Cannabis is a booming industry in the United States. As regulations have been changing, cash businesses are struggling to adapt and digital payment options have yet to be established. These changes could create opportunities for not only cannabis-based companies but other industries as well that want a solution for their cash management concerns.
As the cannabis industry continues to grow in Canada, many companies are looking for new and innovative ways to keep up with demand. One such solution is accepting cash payments which has been a longstanding option for businesses that operate within the legal grey zone of this rapidly changing market. However, not all providers offer true payment flexibility due to their business model or lack thereof.
Cannabis companies are not used to dealing with traditional financial institutions. They have been forced to find new ways of managing cash flow and payments, but the options are limited.
The majority of today’s companies get the bulk of their revenue from electronic payment transactions. Most contemporary companies would collapse if they only accepted cash payments.
It’s no different in the cannabis business. Due of tight restrictions, cannabis companies, from shops to farms, had to operate exclusively on cash transactions until recently. Alternative payment methods have begun to become available as the business grows, allowing it to deal with its federal illegality.
The drawbacks of operating a cash-only company
One of the first things you should create when establishing a cannabis company is a cannabis-friendly bank account.
Without one, you’re more likely to fall into the trap of just accepting cash or risk having your bank account closed, which is a recipe for catastrophe (but unfortunately the standard at this stage in the industry’s development).
Running a cash-only company comes with a slew of issues:
Massive threat to security
Storing cash on your premises exposes you to external and internal theft. Making cash deposits on your own or with the help of an employee necessitates transporting big amounts of money, which poses a significant security risk.
You’ll need to employ additional security, install cameras and a metal detector, and engage an armored vehicle service to transfer your money if you don’t have a safe location to keep them. All of these additional expenditures add up to a significant increase in your starting costs and overhead.
Sales and cart size have decreased.
When customers shop, they expect to be able to use electronic payment methods. While some consumers may choose to pay the ATM charge, many will choose to exclusively buy at cannabis stores that accept electronic payments.
Because consumers aren’t restricted to the cash in their wallets when using electronic payment, you’ll be able to upsell much more at the time of sale. Offering an electronic payment option has been proven in studies to boost average cart size by 22 to 54 percent.
While paying local workers with cash envelopes is easy, paying suppliers or distant employees presents significant challenges.
You can’t use checks or debit cards if you don’t have somewhere to bank your money (which is frequent), so you’ll have to rely on sending cash, money orders, or driving great distances to pay by hand. Everything becomes more difficult when you just accept cash.
Bank accounts that are cannabis-friendly are a part of the answer.
It’s easier said than done to open a cannabis-friendly bank account. Due to federal prohibition, banks have a difficult time working in the cannabis business, which is exactly what Congress is attempting to address with the new SAFE Banking Act.
Fears about federal banks and money laundering
Because cannabis is still classified as a Schedule I drug on the federal level, federal banks will simply turn you away if they learn you’re involved with it. Any deposits made with cannabis profits may be considered money laundering.
Statewide banks and credit unions are a possibility, but they aren’t ideal.
The only other option for cannabis merchants is to appeal to statewide banks and credit unions, but the possibilities differ per state. With increasing success, certain businesses, like as Zodaka, have built networks devoted to connecting merchants with compliant cannabis banks.
Before these services, it was typical for a cannabis company to go through a dozen or more bank accounts before finding one that worked. Finding a solid bank account for cannabis money is now pretty simple—just expect to pay rather hefty fees with each deposit.
Other marijuana-related revenue management options
So, let’s suppose you’ve completed all of the licensing requirements, set up your cannabis-friendly bank account, and are finally ready to go. You suddenly recall that operating a cash-only cannabis company is risky, logistically challenging, and unsustainable.
What do you do if you need an electronic service but don’t know where to look? It’s very tough to make a decision since, until recently, each digital cannabis payment system has its own set of issues (legally and otherwise).
