The Maturation of Pot Payments

Cannabis could be a huge opportunity for acquirers, but the wait for a ubiquitous PayPal-of-pot option continues.

When it comes to electronic payments, the legal cannabis industry is starting to grow up.

Cannabis was once considered the Wild West of the payment world because of all the skullduggery that took place to mislead processors about the type of transactions they were actually handling. Shenanigans still occur, but they are becoming less prevalent.

Fading in the rearview mirror, too, are the closed-loop prepaid systems and other workarounds, such as cashless ATMs, which were still highly popular as recently as last year.

Indeed, the card networks and terminal makers have been cracking down on the use of cashless ATMs in dispensaries. Both Visa Inc. and Mastercard Inc. issued industrywide memos in the past couple of years warning that use of cashless ATMs by cannabis dispensaries violates their operating rules.

In December, terminal maker NCR Corp. went so far as to turn off services to cashless ATMs at dispensaries in Arizona, California, and Massachusetts.

Instead of new workarounds, payment providers are focusing on solutions that do not run afoul of federal banking laws.

Propelling this trend is consumers’ growing desire to pay for dispensary purchases electronically, as opposed to using cash. At the same time, dispensary operators want electronic payment options they can bundle with loyalty, delivery, subscription, and e-commerce applications.

“Accessibility, choice, and convenience are all factors in the online-shopping experience, and by providing them, cannabis retailers will gain access to a wider customer base, and payments play a factor in each of them,” says Robert Braun, head of partnerships for Aeropay, a Chicago-based fintech that services cannabis merchants.

“Together, the shift to e-commerce [and] home and curbside delivery, and cannabis being able to provide the same experience while maintaining compliance standards, has helped the industry move forward,” Braun adds.

Independent Networks

For payments providers, the move away from payment solutions that skirt card network rules and toward legitimate electronic payment options is a plus as states continue to push for legalization.

Currently, 21 states—plus the District of Columbia, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands—have legalized cannabis for recreational use. Use of cannabis for medical purposes is legal in 38 states.

To enable the acceptance of PIN debit cards at the point-of-sale, payment providers are developing solutions that run over independent debit networks, such as the Co-op Pay Network which was developed for credit unions. These independent debit networks, of which there are estimated to be about a dozen, were developed as lower-cost alternatives for merchants.

Providers developed PIN-debit solutions for cannabis merchants because they are typically used by credit unions and community banks, which have historically shown a willingness to bank cannabis merchants. Tapping this community of card issuers enables cannabis merchants to reach the majority of the PIN debit card holders in the United States.

One drawback to independent debit networks is that approval rates range between 70% and 95%, according Paybotic LLC, a West Palm Beach, Fla-based provider of payment solutions to cannabis merchants.

But average tickets can be higher, as is the case with card-based payments in other merchant segments. On average, consumers that use PIN debit cards to make a purchase at a cannabis merchant spend 20% to 30% more than they would if they could only pay with cash, payment experts say.

“Cannabis merchants like that consumers spend more with cards,” says Robert Craig, chief executive for PayQwick, a Calabasas, Calif.-based provider of financial solutions to cannabis merchants. Last year, PayQwick entered an agreement to be acquired by Green Check Verified, a Bonita Springs, Fla.-based provider of financial solutions for the cannabis industry.

“The leap from a cashless ATM to a PIN-debit solution is not that big a hurdle, and there are several debit networks that see the potential for a lot of revenue and want a piece of this market,” Craig adds.

The benefit to consumers is they can make a purchase for the exact amount, instead of having to round up the purchase by $10 or $20, as is the case with cashless ATMs. With a cashless ATM, consumers can only initiate a transaction in predetermined increments, such as $20, since the ATM is a cash dispenser, not a POS terminal.

Rather than dispense cash, cashless ATMs deposit the requested funds from the consumer’s checking account directly to the merchant’s account. The merchant then rings up the total of the sale and pays the customer any change due.

Yet another advantage of PIN debit solutions for consumers is they can avoid the out-of-network bank fees levied for cashless ATM transactions, observers say.

“Cashless ATMs are no longer a viable payment option for cannabis dispensaries due to the uncertainty surrounding their legality, high transaction fees (up to 15%), the difficulty of use, and security risks,” says James Li, technology partner lead for Onfleet Inc., a San Francisco-based delivery service which has partnered with several cannabis payment providers.

