The cannabis industry is one of the fastest-growing industries in the United States. Recreational or medical cannabis sales are legal in most states and sales are expected to exceed $50 million by 2026.
The rapid growth in cannabis sales is expected to be driven primarily by:
- more states legalizing recreational or medical marijuana sales
- additional dispensary licenses being issued in states that currently allow cannabis sales
- more consumers become cannabis customers
- consumers increasingly purchasing cannabis from licensed dispensaries instead of black-market sources
Even with the growth and size of the cannabis industry, secure payments for dispensaries remain a challenge.
Cannabis payments challenge #1 – Banking
Electronic payments require bank accounts to settle the transactions. Until there was widespread availability of banking for cannabis businesses, there couldn’t be credible electronic payment options.
Cannabis banking issues are overblown in the media and politics; however, cannabis businesses will always have banking challenges because cannabis is illegal at the federal level.
The primary issue for cannabis banking is related to conflicting state and federal laws. Even banks that are state-chartered rely on federal systems and organizations to move money and provide services.
Another big challenge for banks to serve cannabis businesses is the sheer amount of cash cannabis businesses need to deposit. Cash creates not only AML (Anti-Money Laundering) and BSA (Bank Secrecy Act) issues for banks but also a logistical challenge.
Most banks and credit unions that serve cannabis businesses are smaller and aren’t equipped to process and store the amount of cash that a portfolio of cannabis businesses generate, and few markets have easy access to a Federal Reserve vault.
Cart before the horse
In the early days of state-legal cannabis sales, many banks avoided serving cannabis businesses because of the challenges presented by cash. Ironically, the best way to reduce cash deposits is for cannabis businesses to utilize electronic payments.
Banks waiting for electronic payments to reduce cash transactions are putting the cart before the horse because for cannabis businesses to utilize electronic payments they needed bank accounts to deposit the electronic deposits.
Luckily for cannabis businesses, banking services (bank accounts, check writing, etc.) are now widely available. The availability of cannabis banking has also improved the availability of non-cash payment options for cannabis businesses.
Cannabis payments challenge #2 – Federal law
It’s widely known that credit card processing for marijuana dispensaries is not available.
The major credit card brands (Visa, MasterCard, American Express, Discover) are not expected to permit cannabis credit card transactions until cannabis sales are federally legal.
Congressional acts, like the SAFE Banking Act, that are designed to increase the availability of banking services for cannabis businesses are not expected to affect the availability of credit card processing for cannabis businesses.
The SAFE Banking Act has failed six times and is largely unnecessary now as cannabis banking is widely available.
Name brand payment providers don’t allow cannabis transactions
Without access to credit cards, cannabis businesses have had to look for alternative payment solutions.
The most obvious alternative to credit cards would seem to be one of the many payment apps or services that are available now.
Cannabis businesses have electronic payment options (which we discuss later) but their options are not recognizable brand names.
Many of the payment solutions discussed below were designed to fill specific needs, like peer-to-peer transfers, instant cash transfers, free money transfers, or fast signup and approval. These services often have limitations, like low maximum transaction amounts and daily/weekly/monthly limits.
Additionally, many of these services operate as stored-value platforms and offer limited banking functions. Stored-value platforms hold all users’ accounts in one master bank account with sub-ledgers used to track individual users’ account balances.
Commingling cannabis sales proceeds with the account balances of non-cannabis sales is problematic for the providers and most likely not allowed by the financial institution that provides the master bank account.
Because of the limitations and purpose-built nature of these payment solutions, many of them have limited adoption in traditional retail sales (in-store and online).
Even though some of the most well-known payment apps aren’t designed for traditional retail transactions, they might be a valid option for cannabis businesses given the limited options they have.
Unfortunately, for the same reason credit cards aren’t available to cannabis businesses, the most well-known payment apps cannot be used for cannabis purchases.
Payment solutions that DO NOT allow cannabis transactions
PayPal is not cannabis friendly. You cannot use PayPal at a medical or recreational marijuana dispensary.
