The Cannabis Cash Conundrum — The Top Challenges For Banking & Buying Legal Buds

Jul 3, 2022 | Banking

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Pot is perhaps the most popular product that people can’t pay for. Sure, customers can buy cannabis nugs in legal states, but it’s not as convenient as swiping a credit card for groceries.

Unfortunately, there’s a great deal of stigma surrounding products related to marijuana. Since most prominent financial institutions are risk-averse, cannapreneurs face greater obstacles to accessing essential services like bank accounts or credit card transactions.

Financing Cannabis Flowers — Four Issues Today’s Cannabis Businesses Face

While a few companies are trying to bridge the gap between dispensaries and financial institutions, cannabis companies face multiple barriers to banking and payment processing. Anyone entering the weed industry must be aware of the financial difficulties they’ll face.

State vs. Federal Marijuana Laws Put Big Finance On Pause

The lack of legal clarity is a core reason keeping banks and payment platforms from accepting cannabis businesses. Specifically, institutions that deal with marijuana want to know the federal government won’t subject them to drug trafficking or money laundering investigations.

Since cannabis isn’t legal federally, banks and credit card issuers must assume the US government won’t protect them. In this uncertain legal climate, financial institutions feel hesitant to offer services to what they consider to be a quasi-black market industry.

This aversion was made abundantly clear in late 2021 when Visa issued a strong warning against the use of “cashless ATMs” for cannabis. Many dispensaries in legal states installed these devices to give customers the convenience of using credit cards without technically breaking Visa’s policies. Unfortunately, as governments and companies like Visa picked up on this trend, there has been a swift crackdown on using “cashless ATMs” in cannabis facilities.

Although the federal government attempted to clear up this issue with the SAFE Act, Congress has yet to pass this or any other piece of meaningful legislation. Had the SAFE Act passed, it would have allowed banks to accept cannabis businesses in states with recreational weed policies.

In the absence of new statutes like the SAFE Act, financial institutions feel they are taking on too much risk by working with cannabis businesses. At this time, only a few hundred small credit unions work with weed companies in the USA. Even if entrepreneurs choose to work with these credit unions, they are often subject to much higher scrutiny.

Lack Of THC Testing Standards Prevents Bank Acceptance

Another reason banks are hesitant to work with cannabis markets is due to the lack of standardized testing procedures. Since marijuana is federally illegal, central authorities like the FDA don’t regulate the industry. Instead, each state has to develop its own policies to track and test compliant cannabis products.

Since every state has unique marijuana classifications and testing procedures, federally-legal “hemp” in one state could be “marijuana” in another. Indeed, this is a significant reason CBD businesses still face increased scrutiny from banks.

Even though hemp CBD oils are federally legal, there’s no nationally-recognized method for evaluating this plant’s legality. Some states only test the top two inches of hemp plants, while others take eight inches. Plus, since each US territory has different hemp manufacturing and extraction requirements, it’s hard to know whether each state’s “hemp” meets local laws.

Rather than jumping into new CBD or THC markets, big banks are waiting for an FDA-approved testing standard to ensure multi-state businesses will remain compliant.

Overreliance On Paper Currencies Presents Security & Compliance Issues

Despite multiple attempts to offer alternative payments, cannabis companies always seem to come back to paper bills. While cold hard cash is the easiest for dispensaries to accept, it presents multiple challenges for store owners.

Most significantly, holding paper currency is a security issue. Cannabis businesses are already vulnerable to theft due to the high value of their products. However, when dispensaries have tons of cash on their premises, it makes them an even juicier target for robbers.

If cannabis businesses primarily accept paper currency, then they have to invest in advanced security systems and storage. These costs will inevitably eat into a dispensary owner’s bottom line.

Even if you put the security issues aside, paper currency is incredibly inconvenient. Multiple studies suggest today’s consumers are less likely to use cash as their primary payment method. Instead, more people want to pay with credit or debit cards. Plus, with the rise of fintech apps like Zelle and PayPal, it’s likely to assume future customers won’t have any cash in their pockets.

From the dispensary’s perspective, using cash also presents many annoyances. For starters, it’s more challenging to track a cash-paying customer’s age and purchasing limits, and thus abide by local compliance laws. Also, holding paper money is highly inefficient for taxation purposes.

However, until companies like Visa or MasterCard embrace the cannabis movement, many dispensaries feel that paper money is the only way to make a sale.

Some Cannabis Dispensaries Feel Forced Into Risky Crypto Payments

Since traditional finance won’t help most cannabis businesses, it’s not surprising some dispensaries have turned to cryptocurrencies. There’s a long history of cannabis companies embracing crypto, and a few digital tokens like PotCoin were designed for the weed industry.

While accepting these digital assets offers some benefits versus paper cash, it also presents novel risks. For starters, the crypto market faces as much regulatory scrutiny as the marijuana sector. Also, similar to paper currency, most consumers nowadays aren’t as keen to transact in crypto.

Another concern with relying on crypto-assets is price volatility. If cannabis businesses accept Bitcoin or Ethereum, there’s no telling whether they’ll still be in profit within a few weeks. If dispensaries aren’t constantly swapping crypto assets into stablecoins or USD, it can be stressful to deal with these currencies.

Cannabis businesses should also remember the FDIC doesn’t insure cryptocurrencies. If companies lose access to their private keys, suffer a hack, or make a mistake with a transaction, there’s no third party that could recover lost crypto.

Lastly, every time companies swap out of a crypto like Bitcoin, it’s a taxable event. These constant transactions could make compliant taxing a real hassle for cannabis businesses.

A Banking Solution In The Bud Business — How Abaca May Be Able To Help

Until there’s federal clarity on cannabis legality, banking will remain a challenge for dispensaries. However, that doesn’t mean there aren’t solutions available for those in the weed industry. For instance, the Cannabis banking company Abaca now offers a suite of financial services for the cannabis and hemp industry.

On Abaca’s cloud-based platform, customers could easily access traditional banking, payment, cash management, and lending services. Since Abaca focuses on the cannabis industry, clients never have to worry about compliance issues.

For more details on how Abaca could solve your cannabis banking issues, contact Abaca via the White Eagle Coalition.