Pot Payments Emerge from the Shadows

Legal cannabis sales have become a fast-growing market for electronic payments. Processors can credit the Covid-19 pandemic with helping move the needle.

Just like their counterparts in other merchant segments, legal cannabis merchants found themselves scrambling to embrace contactless payments options in the wake of Covid-19.

Over the past 16 months, and in increasing numbers, these sellers have been turning to electronic payment options, including account-to-account transfers over the automated clearing house, that do not run afoul of federal banking laws.

The latest rush stands in stark contrast to prior practice. Pot merchants have been primarily cash-only businesses because the federal prohibition on cannabis has kept financial institutions from offering them card-acceptance services,

But the pandemic led many of the states that have legalized the drug to declare these sellers essential businesses. At the same time, consumers wanted a contactless payment option that enables them to pay online from home for a delivery or curbside pick-up or to pay in-store through a mobile app.

Now, many cannabis-payments experts view the addition of electronic payments to dispensaries’ online-ordering platforms as a logical next step for the industry to grow sales.

“Consumers have shown during Covid they are receptive to trying new payment options,” says Dan Roda, chief executive for Abaca, a North Little Rock, Ark.-based provider of payments and financial services to cannabis merchants.

“The cannabis industry lacks conventional card-based payments,” Roda adds, “so it makes sense for merchants to try alternatives because electronic payments can increase consumer spending power and improve operational security by reducing the amount of cash they handle.”

If anything, increased customer spending power is a potent business case by itself. In June 2020, Abaca gathered data from about 15,000 transactions at one of its medical-cannabis merchants that had installed its AbacaPay app.

Abaca—which in addition to its own payment app supports cashless ATM and other well-established electronic payment options for cannabis merchants, such as CanPay—found the average ticket for non-cash transactions was $136.35, compared to $109.06 for cash, or 25% higher.

Overall, adding non-cash payments increased the merchant’s total revenues during the test period by nearly $135,000, or 8.3%.

“When customers pay in cash, most of them make their spending decision at the ATM and not the point of sale,” Abaca cofounder and chief strategy officer Brian Bauer said in a blog detailing the study.

“When presented with the option, about one-third of this dispensary’s customers opted for cashless payments—just shy of 10,000 transactions were cash and almost 5,000 were cashless. [T]he surprising finding is how much more money the cashless customers laid out,” the blog continues.

In 2021, total cannabis sales in the U.S. are expected to hit $19.6 billion, up from $16.3 billion in 2020, according to The Arcview Group, a San Francisco-based cannabis industry investment and research firm. In 2025, those numbers are projected to reach $33.9 billion. Just seven years ago, cannabis sales totaled a mere $3.3 billion.

The Amazon Experience

Given the rapid growth in legal cannabis sales in the United States and consumers’ preference for non-cash payment options, it’s not surprising payments providers are expanding their reach in this market.

Their approach includes deals involving online-ordering systems, mobile apps, and delivery services. Many of these deals were announced through press releases—quite a change from the pre-Covid era, when financial-services providers preferred not to draw attention to themselves because of the stigma attached to legal cannabis.

“Digital payment adoption by cannabis merchants accelerated during Covid, especially as many states mandated curbside pickup,” says Tyler Beurlein, chief revenue officer for Hypur Inc., a Scottsdale, Ariz.-based provider of payment and banking technology. “E-commerce is also here to stay and is the future of this merchant segment because mainstream consumers that buy cannabis want the same kind of e-commerce experience they get from Amazon.”

In February, Hypur partnered with mobile-app provider Strain to integrate Hypur Pay in Strain’s app. The Strain app, a white-label solution for cannabis merchants used by 355,000 consumers and 250 dispensaries, allows consumers to shop online.

With the addition of Hypur Pay, Strain users can pay for their purchases through the app either in-store or prior to pick-up. Hypur Pay facilitates payments by directly debiting a consumer’s account and sending the funds straight to the merchant account.

Cannabis merchants can also use the Strain app to enroll customers in rewards programs, send promotional offers, and push SMS marketing messages to app users when they are near a dispensary.

“The ability to pay through the app adds value for dispensaries,” says Strain chief executive Manuel Ramirez. “As we gained more customers, we saw the need to close the gap between online ordering and payments. With our app, cannabis merchants can accept orders and payment, market to their customers, and provide customer service through a single point of integration, which shortens their technology stack.”

Strain’s app also captures consumer-behavior data, such as products viewed during a session, purchase frequency, and average spend. Merchants can also conduct customer surveys through the app to receive feedback on customer satisfaction and create customer profiles for marketing purposes.

About 70% of a dispensary’s customers that shop online will move to Strain’s app for ordering, says Ramirez. Strain is also developing a customer relationship-management application for cannabis merchants that it expects to release later this year.

‘The Next Wave’

Other fintechs striking deals this year with cannabis-related technology providers include Kirkland, Wash.-based POSaBIT Systems Corp. and Chicago-based AeroPay.

POSaBIT’s linkup is with online-ordering platform provider I Heart Jane to add payments. For cannabis merchants, POSaBIT offers several payment options, including POSaBIT ACH. That option allows customers to log in and store their banking information within POSaBIT’s payments portal for in-store and online payments.

