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Cannabis dispensaries in the US are likely to become cash-only, with industry players blaming the SAFE Banking Act for Mastercard’s decision to pull the pin on debit options.
Last week, Mastercard told financial institutions to stop allowing cannabis transactions on its debit cards.
"As we were made aware of this matter, we quickly investigated it," the company said in a statement. "In accordance with our policies, we instructed the financial institutions that offer payment services to cannabis merchants and connects them to Mastercard to terminate the activity."
Already, most banks in the country opt not to service cannabis companies. This is because cannabis remains illegal at the federal level, despite the fact that states such as California, Florida and Alaska have legalised cannabis use to varying degrees.
"Mastercard’s move is another blow to the payments industry and cannabis operators nationwide,” said Justin Kahn, an investor and co-founder of reepher, which offers prepaid defence plans for cannabis-related offences.
The decision further isolates merchants, which has triggered disappointment and frustration across the US.
“The industries have known this was coming for some time and many operators have been making moves towards safer methods of collecting payments from consumers,” said Kahn.
However, Kahn said that Mastercard’s actions and the subsequent actions taken by the payment providers that serve the cannabis industry have caught many operators off guard.
“Operators have had their funds frozen and services turned off. It’s just another nail in the coffin of cannabis payments," he said.
According to Brandon Dorsky, chief executive of Fruit Slabs, a cannabis edibles firm, the implications of Mastercard shutting out cannabis purchases, even via debit card, should not be understated.
“This will have an immediate impact on cannabis retailers and delivery service providers that utilised debit cards for payment,” said Dorsky. “This will also immediately increase demand for ATM machines and on-site payment kiosks or crypto conversion machines.”
Further, Dorsky warned that this will make cannabis businesses more vulnerable as they are now more likely to have cash on hand at any given time.
The perils of cash only
Insiders that VIXIO spoke to are unanimous in their belief that this move will mean cannabis merchants face becoming cash only.
The new cease and desist policy is another example of the hardships cannabis companies continue to face regarding their cash conversion cycle, according to Brett Gelfand, managing partner of CannaBIZ Collects.
“With additional limitations to accepting Mastercard, retailers will be forced to deal more with cash,” said Gelfand. “The more cash, the more controls are needed to ensure bookkeeping and accounting records are accurate."
Gelfand continued that the issue with large merchants and banks restricting their access to cannabis companies is a major contributor to more cannabis companies being forced to extend trade credit terms, resulting in what he predicted could be a major debt crisis for the industry.
Peter Su, who works in cannabis banking and is a member of the Asian cannabis roundtable, said his thoughts are with the merchants who built a process around this method and now have to go back to the drawing board and potentially have to operate as cash only.
“Cash may be king, but the logistics of dealing with cash is annoying and expensive, not to mention a potential security concern,” said Su.
"My advice is now that dispensaries need to bolster their other options,” said Sarah Bantz, cannabis accountant at Smith Patrick CPA. “The obvious now is cash, but are you able to do this? Merchants need to be considering whether they have enough staff. They need to plan for this change."
Bantz added that an ACH transfer is also a possibility, although less enticing.
“It requires the patient or customer to set up an ACH account and put in banking information so they can pay through an app on their phone,” said Bantz. “It is a stretch to imagine that most customers will want to go home and set something up that includes giving away banking information.”
“It is an option, and I suppose that merchants could push for it, but it isn't great."
SAFE Banking Act
There is hope of change at the federal level, although this hinges on the passing of the SAFE Banking Act.
Introduced in 2019 by Representative Ed Perlmutter (D-CO), it would create protections for depository institutions that provide financial services to cannabis-related legitimate businesses. It would also protect service providers for such businesses and for other purposes.
Although the bill did not make it through the Senate committee stage in 2019, Oregon Senator Jeff Merkley, along with Montana Senator Steve Daines and Representatives Dave Joyce (R-OH) and Earl Blumenauer (D-OR), reintroduced the legislation earlier this year.
“Forcing legal businesses to operate in all-cash is dangerous for our communities: it’s an open invitation to robbery, money laundering and organized crime — and it’s way past time to fix it,” said Senator Merkley.
“For the first time, we have a path for SAFE Banking to move through the Senate Banking Committee and get a vote on the floor of the Senate. Let’s make 2023 the year that we get this bill signed into law so we can ensure that all legal cannabis businesses have access to the financial services they need to help keep their employees, their businesses, and their communities safe.”
Su said that there is a chance of it being passed. “But, approximately 10 years and nine attempts into the SAFE journey, maybe it’s best not to put any money on it one way or the other,” he quipped.
“I think it’s interesting to think that SAFE started out as low-hanging fruit. It was kind of a ‘well, we are far apart on federal legalisation, but hey, we can all agree that these businesses should have access to banking, right?’”
Bantz meanwhile said that the passage of the law requires a “groundswell of lobbying efforts”.
“People need to get on the phone to their legislators and get this passed,” she said. “Then, Mastercard wouldn't need to do this."
