According to CanPay CEO Dustin Eide, if you want to chase rabbit holes and see where they go, you can’t do much better than trying to understand the relationship between cannabis and banking.
Since California legalized medical cannabis use in 1996, the question of how financial transactions would work between patients, dispensaries, and banks has largely been met with unsatisfactory answers. The original solution — essentially the only option available to cannabis businesses in the early days — was to try and function as an all-cash industry.
It was far from ideal.
“Prior to banking,” Eide recalls, “dispensaries and other businesses in the industry were taking duffel bags full of cash to places like Walmart to obtain a cashier’s check so that they could pay vendors, whether that vendor was in the industry or not.”
Things changed drastically with the release of the U.S. Department of Justice’s Cole Memo on Feb. 14, 2014. Viewed in conjunction with guidance issued by the U.S. Treasury Department’s Financial Crimes Enforcement Network Bureau (FinCEN), these new parameters led some credit unions and community banks — namely, institutions that were chartered at the state level — to conclude they could finally structure compliance programs and bank the industry. This change in attitude was at odds with the views of the country’s largest financial institutions, which have thus far refused to engage with the cannabis industry due to a perceived lack of certainty and safe harbors in place on the federal level.
CanPay, a cannabis payment solutions company that launched in September 2016, opted to start its operations in the state of Washington, where Eide and his partner had already spent years working with traditional merchant-payment services.
“I really wanted to explore something that would give me a long-term challenge,” Eide says. “Looking at the cannabis industry, I realized there was very little stability and very few legitimate options available for those newly legalized businesses, at least at the state level, determined to participate in the industry.”
Now operating in Washington, Colorado, Maine, and Florida, CanPay works with dispensaries and other marijuana-related businesses to offer a stable, compliant, and totally transparent debit payment network to the cannabis industry. To understand the significance of having a new option for accepting payment at the dispensary level, one need only look at some of the inferior solutions that preceded it.
As Eide explains it, many dispensaries have had to obfuscate the true nature of their business in order to take advantage of banking services.
“In the world of cannabis, historically you would be required to hide the nature of your business,” he says. “Maybe at the branch level you could have nod and wink conversations with your banker because they would see you had ‘organics’ or ‘wellness’ in your name and figure out that you might be involved in the cannabis industry, but you couldn’t be open about it.”
Eide says another tactic was to utilize a holding or management company and have the bank account for your dispensary nested underneath it. Given that major credit card companies like Visa and Mastercard have clearly stated that use of their networks for cannabis sales is prohibited, there were also ways around taking those payment forms from patients and consumers.
Unsurprisingly, most of these solutions were quickly shut down once their true nature was discovered.
“There are solutions that are out there that attempt to utilize Visa and Mastercard,” Eide says, “but they are unstable at best and typically bring into question both the flow of funds from a legitimacy standpoint as well as questions about why a company isn’t doing business in their own name. Who doesn’t know in the chain of the payment that this is a cannabis transaction?”
For CanPay, transparency is key.
To use it, a user installs an app, verifies their identity, and uploads their checking account information. Apple does not permit cannabis-payment apps, but Eide says that from CanPay’s site, one will end up with a program on their device that “looks and feels like a normal, native app.” When making a purchase with a dispensary that accepts CanPay, the app generates a unique, random, and single-use payment PIN. This ensures that no personally identifiable information or banking data is shared.
While the service is not yet available in California, Eide says there are plans in the works.
“Would I say that California is sufficiently banked? Absolutely not,” Eide says. “Do I think it will get there in a relatively quick fashion because of the forthcoming legislative changes and where we’re headed as an industry? Yes. Absolutely.
“It’s a very big market,” he adds. “It’s going to take a number of financial institutions to step up. We’re already aware of some that are exploring their options in the lead-up to 2018 and exploring compliance programs and whatnot and how best to do it.”
And he’s confident CanPay can be one of the players to step up.
“We do expect to have an announcement in the near future regarding at least one major relationship in California,” he says.