POSaBit, which declined to comment for this story, also offers a debit point-of-banking option that acts as a cashless ATM at the point of sale. Point-of-banking solutions allow customers to purchase goods or services by inserting a debit card in a POS terminal, then entering the amount of the transaction and their PIN.

Instead of dispensing cash, a point-of-banking application generates a receipt for the transaction as funds move from the consumer’s deposit account linked to her debit card to the merchant’s account.

In January, AeroPay, which also refused to comment, partnered with Blackbird, a cannabis-software and -delivery company, and in February linked with Olla, an e-commerce platform built specifically for cannabis merchants. The connections enable payments through both platforms via bank-to-bank transfers.

Consumers using Blackbird will be able to prepay online at the time of checkout using AeroPay for curbside pickup or delivery orders in states where legal cannabis delivery is allowed, such as Nevada and Florida.

Blackbird provides a white-label online-shopping application for cannabis merchants, It also operates an online marketplace called BlackbirdGo in select markets for consumers who want to place orders for delivery or curbside pickup.

Olla’s platform supports online pre-ordering, curbside pickup, home delivery, and in-store ordering. In 2020, more than $250 million in online cannabis orders were placed through Olla’s platform.

“E-commerce is seen as the next wave in the legal cannabis industry,” says Abaca’s Roda. “Practically all cannabis merchants are developing an e-commerce strategy to make it easier for customers to pay and market to them.”

Getting Banks’ Attention

Another fintech announcing payment options for cannabis merchants this year is OLB Group, Inc., which has partnered with a marketing firm that offers a white-label rewards programs to more than 500 cannabis merchants.

“They came to us looking to add a payment option,” says OLB chief executive Ronny Yakov, who adds OLB plans to offer cannabis merchants a prepaid card at a future date. “The sense we are getting is the market for legal cannabis is opening up more and we want to be ready to offer cannabis merchants a business model that includes multiple payment options. We already provide payment processing to CBD merchants.”

CBD, or cannabidiol, is a chemical in the cannabis sativa plant that is not psychoactive, and therefore does not get the user high. Fourteen states have legalized CBD products.

Besides credit and debit card acceptance, OLB’s SecurePay payment gateway supports QR codes, mobile-app solutions such as Apple Pay and Google Pay, ACH account-to-account transfers, and cryptocurrency.

In all, 36 states have legalized cannabis for medical use, and 16 plus the District of Columbia have legalized it for adult recreational use. The trend is not unlike how alcohol prohibition fell in the United States almost a century ago.

“The biggest driver in overall sales is new states legalizing,” says David Abernathy, principal for Arcview’s management-consulting division. “Legal cannabis sales are also eating away at the illegal market, which represents between $60 [billion] and $80 billion in annual sales. We don’t expect a plateauing of legal sales in the next five years, and would be surprised if we saw it in 10 years.”

Ultimately, Abernathy predicts legal cannabis sales will eventually displace the bulk of illegal sales. If enough illegal sales are converted, legal cannabis could easily become a $100 billion industry within a decade.

“Once that happens, it will be a large enough market to catch big banks’ attention,” Abernathy adds. “The reason cashless-payment providers are gaining traction is the difficulty cannabis merchants have getting payment services from banks.”

Compliance Issues

Indeed, the financial institutions that are working with fintechs to provide banking services to cannabis merchants are typically small banks and credit unions. These institutions are less averse to servicing high-risk merchants than are large banks, cannabis-industry experts say.

The compliance issues that surround financial institutions servicing the legal cannabis market are strict and cumbersome. For example, they are required to file a suspicious-activity report for every cannabis-related transaction they handle. As a result, the compliance issues are not worth the cost and operational headaches for big banks given the size of the current market.

“The big banks don’t see legal cannabis as large enough to move the dial because they can make more money in credit cards, for which they already have the supporting infrastructure in place. With cannabis merchants, they’d have to build that infrastructure,” says Bob Craig, chief executive for PayQwick Inc., a Los Angeles-based provider of treasury-management services to cannabis merchants.

PayQwick, which launched in 2014 and serves more than 400 cannabis merchants, initially offered a cashless-payment option, only to drop it after several years because of wavering support for the product among processors.

PayQwick works with multiple financial institutions around the country to provide treasury management and banking solutions to cannabis merchants and their suppliers.

“We didn’t get a lot of assurances that our merchant accounts wouldn’t be suddenly shut down, even though they were compliant, so we began moving away from consumer payment options to focus on treasury management,” Craig adds. “Our focus now is to help cannabis merchants digitize cash to pay their bills.”

‘Getting More Traction’

Despite the inroads fintechs are making with non-cash payment options in the cannabis market, there are still providers looking to mislead the card networks by veiling the true identity of their cannabis merchants, some observers say. That, cannabis-payments experts say, not only gives the industry a black eye, but invites tighter regulation.

“There is a lot of money that can be made short-term by processors gaming the system, but we still live by the rule that dispensaries shouldn’t have to hide their identity for payment processing,” says Dustin Eide, chief executive at CanPay, which provides a mobile-payment app to more than 700 merchants in states where cannabis has been legalized.

“Cannabis merchants are definitely seeing the value in digital payments and e-commerce now,” he adds. “That’s why they are getting more traction.”