But PIN debit solutions still have drawbacks. Even though banks issue PIN debit cards that can run over independent network rails, there are some—the national banks especially—that don’t want their debit cards being used for purchases in dispensaries and will take steps to prevent it, observers say.

“As the major banks learn that their consumers are purchasing cannabis with debit cards, they will have the ability to block the purchase,” says Paybotic chief executive Max Miller. “The banks can simply make a quick configuration change in their platforms, and any transactions from the secondary network using the merchant code for cannabis will be declined.”

In March, Paybotic announced the opening of a waitlist for its menu of financial services available to cannabis dispensaries. The services include FDIC-insured checking accounts, electronic payments, and mobile and online access. The West Palm Beach, Fla.-fintech partners with Regents Bank to provide financial services to cannabis dispensaries.

The ACH Option

An alternative to PIN debit is ACH-based solutions that move money directly from the consumer’s account to the merchant’s account, using the automated clearing house. These solutions have begun to flourish as consumers’ preference for shopping online has increased substantially since the onset of the Covid-19 pandemic.

With an ACH transaction, consumers can pay for an order placed online and have its delivered to their home or curbside. ACH solutions also complement subscription services. Aeropay, for example, late last year partnered with HighHello, a Grand Rapids, Mich.-based monthly subscription club that charges members a recurring monthly membership fee.

Fees range from $100 per month for a full membership or $75 for an
edibles-only membership. After answering a series of questions, HighHello members receive a box of cannabis products based on their preferences each month.

“Digital payment solutions allow for employees to safely deliver products without carrying [and receiving] cash,” says Aeropay’s Braun, who adds only 14% of customers say that they carry cash. “Simply put, not having a digital payment solution dampens customer spending.”

But ACH solutions, though well-suited to e-commerce, are less so in-store, where it is unlikely consumers will take the time to set up an account at the time of purchase.

“Linking a bank account through the ACH takes a few minutes, says Ryan Hamlin, chief executive and co-founder of POSaBIT Systems Corp., a Kirkland, Wash.-based payments-technology provider to cannabis merchants. “It’s rare that you will capture a customer [for one of these accounts] at the point-of-sale. It’s better to promote this payment option to consumers outside the dispensary.”

Pitching ACH payment options to consumers via e-mail or text also opens the door to offering incentives for opening an account, as well as enrollment in the dispensary’s loyalty program.

“ACH is the best e-commerce solution dispensaries can offer until cannabis is de-scheduled at the federal level and dispensaries can accept cards,” Hamlin adds.

The ‘Second Wave’

At the same time, the advance of payment options for cannabis merchants is leading to consolidation among payment providers.

In April, POSaBit strengthened its position with the $7.5-million acquisition of Scottsdale, Ariz.-based Hypur Inc., a provider of payment and compliance solutions to high-risk merchants, including cannabis dispensaries, CBD retailers, and merchants that accept cryptocurrency.

What made Hypur an attractive acquisition target was that it offered an ACH-based e-commerce and mobile-payment solution, two payment options POSaBit lacked, and redundant PIN-debit processing, according to Hamlin.

In addition, the acquisition netted POSaBit more than 150 merchant locations generating more than $100 million in annualized gross merchandise value. Another 60 Hypur merchant locations are expected to go live within 90 days.

“This business is entering the second wave, and we are starting to see the rollup of players offering niche solutions, such as loyalty, by larger players,” Hamlin says. “We will see more consolidation as there are players looking to become one-stop shops.”

Still, payment providers are starting to butt up against a wall when it comes to offering alternative payment options. While digital wallets, text-based payment apps, and cryptocurrency solutions are available, consumers are likely to view than as less attractive than PIN debit and ACH offerings, according to Paybotic’s Miller.

There is no “PayPal of Pot solution offering ubiquity to the merchant community,” says PayQwick’s Craig. “Still, that hasn’t stopped cannabis merchants from trying [business-to consumer payment] solutions despite their limited longevity.”

Nor has it stopped payment providers from offering incentives, such as free terminals, to cannabis dispensaries to gain space at the checkout counter.

This jockeying for space can be important, Craig says, as payment providers and processors position themselves for the day when cannabis is de-scheduled at the federal level and they can simply flip a switch to enable dispensaries to start accepting credit cards.

“De-scheduling, not rescheduling, is what will really open up this market [for processors],” Craig says.