PayPal started as a peer-to-peer payment service as a way for people to transfer funds to friends online. PayPal became widely known while it was owned by eBay from 2002-2014 when it was the preferred form of payment for eBay transactions.
PayPal has evolved into much more than peer-to-peer transfers with payments coming directly out of payer’s bank accounts. PayPal accounts can now be linked to debit and credit cards and PayPal can be used for in-store purchases at stores like Home Depot.
PayPal balances are held in a stored-value platform and transfers of funds into and out of PayPal are settled via ACH.
Despite PayPal’s evolution into one of the largest electronic payment providers in the world, PayPal does not allow cannabis transactions.
Venmo is not cannabis friendly. You cannot use Venmo at medical or recreational marijuana dispensaries.
Venmo is a mobile app that started as a peer-to-peer money transfer app to make it easy for people to split the bill for things like dinner, trips, concerts, etc. Venmo is owned by PayPal.
A unique feature of Venmo is that users can share their purchases (excluding the transaction amount) with their friends. This could be fun, or worrisome, for cannabis transactions.
Venmo balances are held in a stored-value platform and transfers of funds into and out of Venmo are settled via ACH.
Venmo has expanded into business payments and even lets users buy cryptocurrency. Venmo does not allow cannabis transactions.
3. Cash App
Cash App is not cannabis friendly. You cannot use Cash App at a medical or recreational marijuana dispensary.
Cash App is a mobile app-based service for peer-to-peer money transfers. Cash App transfers are free but there is a fee for instant transfers. Cash App is owned by Block Inc. (formerly known as Square) and was originally known as Square Cash.
Cash App balances are held in a stored-value platform and transfers of funds into and out of Cash App are settled via ACH.
Cash App has expanded their services to include banking, debit cards linked to your Cash App balance, and brokerage services enabling users to purchase stocks and cryptocurrency. Cash App does not allow cannabis transactions.
4. Apple Pay
Apple Pay is not cannabis friendly. You cannot use Apple Pay at medical or recreational marijuana dispensaries.
Apple Pay lets users pay with a debit card, credit card, or Apple Cash balance using their iPhone or Apple Watch. Apple Pay can be used for in-store, in-app, and online purchases.
Apple Pay transactions are more secure than physical card transactions because they use tokenization (using the EMV Payment Tokenisation Specification) and bio-metric (fingerprint or face ID) two-factor authentication.
Apple Pay relies on credit card networks and does not allow for cannabis transactions.
5. Apple Cash
Apple Cash is not cannabis friendly. You cannot use Apple Cash at a medical or recreational marijuana dispensary.
Apple Cash lets users transfer money directly to another Apple Cash user via Apple iMessage. You can even use Siri to send money with Apple Cash. Apple Cash is built into iPhone, it’s not a separate app, making it super secure.
Apple Cash balances can also be used to make purchases from businesses that accept Apple Pay. Apple Cash transfers are immediately available to the recipient. Apple Cash uses a stored value system for Apple Cash balances. Apple Cash balances can be transferred to a bank account via ACH.
Apple Cash is separate from Apple Pay and the Apple Credit Card but does not allow cannabis transactions.
6. Google Wallet (formerly Google Pay)
Google Wallet (which includes Google Pay) is not cannabis friendly. You cannot use Google Wallet or Google Pay at a medical or recreational marijuana dispensary.
Google Pay is a mobile payment and digital wallet service owned by Google that has gone through various name changes and evolutions. Google has used various names for its payment service including Android Pay and Google Wallet. These services were combined into Google Pay which was re-branded back to Google Wallet.
Google Pay can be used for peer-to-peer transfers, in-app, online, and in-store purchases using Android phones, tablets, and watches. Google Wallet also features deals especially for its users, loyalty card integration, and electronic event ticket storage.
Google’s Plex service lets financial institutions offer banking services within the Google Wallet app, but Google Wallet and Google Pay do not allow cannabis transactions.
Zelle is not cannabis friendly. You cannot use Zelle at a medical or recreational marijuana dispensary.
Zelle is a peer-to-peer payment service. The difference with Zelle is that payments are made directly between the sender and recipient bank accounts, unlike other peer-to-peer payment services where money is stored in the app’s balance and requires a second step to transfer funds to your bank account via ACH.
