The majority of businesses today obtain most of their earnings through electronic payment transactions. Most modern businesses would fail if they operated on a “cash-only” basis.
The cannabis industry is no exception. Until recently, cannabis businesses, from dispensaries to farms, were limited to operating solely on cash transactions due to strict regulations. As the industry continues to grow, alternative payment options have started becoming available to cope with its federal illegality.
The trouble with running a cash-only business
When starting a cannabis business, one of the first services you should establish is a cannabis-friendly bank account.
Without one, you’re likely to fall into the trap of running your business as cash-only or constantly reckon with having your bank account shut down, which is a recipe for disaster (though the unfortunate norm at this point in the industry’s growth).
Running a cash-only business creates a host of problems:
Massive security risk
Storing cash on your premises opens you up to theft both externally and internally. Making cash deposits on your own or having an employee do it requires carrying large sums of money, which creates a huge safety risk.
To mitigate these risks you’ll need to hire extra security, put up cameras and a metal detector, and enlist an armored car service to transport your funds if you do have a place to store it. All of these extra expenses increase your startup costs and overhead dramatically.
Decreased sales and cart-size
Customers expect electronic payment options when they shop. While some customers may decide to eat the ATM fee, many will opt to only shop at cannabis retailers who do offer some form of electronic payment option.
Offering electronic payment dramatically increases your ability to upsell at the point of sale since customers are not limited to the cash in their pockets. Studies have shown that offering an electronic payment option can increase your average cart-size from 22 to 54 percent.
Lack of usability
While paying your local employees with envelopes of cash is simple, serious complications arise when paying your suppliers or remote employees.
If you have nowhere to bank your cash (as is common) you can’t use checks or debit cards, so you need to resort to mailing cash, money orders, or traveling long distances to pay by hand. Being cash-only makes everything more complicated.
Cannabis-friendly bank accounts are part of the solution
Setting up a cannabis-friendly bank account is easier said than done. Banks have tremendous problems operating in the cannabis industry due to its federal illegality, which is the exact issue congress is trying to rectify with the recent SAFE Banking Act.
Federal banks and money laundering fears
Federal banks will simply turn you away once they know you are affiliated with cannabis, since it’s still a Schedule I narcotic on the national level, and any deposits they allow from cannabis proceeds can be deemed as money laundering.
Statewide banks and credit unions: Possible but imperfect
Cannabis retailers only option then is to turn to statewide banks and credit unions, however, these prospects vary by state. Some companies such as Zodaka have been developing networks dedicated to placing merchants with compliant cannabis banks, with growing success.
Before these services, it was common for a cannabis business to go through upwards of a dozen bank accounts before settling on a good one. Now, finding a stable bank account for cannabis funds is somewhat easy—just be prepared to pay relatively high fees with each deposit.
Other solutions for managing marijuana-related revenue
So let’s say you’ve jumped through all the hoops of licensing your business, you’ve set up your cannabis-friendly bank account, and are finally ready to operate. Suddenly, you remember that running a cash-only cannabis business is insecure, logistically difficult, and not at all sustainable.
You need an electronic service, but where do you turn? It’s incredibly difficult to decide because, until recently, every digital cannabis payment solution came with its own set of complicated problems (legally and otherwise).
Here’s a brief rundown of solutions look like (and their pros and cons):
Cash
Many cannabis businesses are unbanked, and storing all that cash (along with product) on their property is an insane security risk. Cash increases the cost of running your business as you need to pay for added security.
Cash is also inconvenient for customers as cannabis is one of the few industries that demands the use of cash, and ATM fees can eat a major hole in your pocket.
Point of banking (POB)
This is a pretty common solution, and you can tell when a dispensary is using a POB because they will often give you back physical change or electronic rebate for a debit card transaction.
The reason for this is that, as these programs operate on the ATM rails, all payments must be accounted in increments of $5.
The reason being that these systems operate via a non-compliant use of the ATM network, essentially turning the cashier’s station into a cash dispenser. This is by far the most common way that dispensaries are getting around the “cash-only” problem.
Overseas accounts
This is typically the solution for cannabis companies that accept credit cards. These systems work by routing your funds to an international merchant account before wiring them back into the states at a later date, essentially hiding the source of the funds from regulators.
Aside from being illegal, these programs create a ton of issues for merchants. For one, overseas accounts usually require a rolling financial reserve which must be maintained in the merchant account. In the extremely common case that this merchant account is shut down, the merchant has no recourse for recovering those funds due to cannabis’ federal illegality. We’ve had several merchants lose over $100,000 in this fashion.
Bank-to-bank transfer (Zodaka)
These sort of systems are just beginning to emerge but are showing some promise. While companies like Zodaka are just entering the cannabis market, they are able to offer one of the only totally domestic, legal cannabis payment system directly from your bank account.
Totally compliant, this system is essentially a “PayPal for cannabis” where you pay directly from your bank account. Effectively, these systems allow you to pay like you are using a debit card, but without the card.
Thus far they have been applied to ecommerce CBD and online seed sales without legal issues, but as their presence in cannabis is small at this point they are yet to be proven. For more on how it works, check out this YouTube video or visit the website.
E-wallets/prepaid cards
E-wallets are digital accounts which you can load funds into. The problem is that the loading period for e-wallets is usually two to three business days, so you aren’t able to make “spur of the moment” or emergency purchases.
If you want to buy cannabis with an e-wallet, you need to plan several days in advance. Physical “prepaid” gift cards operate very similarly, except in their case the customer also has to wait for the card itself to arrive. Neither of these solutions is scalable for the projected billions of the cannabis industry.
Cryptocurrency
The problem with crypto solutions is that the technology and currency they are built on is not established enough to base an entire business on. Each crypto infrastructure is very specialized, and none of them have enough data to prove their efficacy.
The fact of the matter is that each of these systems is so new that no one knows exactly how or if they can be applied to standard industries (not to mention incredibly nonstandard industries like cannabis).
In addition, even though the dollar-to-crypto transfer happens nearly instantaneously, your payment is still subject to the wild volatility ubiquitous in the crypto space. There was also a recent shift in government regulations on “stablecoin.”
Cryptocurrencies are constantly popping up and dropping, and until these systems are stabilized they are not reliable enough to base a business on.
Conclusion
Part of growing a strong business is mitigating risk. If you’re putting together a business plan because you’re seeking funding for your cannabis business, make sure you address how your business will deal with payment processing and where you’ll store your cash. Funders will want to know that you have a plan in place, especially if you’re growing and expanding.
Whatever cash management and payment systems you put in place for your business, keeping an eye on cannabis regulations and legislation as they emerge will be an important part of your ability to stay on top of a developing industry.
Carson O'Connell is the Director of PR and Marketing at Zodaka. After graduating from UC Berkeley, he was brought on by Zodaka to help work on business development projects, eventually taking over the Marketing and Public Relations departments. As one of the first employees at Zodaka, Carson has enjoyed watching the company grow from a fledgling project into the enterprise payment solution it is today. Carson was born and raised in Chico, CA, and now lives in Oakland.