Here’s a quick overview of what solutions look like (along with their benefits and drawbacks):
Many cannabis companies are unbanked, which makes keeping all of that cash (along with product) on their premises a huge security concern. Cash raises the cost of doing company since you have to pay for extra protection.
Customers find cash difficult since cannabis is one of the only businesses that requires the usage of cash, and ATM fees may quickly drain your bank account.
Banking location (POB)
This is a popular option, and you can determine whether a dispensary is employing one by the actual change or electronic refund they offer you for a debit card purchase.
This is because, since these systems run on ATM rails, all payments must be recorded for in $5 increments.
The reason for this is because these systems utilize an ATM network that isn’t compatible, thus converting the cashier’s station into a cash dispenser. This is by far the most frequent method for dispensaries to circumvent the “cash-only” issue.
Accounts from other countries
For cannabis businesses that take credit cards, this is usually the answer. These systems operate by sending your money to a foreign merchant account and then transferring them back into the United States at a later date, thereby concealing the source of the funds from authorities.
These systems are not only unlawful, but they also cause a slew of problems for businesses. For one thing, most foreign accounts need a rolling financial reserve to be kept in the merchant account. Due to cannabis’ federal illegality, if this merchant account is closed, the merchant has no recourse for retrieving those money. Several businesses have lost over $100,000 as a result of this.
Transfer of funds from one bank to another (Zodaka)
These types of systems are still in their infancy, but they show promise. While businesses like Zodaka are still new to the cannabis industry, they are able to provide one of the few completely domestic, legal cannabis payment systems, which allows you to pay using your bank account.
This method is basically a “PayPal for cannabis,” with payments made straight from your bank account. These methods effectively let you to pay as if you were using a debit card, but without the card.
They have so far been used without problem in ecommerce CBD and online seed sales, but since their presence in cannabis is still limited, they have yet to be proved. Check watch this YouTube video or go to the website to learn more about how it works.
E-wallets are electronic accounts into which you may deposit money. The issue is that e-wallets take two to three business days to fill, so you won’t be able to make “spur of the moment” or emergency purchases.
You’ll need to prepare ahead of time if you want to purchase cannabis using an e-wallet. Physical “prepaid” gift cards work similarly, with the exception that the client must wait for the card to arrive. Neither of these options is scalable for the cannabis industry’s anticipated billions.
The issue with crypto solutions is that the technology and currency on which they are based are not well-established enough to support a full-fledged company. Each crypto infrastructure is very specialized, and none of them has sufficient evidence to demonstrate its effectiveness.
The truth is that since each of these technologies is so new, no one knows how or if they can be applied to traditional businesses (not to mention incredibly nonstandard industries like cannabis).
Furthermore, even if the dollar-to-crypto transfer is almost immediate, your payment is still susceptible to the volatile nature of the crypto market. In addition, regulatory restrictions on “stablecoin” have recently changed.
Cryptocurrencies are continuously rising and falling, and they are not dependable enough to build a company on until they are stabilized.
Risk management is an important part of building a successful company. If you’re putting up a business plan to raise money for your cannabis business, be sure to include information on how your company will handle payment processing and where you’ll keep your cash. Funders, particularly if you’re developing and expanding, will want to know that you have a strategy in place.
Keeping an eye on cannabis laws and legislation as they arise will be an essential element of your capacity to remain on top of a growing market, regardless of the cash management and payment systems you put in place for your company.
The “420 friendly banks” are banks that allow cannabis businesses to open accounts and use their services. The banks in this category are also known as 420 friendly because they were created before the passage of the Controlled Substances Act.
Frequently Asked Questions
How do dispensaries pay their employees?
A: This is a very difficult question to answer, as different dispensaries can have different policies for their employees. However, its common practice that the dispensary pays its employees in cash or with gift cards.
Can you use venmo for cannabis?
A: Yes, you can use Venmo to buy cannabis products.
Can dispensaries use debit card?
A: A debit card is a type of plastic card that typically displays the holders bank account number on it. It can be used to withdraw money directly from ones checking or savings account, and sometimes even at ATMs.
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