Zelle is owned by seven of the largest banks in the United States, including Bank of America, JPMorgan Chase, and Wells Fargo. Zelle transfers can be initiated and managed within the Zelle mobile app or website of participating banks.
Zelle features free instant transfers, and the funds are immediately available to the recipient. Unfortunately, not everyone can use Zelle. Zelle works with over 1,000 financial institutions but if your bank is not a Zelle partner you can’t use Zelle to send or receive money.
Zelle provides efficient account-to-account transfers, but Zelle does not allow cannabis transactions.
Square is not cannabis friendly. You cannot use Square at a medical or recreational marijuana dispensary.
Square is a payment service owned by Block Inc. Square is designed to make it easy for small businesses to accept debit and credit cards.
Square processes in-store and online transactions, offers some banking services, and point-of-sale hardware and software. Square relies on credit card networks and does not allow cannabis transactions.
Stripe is not cannabis friendly. You cannot use Stripe at a medical or recreational marijuana dispensary.
Stripe provides software products to integrate debit and credit card payments into websites and mobile apps. Square offers industry-specific solutions but not for cannabis.
Stripe also offers in-person payments, invoicing, corporate cards, lending, banking-as-a-service, and online identity verification but Stripe does not allow cannabis transactions.
Cannabis payment options that ARE available
Several cannabis merchant processing solutions do exist.
1. ACH payments
Cannabis ACH payments, like Hypur Pay, have been available for over five years. In fact, Hypur Pay has been used by cannabis businesses since 2016 to process over 600,000 transactions.
ACH payments can be used for in-store purchases, delivery purchases, online cannabis payments, and in-app purchases. ACH payments can be integrated directly into apps, point of sale systems, and loyalty programs with the entire checkout process occurring on the same webpage or within the app.
2. Debit cards
Debit card processing for cannabis businesses is available but with limitations. Traditional debit card processing only works for card-present (in-store and delivery) cannabis transactions.
Cannabis debit card processing uses what’s referred to as PIN debit transactions which cannot be used for online purchases. PIN debit processing can be integrated with point-of-sale systems through APIs.
Another debit card-based solution for cannabis businesses is cashless ATMs, also referred to as “point of banking” devices. Cashless ATMs are a bit of a workaround solution and their longevity is questionable due to their violation of debit network rules and funky checkout process.
3. Cashless ATMs
Cashless ATMs require customers to pay an ATM fee, often called a “convenience fee”, to the ATM provider and possibly an out-of-network ATM charge to their bank.
These convenience fees reduce the benefits of electronic payments by encouraging customers to pay with cash or shop at a dispensary that doesn’t charge a fee. Defeating the purpose of offering electronic payments.
Cashless ATMs became popular because they were the first card-based cannabis payment solution. As better debit card options become available, many cannabis businesses are moving away from cashless ATMs.
Oddly enough, even as cannabis businesses and consumers are moving more and more to card-based solutions, a steady flow of cannabis technology providers are getting into the ACH payment game with their own “______ Pay”.
This is creating a very fragmented payment market that is frustrating for cannabis businesses and where the consumer is the ultimate loser, which is unfortunate.
Consumers should be able to choose how they pay, not have their payment choice dictated by what point-of-sale system a store uses, how they shop (in-store vs. online), or where they shop (which store or order app).
Cannabis technology providers, hoping to bolster their bottom line with payment revenue, are creating their own payment technology or leveraging the technology from a third party.
Both strategies are flawed because cannabis payments are tricky (we’ve been doing it since 2016 so we know). We discuss this in detail in another article, but it’s hard to imagine these payment solutions running smoothly, gaining traction, and being profitable for the providers.
Meanwhile, it’s the technology providers’ customers (cannabis businesses) that suffer, having to implement, train, educate consumers, and reconcile multiple payment solutions. But it’s the cannabis customers who are the ultimate loser.
Payments are one of the many growing pains of the cannabis industry. Unfortunately, many of the payment issues are self-inflicted.