be reported.
Having large sums of cash on site and the problems which arise in doing so are often overlooked. One only needs to watch the local news to see stories of gas stations/convenience store robberies. These proprietors are lucky if the assailants are successful in stealing only a few hundred dollars, but often it is much more. Ask yourself the following: “How much cash might a dispensary have on hand at any given moment?”. The answer might be thousands of dollars, maybe tens of thousands. The resulting potential for theft is significantly magnified. Perimeter security is established via alarm system with cameras constantly watching and offering real-time downloadable video, maybe a DVR off-premises. In addition, some dispensaries may employ silent-trip alarms, vaults, or possibly armed employees. The aforementioned measures ensure a relatively safe, secure site, but the cash still needs to be moved from that site to the bank. To accomplish this, armored car service will be used, not your office manager putting it in a few envelopes. Take a calculation of the cost described above month after month to protect against outside theft. Mitigating inside theft, shortages caused by employees, also incur costs. Guarding against these threats in a rapidly growing industry will quickly become cost-prohibitive.
The same set of treasury rules impact cannabis dispensaries from having traditional merchant card acceptance. When a business accepts payment cards, the transactions are batched. The batch deposits into a merchant’s account via ACH which requires a clearing bank. Therein lies the issue.
Several alternative payment methods proposed, implemented, terminated, etc. Below are a few examples:
- ATMs– provided a 3rd party vendor. A customer decides to check out and the sale amount is determined. The customer proceeds to the ATM and, after submitting the debit amount, a convenience fee is accessed. The machine then prints out a receipt and the customer takes the receipt to counter to pick up the Cannabis purchase.
- E-Wallet – one of the original alternative-payment methods. Issues quickly surrounded consumer adoption (or lack of) but the larger impact was e-wallets were determined to be money-remittance and the providers of such are required to have a money-remittance license in every state their clients transact in.
- Generic DBA Name – Apply and setup a traditional merchant name using a generic name such as “John Doe Wellness Center”. On the surface, the DBA could be mis-construed as a physical therapy business. Masking the true business type is not a long-term solution. The payment-processor’s risk assessors will make this discovery (as many dispensaries have witnessed) and have the payment account terminated.
- Mobile Payments – There are some solutions in the market, but none deemed reliable or masked like the previously mentioned Generic DBA configuration.
- Stored Value Cards – These cards are closed-loop. The cards are the equivalent to gift cards, which have a participating group of merchants. There are systems setups for dispensaries. Customers load value onto a card and the stored amount resides with the processing partner. When the card is redeemed at a participating dispensary, the sale amount will transfer to the dispensary’s stored account. They can ACH out funds also, but these funds are delayed 2-4 days.
- Pin Debit at the Counter – At checkout, the purchase amount is calculated, and the customer pays using their check-card/debit card. The sale includes a convenience fee, charged to the customer. Unlike the ATM merchant, this payment card option does not require the customer to leave the counter to pay. The sale amount is entered in front of the customer into a traditional card terminal using a pin pad. The customer will enter their PIN and two receipt copies are printed. One for the customer and another for the dispensary.
A question I am often asked is “Joe, when will traditional card-payment systems be offered to dispensaries?”. I answer, “Until Treasury rules are modified by our legislative branch and signed by the President, the current environment will remain.”. If a dispensary takes cashless transactions it benefits that dispensary on a number of fronts. Avoiding cash transactions:
- Lowers cash handling, vaulting, and depositing
- Can lower cost of security • Lowers issues with cash-deposit totals and the reporting created
- Reduces shortages If the cashless transactions are pin-debit based, the dispensaries benefit due to:
- Pin debit transaction having zero chargeback liability for a merchant
- Zero processing cost to the dispensary (depending on the pin debit solution)
- Sale amounts are batched and deposited into dispensary’s bank account via ACH.
While there is plenty to digest here, I offer words of caution to dispensary operators and owners: If you are considering cashless payment options, do so diligently. Ask questions. A bad question is a question never asked. Finally, Understand their system, how it works, and ultimately ask yourself, “Does this provider understand my business?”.
Joe Radest HeadshotJoe Radest started his career in card payments in 1998 working for the industry giant First Data. Since FDC, Joe has worked with other notable processors – TSYS, Global Payments and Chase Paymentech. Over 5 years ago, Joe branched out on his own; providing complete end to end business process management and secured payment technology solutions, which affords business clients the ability to securely transact payments without having sensitive data touching their environment. He can be reached by phone at 770-731-0414 or by email at firstname.lastname@example.org.