Since its re-legalization starting in California in 1996 (for medical use), the cannabis industry has had a large problem with regard to banking and payments. As more and more states allow medical use and some allow recreational use, this problem will get larger. Since the sale and use of cannabis is still prohibited by federal law and regulations and cannabis is classified as a Schedule 1 drug, that leaves everyone involved in the cultivation and sale of cannabis in an awkward legal gray area.
Most banks choose to stay away from providing banking services to cannabis merchants because by doing so, they would risk losing their FDIC insurance, and the risk of not having that protection currently outweighs potential gains to made by providing those services. On the payments side, the card networks do not want to become involved because they too must adhere to federal rules and do not want to take on the additional risk. On the other side, are the cash-heavy cannabis merchants, who must deal with the issues of cash security, payroll, taxes, and other needs all without the benefit of banking services.
Getting around the federal government
The fact that the federal government has not budged on prospect of considering its stance on the legalization of the cannabis industry has led many states to consider granting their own state banking charters that would allow cannabis merchants to have access to banking services. Recently such a banking charter was proposed in the California legislature, but as pointed out in a Forbes article, the bill was killed by the California State Assembly. This may be just a minor setback for the proposed banking charter as the Assembly did acknowledge that cannabis merchants do need access to banking services.
In Colorado there is one financial institution that is willing to take on the risk. Partners Colorado is a credit union that was originally chartered in 1931, and according to a recent New York Times article, the financial institution claims it had $931 million in cannabis-related deposits in 2017. This of course helps to relieve cannabis merchants’ problem of excessive cash and provides banking services the merchants desperately need. There is still the matter of how users pay for the marijuana.
Some organizations are looking for ways to digitize the process of paying for cannabis even though the payment card issuers and processing networks are clearly staying out of this industry until they get the go-ahead from the federal government. One of those organizations looking to digitize the payments is Alt36. As you might have guessed, it works off of a blockchain and cryptocurrency model (space does not permit discussing this somewhat controversial concept here).
Is paying in cash only really so bad?
Being such a cash-exclusive and cash-heavy business is problematic for cannabis merchants, as noted above, but is cash-only payment really a problem from the consumer point of view? Consumers may miss the convenience of being able to pay via digital or plastic, but does the inability to use these methods stop them from making purchases? I think not. And given the wide availability of ATMs, account holders’ ability to convert their funds from plastic to cash is in many cases right around the corner and in some cases directly onsite at the merchant location, as pointed out in a recent creditcards.com article.
The battle continues
Even though baby steps have been taken, it does not appear that the banking industry is ready to fully embrace the cannabis industry. I would expect, however, given the amount of revenue that is likely to be generated in this industry, that the legal status of cannabis will become harder and harder for the federal government to ignore. Also not to be ignored is the irony of the business being federally illegal but nonetheless federally taxable, as pointed out by CNBC.
As more states begin to legalize the cannabis industry, I would expect to see more state banking bills being put forward and potentially passing. So the question is not just when but what will be the tipping point for federal legalization of cannabis and the allowance of all banks and payments industry players to have their role in the industry.